Jul 28, 2010
Executives
Mike Long - Chairman, President & Chief Executive Officer Paul Reilly - Executive Vice President, Finance and Operation & Chief Financial Officer Greer Aviv - Investor Relations
Analysts
Craig Hettenbach - Goldman Sachs Amit Passi - UBS Jim Suva - Citi Matthew Sheerin - Stifel Nicolaus Brian Alexander - Raymond James William Stein - Credit Suisse Steven Fox - CLSA Brendan Furlong - Miller Tabak Sherri Scribner - Deutsche Bank Shawn Harrison - Longbow Research
Operator
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Greer Aviv
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With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operation and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components. By now, you should have all received a copy of our earnings release.
If not, you can access our release on the investor relations section of our website.
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With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operation and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components. By now, you should have all received a copy of our earnings release.
If not, you can access our release on the investor relations section of our website.
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With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operation and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components. By now, you should have all received a copy of our earnings release.
If not, you can access our release on the investor relations section of our website.
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At this time, I would like to introduce our Chairman, President and CEO, Mike Long.
Mike Long
Thank you, Greer, and thanks to all of you for taking the time to join us today. The second quarter was another outstanding quarter for Arrow; as we achieved record level second quarter revenue and earnings per share.
Both business units drove the strength in this quarter with continued strong momentum in global components sales, which increased 44% year over year, and better than expected sales growth of 21% year over year in ECS. In addition, our cash flow generation was very good and came in well ahead of our expectations.
Operating income growth substantially outpaced sales growth on both the year-over-year and sequential basis. Our operating income margin reached the highest level since the fourth quarter of 2007.
Earnings per share more than tripled year over year, substantially ahead of our revenue growth. And we also had a new record for return on working capital, which exceeded 36% in the second quarter and is more than two times greater than a year-ago level.
Return on invested capital is also near record levels. These results clearly demonstrate our commitment to sales excellence, operational excellence and the ability to maximize shareholder value.
Time and time again, we have proven our ability to manage well through cycles. As you will hear more in detail later in the call, all of our components regions contributed to the superb second quarter results, and we continue to see an upward trend in gross margin.
Both the global components and the global ECS businesses posted sales ahead of normal seasonality.
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Following the end of the second quarter, we achieved another milestone in our global ERP implementation with the successful go-live in our northern European components business on July 6th. As a result of this go-live, the global components team in northern Europe is now managing critical activities, such as demand creation, quote-to-order, order-to-invoice and other crucial processes with the new system.
More importantly, we have not missed an order, receipt of inventory or shipment in northern Europe this month. The transition in this region was seamless, thanks to our CIO, Vin Melvin, and his global team for a job well down and to Brian McNally and the European components team for ensuring a true partnership with the IT team, all working for our collective success.
As we have previously mentioned, the pace of activity in northern Europe is 10 times the pace of the activity that we had in the implementation of the Australia-New Zealand conversion. Our solid cash position and strong balance sheet has enabled us to continue to invest in initiatives to grow the business, including our vertical markets, geographic expansion, expansion of our value-added services and our global ERP implementation.
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The addition of Sphinx strengthens Arrow ECS by bringing increased scale to Europe and then additional expertise in the high-growth security and networking information technology markets, in addition to a highly talented team and an expanded line card. Cumulatively, these acquisitions are expected to be accretive to earnings by $0.05 to $0.10 per share on an annual basis.
In addition to the $0.10 to $0.12 accretion from the A.E. Petsche acquisition we closed in December 2009.
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Operating income in the region more than doubled year-over-year. Our focused efficiency initiatives in Europe and improved market conditions in the region resulted in impressive year-over-year sales growth while operating income had been extraordinary compared to this time last year.
Asia Pacific posted its second quarter $1 billion sales level, a record level of operating income dollars. The upward trend in gross margins for the global components business carried into the second quarter, as gross margins expanded 170 basis points year-over-year and is up 40 basis points sequentially.
