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

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.

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. At TS, we strengthened our position in France, with the addition of Amosdec, a value-add distributor of enterprise IT products with a strong virtualization practice.

In Asia, EM added 2 Taiwan-based distributors that will add new products and customers, while strengthening our demand creation capabilities and our IP&E market position in the greater China region. Our long-standing capital allocation policy continues to prioritize profitable organic growth first, followed by value-creating M&A and when we find ourselves in the position of excess liquidity, we will opt for returning cash to shareholders.

Accordingly, we remain committed to investing in long-term profitable growth opportunities and are comfortable we have adequate liquidity to pursue these opportunities in conjunction with our stock repurchase program. Although it is difficult to forecast future demand in the current macroeconomic environment, we are encouraged by the speed with which the electronic supply chain is rebalancing and the relative strength of our computer business outside of EMEA.

We remain confident that our experience through many industry cycles will continue to serve us well, as we work through the current environment, and we continue to focus on driving long-term shareholder value creation. Now let's turn to the operating groups.

In the September quarter, Electronic Marketing's revenue came in towards the low end of expectations, primarily due to the continuing impact of the current supply chain correction that affected our book-to-bill ratio in June, resulting in slightly-lower-than-expected billings. As a result, pro forma revenue declined 7% sequentially, as compared with a typical range of plus 1% to minus 3%.

While EMEA was our weakest region, we also saw a slightly lower-than-expected revenue in the Americas and Asia. Reported revenue of $3.82 billion increased 5.4% year-over-year, and pro forma revenue was roughly flat from the year-ago quarter after 6 consecutive quarters of strong double-digit growth.

EM's gross profit margin declined 107 basis points sequentially and 27 basis points year-over-year. The sequential decline was primarily due to the double-digit decline in revenue in the higher gross margin EMEA region and the transfer of the lower gross margin computing components business from TS Americas to EM Americas during the quarter.

This transfer also contributed to the year-over-year decline. EM's operating income was roughly flat with the year-ago quarter, and operating income margin of 5% declined 30 basis points, due primarily to lower sales and the previously mentioned transfer of the Latin American computing components business from TS.

This represents the seventh consecutive quarter that EM has been within or above our target range for operating income margin globally. Operating income margin declined 85 basis points sequentially, which was worse than a typical September quarter, strongly influenced by the higher-than-normal seasonal decline in revenue.

Return on working capital declined 823 basis points from the year-ago quarter, primarily due to an increase in working capital, and to a lesser extent, the decline in operating margin. In the first quarter of FY '11, our inventory was below a normalized level because of the extended product lead times and shortages.

Sequentially, EM's inventory increased 3.5% on a pro forma basis after adjusting for acquisitions, the transfer of the computing components business from TS and changes in foreign currency exchange rates. In total, EM working capital increased 8.1% sequentially and 6.5% pro forma.

The sequential increase in working capital was driven by a significant decline in accounts payable due to reduced orders to our suppliers. While EM's book to bill decline for the second consecutive quarter, we are encouraged by an improved book to bill across all regions through the first 3 weeks of October.

Even though it is still difficult to determine how much of the below-normal seasonality in September was due exclusively to the supply chain correction, it appears the industry is making rapid progress in rebalancing inventory and backlog during a period of decelerating growth. Similar to EM, TS experienced a more-than-normal seasonal revenue decline in the September quarter.

Reported revenue increased 1.9% year-over-year to $2.61 billion, and pro forma revenue grew 6.3% from the prior year quarter in constant currency. Asia continued to lead with pro forma year-over-year revenue growth of 35.6%, while our largest region, the Americas, was up 13.3%, while EMEA was down 12.5% in constant currency.

From a product category perspective, software grew over 40% from the prior year quarter, while hardware was up over 30%, led by industry standard servers and storage. Gross profit margins improved 75 basis points sequentially and 37 basis points year-over-year, with all 3 regions contributing to the improvement, somewhat benefited by the transfer of the Latin American computing components business to EM.

Despite the top line challenge, TS delivered improvements in operating income margins and returns, both sequentially and year-over-year. Operating income dollars increased 14.7% year-over-year to $65 million, and operating income margin improved 28 basis points, with all 3 regions contributing.

In the Americas region, operating income margin improved 37 basis points year-over-year, and return on working capital remains comfortably above our long-range target. TS Asia's gross profit margin improved 66 basis points year-over-year, while operating income margin increased 60 basis points from the prior year quarter.

In EMEA, which has been dealing with a weak demand environment for multiple quarters now, the focus on profitability was evident this quarter as gross profit margin increased significantly both sequentially and year-over-year despite the declines in revenue. This improvement, along with our continued expense efficiencies, drove operating income up 36% year-over-year, as operating income margin expanded by 35 basis points.

As a result of the improved profitability at TS, return on working capital increased 364 basis points year-over-year and 231 basis points sequentially. While we still have a gap from our long-term profitability goals in portions of the TS portfolio, these improvements demonstrate the potential for increased profitability, as we continue to apply our portfolio management discipline across the business and leverage the investments we have made in the higher growth markets.