Moving on to current trends, lead times remained extended, bookings increased continually throughout the quarter along with our daily run rates, and book-to-bill in components is above 1.1 on a global basis and is at the same levels we saw in Q2 of 2009. Importantly, we have seen no meaningful change in cancellation rates.
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Storage, software, services, and industry-standard servers grew at very strong double-digit rates on a year-over-year basis. Sequentially, we saw a very strong growth in proprietary servers along with industry-standard servers, storage and software.
Sales growth has been better than expected in ECS and many of our strategic investments and key solution segments are paying off. With our explosive growth in storage and software and an increase in industry-standard servers, our sales mix and business model are changing.
At Investor Day, we committed to a $20 million annual efficiency initiative and ECS based on our completed ERP rollout of North America. These savings come from gaining full back office benefits and better resource alignment in our sales coverage models.
In summary, our performance this quarter was terrific. The second quarter results proved further confirmation of our dedication to a strategic objective while continue to manage the business at best in class levels.
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Paul will now give you a more detailed review of the second quarter financials.
Paul Reilly
Thanks Mike. As reflected in our earnings release, there are a number of items that impact the comparability of our results with those in the trailing quarter and the second quarter of last year.
I will review our results excluding these items to give you a better sense of our operating results. As always, the operating information we provide to you to be used as a compliment to our GAAP results.
For a complete reconciliation between our GAAP and non-GAAP results, please refer to our earnings release for the earnings reconciliation slide at the end of the webcast presentation. Second quarter sales of $4.6 billion were ahead of our expectations and represent an increase of 36% year-over-year, an increase of 9% on a sequential basis.
This is the third consecutive quarter of year-over-year sales growth coming out of the downturn and represents a record level of revenue for Arrow. Operating income grew more than 2-1/2 times on a year-over-year basis.
Global component sales of $3.3 billion increased 44% year-over-year and 4% sequentially, an increase of 46% year-over-year and 7% sequentially, excluding the impact of foreign exchange. Gross margins increased 170 basis points year-over-year and increased 40 basis points from the first quarter that rebounded to 2008 levels.
We reduced our ratio of operating expenses to sales to a near record low level this quarter, as we have remained focused on operational excellence and running the business at best in class levels. Our operating profit grew five times and four times faster than sales on a year-over-year and sequential basis respectively, again demonstrating exceptional expense control and operating leverage in our business.
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Sales in the Americas increased 54% year-over-year and 11% sequentially, substantially ahead of normal seasonality. Our growth is driven by strength across the board in both semis and PEMCO, with notable sales growth seen in the aerospace and defense and lighting markets.
Daily run rates improved throughout the quarter, and our backlog is up from the first quarter.
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The pace of recovery in our European business remained strong as sales increased 52% year-over-year and were off slightly on a sequential basis to $968 million, ahead of normal seasonality. Excluding the impact of foreign exchange, sales were up 60% year-over-year and up 8% quarter-over-quarter.
This out performance was driven by strength in all regions in our core business, particularly Central Europe. We saw solid growth in a number of vertical markets including an all-time record level sales in transportation and lighting, and lighting continues to be our fastest growing segment.
Our daily run rates were up strong double digit compared to the year-ago period and to a level similar to the sales we saw back in the second quarter of 2008.
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Looking forward, we would again expect sales growth to be above normal seasonality. Our Asia-Pacific business achieved a record level of sales, gross profit and operating income in the second quarter.
Sales growth continued to be strong, increasing 26% year-over-year and growing 1% sequentially of a better than expected first quarter.
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However, we remain focused on managing well our costs and improving productivity, which resulted in an increase in operating profit of 25% year-over-year and 80% sequentially. The second quarter, again, demonstrated the leverage we had in the ECS model, as operating income grew almost four times faster than sales growth on a sequential basis.
And looking ahead to the third quarter, we expect sales to be in line with the low end of normal seasonality. Geographically, sales in North America were well ahead of normal seasonality, increasing 32% from the first quarter.
On a year-over-year basis, sales increased an impressive 22%. Strong top-line growth coupled with focused expense control resulted in an increase in operating income of 30% year-over-year and 79% sequentially.
Operating profit grew 2-1/2 times faster than sales sequentially and return on working capital is at record levels. In Europe, sales were relatively in line with our expectations.
Excluding the impact of foreign exchange, sales increased 28% year-over-year and 12% sequentially in line with the high end of normal seasonality. Our efficiency initiatives in the region resulted in an increase in operating profit of 28% from the first quarter, and operating income outpaced sales growth by almost 14 times.
Return on working capital in Europe was more than double or more than doubled year-over-year to a record level and is now almost two times of corporate average. Our consolidated gross profit margin was 12.8%, an increase of 90 basis points year-over-year representing a significant improvement in the pace of recovery in our margins.
And in fact, we have seen a 130 basis point improvement from the low point in the third quarter of 2009. On a sequential basis, gross margin increased 10 basis points.
This marks the third consecutive quarter of gross profit improvement on a consolidated basis. Importantly, gross margin in our core components customer base increased 20 basis points from the first quarter.
Operating expenses as a percentage of sales decreased 130 basis points year-over-year and decreased 60 basis points sequentially to 8.5%, representing a record low second quarter level for Arrow and a near record low level for any quarter in our history. Operating income was $194.8 million, an increase of 177% year-over-year and an increase of 28% sequentially.
The results this quarter, again, demonstrate our ability to outgrow the market, improve gross profit margins, and the significant operating leverage we have in our model with operating income growing three times faster than sales on a year-over-year and sequential basis respectively. Operating income as a percentage of sales increased 210 basis points year-over-year and effectively doubling and a 60 basis point increase sequentially.
Tax rate for the quarter was 31.6% and you should assume, for modeling purposes, it will remain between 31% and 33%.
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However, we remain focused on managing well our costs and improving productivity, which resulted in an increase in operating profit of 25% year-over-year and 80% sequentially. The second quarter, again, demonstrated the leverage we had in the ECS model, as operating income grew almost four times faster than sales growth on a sequential basis.
And looking ahead to the third quarter, we expect sales to be in line with the low end of normal seasonality. Geographically, sales in North America were well ahead of normal seasonality, increasing 32% from the first quarter.
On a year-over-year basis, sales increased an impressive 22%. Strong top-line growth coupled with focused expense control resulted in an increase in operating income of 30% year-over-year and 79% sequentially.
Operating profit grew 2-1/2 times faster than sales sequentially and return on working capital is at record levels. In Europe, sales were relatively in line with our expectations.
Excluding the impact of foreign exchange, sales increased 28% year-over-year and 12% sequentially in line with the high end of normal seasonality. Our efficiency initiatives in the region resulted in an increase in operating profit of 28% from the first quarter, and operating income outpaced sales growth by almost 14 times.
Return on working capital in Europe was more than double or more than doubled year-over-year to a record level and is now almost two times of corporate average. Our consolidated gross profit margin was 12.8%, an increase of 90 basis points year-over-year representing a significant improvement in the pace of recovery in our margins.
And in fact, we have seen a 130 basis point improvement from the low point in the third quarter of 2009. On a sequential basis, gross margin increased 10 basis points.
This marks the third consecutive quarter of gross profit improvement on a consolidated basis. Importantly, gross margin in our core components customer base increased 20 basis points from the first quarter.
Operating expenses as a percentage of sales decreased 130 basis points year-over-year and decreased 60 basis points sequentially to 8.5%, representing a record low second quarter level for Arrow and a near record low level for any quarter in our history. Operating income was $194.8 million, an increase of 177% year-over-year and an increase of 28% sequentially.
The results this quarter, again, demonstrate our ability to outgrow the market, improve gross profit margins, and the significant operating leverage we have in our model with operating income growing three times faster than sales on a year-over-year and sequential basis respectively. Operating income as a percentage of sales increased 210 basis points year-over-year and effectively doubling and a 60 basis point increase sequentially.
Tax rate for the quarter was 31.6% and you should assume, for modeling purposes, it will remain between 31% and 33%.
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In addition, during the quarter, we repurchased $75 million of our stock, leaving us with $25 million under the board authorization. The board has also authorized management to acquire additional $100 million, bringing the total that can be spent on future buybacks to $125 million.
Focused management of working capital resulted in a 100 basis point year-over-year decline in working capital to sales, as we continued to manage efficiently all the leverage within working capital. This represents a record low level for any second quarter in our history.
As Mike mentioned earlier, return on working capital more than doubled year-over-year, the highest level yet. From an inventory standpoint, our Q2 inventory turns in North America were 5% better than Q2 in 2008.
In Europe, returns are better than Q2 2008 by 10% and finally in Asia, we are 30% better than Q2 2008 in inventory turns.
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Mike Long
Thank you, Paul. In summary, our results speak for themselves this quarter, with record level revenue and earnings per share, exceptional returns and very good cash flow generation.
Our components business posted another terrific quarter with each of our regions experiencing continued momentum and robust growth trends while generating significant increases in profitability and returns.
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We are in a period of accelerating sales right now, and we believe we are outgrowing the market. There is significant earnings leverage inherent in our model, and we expect to generate premium earnings and returns for all of our shareholders.
I would personally like to thank all of our employees around the world for a job very well done and their unwavering commitment to our long-term success. Looking ahead to the third quarter, we believe that total sales will be between 4.39 and 4.79 billion, with global component sales between 3.32 and 3.52 billion and the global enterprise computing solutions sales between 1.07 and 1.27 billion.
As a result of this outlook, we expect earnings per share on a diluted basis, excluding any charges to be in the range of $0.96 to $1.06 per share. Greer.
Greer Aviv
Thank you, Mike. Please open up the call to questions at this time.
Operator
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Craig Hettenbach - Goldman Sachs
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Mike Long
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Paul Reilly
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Craig Hettenbach - Goldman Sachs
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Andy Bryant
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Paul Reilly
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Craig Hettenbach - Goldman Sachs
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Mike Long
No, in systems we have not seen an impact in our business. You saw the numbers that we just reported in Europe for Q2, and so quite honestly business has remained pretty strong.
Craig Hettenbach - Goldman Sachs
Okay, thank you.
Operator
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Amit Passi - UBS
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Paul Reilly
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Andy Bryant
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Amit Passi - UBS
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Mike Long
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Amit Passi - UBS
Great and then just one final question. I think, if I include the September quarter, you basically would have seen five consecutive quarters of better than normal seasonality in your components business.
Mike, just curious, when do you think we should get back to seasonality, would it be the December quarter? And then, do you have any concerns that we probably could see below normal seasonality as we exit 2010 into the first half of 2011?
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Amit Passi - UBS
Thanks a lot for the incremental color. Okay.
Operator
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Jim Suva - Citi
Alright, thank you very much and congratulations to you and your team on our great results and the profitability is very commendable. Can you talk a little bit more on the inventory, exactly how much of it was organic versus I believe you closed three acquisitions in the quarter?
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Paul Reilly
Hey Jim, it’s Paul. Let me lead off with your question around the impact M&A.
In fact, if you think of the three acquisitions, Sphinx is one in the ECS business, which you know has inventory turns that are 20 to 30 times. The second one was in Converge, which has very low inventory requirements and high inventory turns.
So that was less than $10 million for Converge, less than about $10 million for the Sphinx acquisition. And the other acquisition has no inventory at this point in time.
So if you look at it, about $20 million of increase comes from M&A and the rest is organic growth.
Mike Long
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Paul Reilly
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Jim Suva - Citi
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Mike Long
Yes, I think Jim, what we would see is something that would be more flattish with what we have right now at the end of the second quarter.
Jim Suva - Citi
Alright, thank you and congratulations again for great results, especially on the profitability.
Mike Long
Thanks a lot.
Operator
And Matt Sheerin with Stifel Nicolaus will have our next question.
Matt Sheerin - Stifel Nicolaus
Yes, thanks, and good afternoon. So a question on your gross margin, which was obviously up nice year-over-year and sequentially.
I know that some of it was mix related, but how much of it was a benefit from overall pricing, given that you do have inventory and you do have certain customers that are asking for expedited orders, which obviously puts you in a better position. So, is your pricing helping you here?
Paul Reilly
Hey Matt, it’s Paul. Let me first start off by saying that gross profit was up year-over-year in all regions, and that has nothing to do with mix.
So look at each of the individual regions and you look at two business segments, so we were up in each region around the world.
Matt Sheerin - Stifel Nicolaus
Okay.
Paul Reilly
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Matt Sheerin - Stifel Nicolaus
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Paul Reilly
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Matt Sheerin - Stifel Nicolaus
Okay, great. And just finally on your comments about components, it looks like Asia was up about 1%.
Is that seasonal? It looks like it might be a little bit less than seasonal?
Are you starting to see any signs of sluggishness in Asia at all?
Paul Reilly
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Mike Long
Matt, I think I can help you a little with the Asia Pac piece is that, we still saw a consumer very strong. The data processing business, the industrial business, the lighting business and the automotive business were all up more than double digits.
The only place we saw a slowing in Asia Pac region, which is what equates to our ultra source business, was in the communication market. Every other market there, we did see relatively strong increases quarter-on-quarter.
So we can pinpoint it directly to the communications business.
Matt Sheerin - Stifel Nicolaus
Okay, so the book-to-bill in Asia in that core business that you talked about, is that in line with the company average then?
Mike Long
Yes.
Matt Sheerin - Stifel Nicolaus
Okay, alright, thanks a lot.
Mike Long
Alright.
Operator
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Brian Alexander - Raymond James
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Paul Reilly
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Brian Alexander - Raymond James
Okay. And then just on the computing business, the Sun Oracle relationship, how much incremental revenue do you think from here is at risk?
And is that really what the primary delta is in terms of your Q3 outlook, relative to what we would consider to be normal seasonality, although I realize that’s changing?
Andy Bryant
Yes Brian its Andy. We’ve seen in our entire proprietary server portfolio, we almost got back to a little growth in the second quarter and Sun was actually the second strongest line in the quarter.
So, I think our risk is mitigating. I think we see an opportunity actually to have an upside in Europe.
We are undergoing an expansion with Oracle Sun in Europe as they look at the countries that they want to roll out their value-added distributor model in. We’ve been assigned a global account rep from Oracle, which is a positive sign.
So we just have to see how their product cycles play out and where they go with their hardware sales, but I think we are getting to the point where the risk of revenue decline is going to mitigate a bit.
Brian Alexander - Raymond James
And then final question, how should we think about, maybe for Paul, the operating margin progression for the computing business in the back half of the year, given that your largest supplier is refreshing its mid range line, and this tends to have above average margins. So that would suggest that your mid range of mix probably gets better in the back half of the year, certainly in Q4, and you’ve got incremental cost savings.
I think you said earlier of about $12 million going forward. So should we expect some pretty meaningful operating margin expansion in the computing business on a year-over-year basis in the second half?
Mike Long
Your analysis is correct. Its the pace of new product introduction that picks up in the fourth quarter around proprietary service.
We should see a good uplift in operating margin.
Brian Alexander - Raymond James
Thank you very much and nice job.
Mike Long
Thanks Brian.
Operator
And William Stein with Credit Suisse, will have our next question.
William Stein - Credit Suisse
Great, thanks. I’m wondering if the component shortages that you discussed limited your own revenue in the quarter, on the component side in particular obviously.
Mike Long
That’s an interesting question. We believe that we’ve been going at it the last several quarters with about the same amount of unfulfilled orders.
So pending the orders flopping into the next quarter, we think right now we are doing a pretty good job filling what we have and we would expect to stay on that pace.
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William Stein - Credit Suisse
It sounds like there was some mixed opportunity, but it didn’t increase sequentially.
Mike Long
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But today, from what we are hearing from our customers, the standard flow of production and the line down situations are much much less than they were a quarter ago and even a quarter before that.
William Stein - Credit Suisse
Okay, and then like everyone else I’m also going to focus on systems for a second. It looks like if assuming the Converge and Vertical revenue was contemplated in the guidance, it looks like organic growth is down about 18% sequentially, which it looks like well below the low end of what used to be typically seasonality.
Paul Reilly
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William Stein - Credit Suisse
That’s the September guidance.
Mike Long
Oh, sorry about that.
William Stein - Credit Suisse
Yeah.
Mike Long
Yeah, so we still think we’ll be within the low end of normal seasonality for Q3.
William Stein - Credit Suisse
Thank you.
Operator
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Steven Fox - CLSA
Hi, good afternoon. Not to beat a dead horse on the inventories, but is there any way to parse the difference between, say the fast-moving parts in the components inventory and the slower moving parts?
And then secondly, could we step back and look at the computing business from a cyclical standpoint. Any signs that you would point to that the cycle has legs beyond say Q4 of this year that would be encouraging to investors at this point.
Paul Reilly
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Steven Fox - CLSA
Okay.
Mike Long
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As an example, everyone knows proprietary servers were suppressed going into the quarter, but we did see a 21% increase in proprietary servers quarter-over-quarter and they actually outpaced the increase in industry standard servers for the first time in a long time. Our storage products are still growing very strong year-over-year in the 29% range.
Having said that, as we are looking to the seasonally strong fourth quarter, right now, we see no reason to expect anything other than normal seasonality going into the second half of the year here.
Steven Fox - CLSA
That’s encouraging. Thank you very much.
Mike Long
Right.
Operator
And just a five-minute warning. Next we’ll move to Brendan Furlong with Miller Tabak.
Brendan Furlong - Miller Tabak
How are you doing everybody? Earlier on in the call in the preamble, you said that the gross margin is in an upward trend.
Nobody seems to have challenged you on that one and I was just curious if you could throw some color on what that upper trend actually means.
Mike Long
Yeah. From our viewpoint, you may recall that we saw a rapid sharp decline in gross profit entering the economic malaise if you will, that started in 2008, and we said that the recovery would continue slow, slow for sure, about the same pace as the downturn.
So we continue to see on a region-by-region basis improvement in gross profit percentage. So we still see that momentum continuing into Q3 and we see normal seasonality, which is fully our expectation into Q4.
Then we would expect to see that GP continue to move upward.
Brendan Furlong - Miller Tabak
Mike Long
With that said, if it was growing to a halt, but lead-times stayed around normal, there should be no negative impact on gross profit percent. And as we’ve been saying, the biggest area of opportunity regionally for us in gross profit is in Europe.
And Europe really came into the recovery about two quarters later than North America. So we would think that if you were to see a slowdown in the recovery in North America at the top line, we probably have two more quarters to go in Europe.
So we’d see that also continuing to grow. So it’s a lot of different data points, a lot of different moving parts, but doesn’t necessarily mean that it would shut down in one quarter.
And for sure, at that point in time we’d still look for opportunities to increase it, and don’t believe that there would be a decline in gross profit then.
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With that said, if it was growing to a halt, but lead-times stayed around normal, there should be no negative impact on gross profit percent. And as we’ve been saying, the biggest area of opportunity regionally for us in gross profit is in Europe.
And Europe really came into the recovery about two quarters later than North America. So we would think that if you were to see a slowdown in the recovery in North America at the top line, we probably have two more quarters to go in Europe.
So we’d see that also continuing to grow. So it’s a lot of different data points, a lot of different moving parts, but doesn’t necessarily mean that it would shut down in one quarter.
And for sure, at that point in time we’d still look for opportunities to increase it, and don’t believe that there would be a decline in gross profit then.
With that said, if it was growing to a halt, but lead-times stayed around normal, there should be no negative impact on gross profit percent. And as we’ve been saying, the biggest area of opportunity regionally for us in gross profit is in Europe.
And Europe really came into the recovery about two quarters later than North America. So we would think that if you were to see a slowdown in the recovery in North America at the top line, we probably have two more quarters to go in Europe.
So we’d see that also continuing to grow. So it’s a lot of different data points, a lot of different moving parts, but doesn’t necessarily mean that it would shut down in one quarter.
And for sure, at that point in time we’d still look for opportunities to increase it, and don’t believe that there would be a decline in gross profit then.
Brendan Furlong - Miller Tabak
Okay, that’s kind of what I was looking for. And then my other question, the SG&A that end at sales were pretty much record lows.
Do you plan to keep it at kind of record lows on a quarterly basis or am I reading too much into this, that you are kind of expecting things to moderate so much next year and that’s why you’re keeping your expenses at such low levels?
Mike Long
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Brendan Furlong - Miller Tabak
Excellent. Thank you very much.
Operator
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Sherri Scribner - Deutsche Bank
Hi. Thank you.
You provide a bunch of different details on the segments and geographies. I was hoping we could maybe take a step back and if you could give us like, your view on how the geographies are progressing.
I know Europe was a bit behind. It seems like from your commentary that all of the geographies continue to move along and you are not seeing any hiccups.
I just wanted to get your thoughts?
Mike Long
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The core business that we have was really particularly strong, growing almost 50% year-over-year. And then we saw as I had indicated before, strong performance in a lot of the vertical markets around lighting industrial and PEMCO and automotive and the slowdown that we saw there was in our lower margin, ultra source business, primarily tied to the communications market.
So overall we’ve seen a pretty good marketplace there.
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The vertical markets, we did see several of them start to kick on, but we saw I would say the exceptional market for us, where transportation and lighting, and lighting continues to be the best growing segments. So we see that continuing on if you will for Europe.
Our sales in North America if you will were substantially added. While I would say normal seasonality would be there, but that was driven across the Board in both semiconductor products and in our passive products.
We did have notable growth, if you will in the aerospace and defense and lighting market industries, but what is really encouraging about North America is the daily run rates improved as the quarter went on and our backlog, meaning customers placing long-term orders on us was also up compared to the first quarter. So we expect the sales to continue in that market, and really the vertical performance there, again airspace, alternative energy, lighting were the main drivers for the quarter for us.
Sherri Scribner - Deutsche Bank
Okay, that commentary is helpful. And then at the analyst day there was a lot of questions about Europe and the impact of what was perceived at that time to be a weakness in Europe.
It doesn’t sound like you saw any weakness in Europe. Just wanted to get a sense of did you have currency impact from what was going on during the quarter?
Mike Long
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Paul Reilly
And Sherry, from a currency translation impact, it was about a negative $0.02 for us this quarter, compared to the rate we use for giving guidance.
Sherri Scribner - Deutsche Bank
Right. Okay great.
Thank you.
Operator
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Shawn Harrison - Longbow Research
Hi good afternoon. Hopefully, two brief questions.
At ECS, EBIT margins were up slightly year-over-year, even though sales were much higher. Is the variance just in the terms of where they potentially could be, just solely mix right now?
And to your earlier comment that you would just need to see some server refresh be relatively healthy from your largest customer coming back in the fourth quarter, and you should see a more normalized level of profitability there?
Mike Long
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Shawn Harrison - Longbow Research
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Mike Long
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Shawn Harrison - Longbow Research
Okay. Thank you very much.
Operator
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Amit Passi - UBS
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Mike Long
Correct.
Amit Passi - UBS
Any sense of -- I mean, is there a timing limitation as to when you exhaust the full 125 or any sense of how we should think about your interest in buying stock at these levels?
Mike Long
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Amit Passi – UBS
Okay. Alright, thank you.
Operator
And that will conclude the question-and-answer session. I will turn the call back over to the speakers for any additional or closing remarks.
Greer Aviv
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I would like to thank all of you for taking the time to participate in our call this afternoon. If you have any questions about the information presented today, please feel free to contact Paul, Mike Taunton or myself.
Thank you and have a nice day.
Operator
And that will conclude today’s call. We want to thank you for your participation.