Now I would like to turn the commentary over to Ray Sadowski to provide more color on the progression of our share repurchase program and shareholder value creation. Ray?

Thank you, Rick, and hello, everyone. As we stated in our earnings release, we used $204 million of cash for operations this quarter, which was more than we expected.

As our business slowed, we, in turn, reacted quickly to reduce the purchases on our suppliers, which pushed working capital higher as accounts payable declined significantly.As we know from previous cycles, lower sales and shorter product lead times ultimately result in lower working capital requirements and our cash flow should improve noticeably. Although we used cash from operations this quarter, on a trailing 12-month basis, cash from operations remained positive at $186 million.

As we announced in August, Avnet's Board of Directors approved a $500 million share repurchase program. During the quarter, we repurchased 3.45 million shares for an aggregate cost of $90.9 million, $81.9 million of which was settled during the quarter.

We've mentioned on our last quarterly earnings call that we would repurchase shares more aggressively, as our stock price approached book value. Consequently, with a market value range during the quarter of roughly $24 to $28 per share and a book value of approximately $26 per share, we took the opportunity to make a sound investment on our company.

From August 15, when the program was made effective, through the first 3 weeks of October, we have repurchased about 5 million shares. It should be noted that the impact on average shares outstanding used to calculate earnings per share for the first quarter was relatively small, due to the impact of daily averaging.

However, it will more positively impact our EPS calculation next quarter. Going forward, we will continue to execute on the share buyback program, as long as it remains a good investment.

For the past several quarters, we have consistently been delivering return on capital within our target range and generating economic profits. As Rick mentioned earlier, this quarter, we fell below our target range of 14% to 16% for the first time in 7 quarters.

However, at 12.3%, we are generating returns above prerecession levels and above our weighted average cost of capital. We tend to see a drop in performance in our first fiscal quarter as revenue decline in the weaker summer quarter, following our June year-end, which is generally one of the highest performing quarters.

While we believe that this cycle is primarily driven by inventory and customer backlog adjustments, there are still macro uncertainties about global GDP going forward that could impact our business. Nevertheless, we have navigated through various market cycles before, and are confident that our broad market exposure and portfolio management discipline will allow us to outperform on a relative basis.

With both a strong balance sheet and liquidity position, we have the ability to continue our focus on investments that will drive long-term shareholder value creation. Looking forward to Avnet's second quarter fiscal 2012.

We expect EM sales to be in the range of $3.45 billion to $3.75 billion, and sales for TS to be between $3 billion and $3.4 billion. Therefore, Avnet's consolidated sales are forecasted to be between $6.45 billion and $7.15 billion.

Based upon net revenue forecast, we expect second quarter fiscal 2012 earnings to be in the range of $1.01 to $1.09 per share. The above guidance does not include any potential restructuring charges or any charges related to acquisition and post closing integrations.

The guidance assumes 150.6 million average diluted shares outstanding used to determine earnings per share and an effective tax rate in the range of 29% to 31%. In addition, the above guidance assumes that the average euro to U.S.

dollar currency exchange rate for the second quarter fiscal 2012 is 1.39:1. This compares with an average exchange rate of 1.36: 1 in the prior year second quarter and 1.41:1 in the first quarter of fiscal year 2001 -- 2011, excuse me.

With that, let's open the lines for questions. Operator?

I wanted to first just dig in on TS EMEA in terms of the demand environment looking forward, given, I guess, how poor it is right now. Then also some of the cost cuts that were announced last quarter, whether you're looking for additional cost reduction actions as you move through the end of the year.

So Shawn, this is Rick, and I'll ask Phil to jump in as well. As we've talked about on previous calls, the situation regarding the overall IT spends and growth for TS and EMEA has been a pretty rough patch and it continued obviously through the September quarter.

And on the overall cost issue, we did mention some actions we had taken there, but on an overall basis, managing through cost and managing our portfolio, making changes to keep in line with businesses. That standard course of business for us is something we work through all cycles and at all particular times.

So let me turn it over to Phil. Add some more color on -- specifically on EMEA.

Off to go where Rick left off. We're constantly looking at the cost structure in all our regions, frankly, as we move forward to adjust the cost and while we're continuing to align for investments as well.

And in EMEA, we're continuing to do that. On the market softness, yes, the market overall as a broad term, EMEA, certainly a bit softer still.

However, at the same time, and it also affects some of that guidance moving forward, we've also committed to deselect revenue as well, strategically. So in some cases, we've actually made decisions where it's not revenue that's going to add value or hit the hurdle rates that we have internally and we can't not make it better, we will deselect that revenue, and I'll give the team credit.

In Europe, some of the additional softness was inflicted by own our VBM principles around the deselecting revenue. But we are cautious moving forward.

We think we're on the right track. We know we're on the right track.

A little bit of market cooperation would help additionally, but that's the story right now for Europe.

Okay. And then just a follow-up to that and then a separate follow-up.

Maybe if you could talk about the impact of Thailand on that business. And then also, the other question I had was, with the accounts payables declining but inventory was up, typically I thought since the payable and inventory is somewhat related, maybe if I could just get a little bit more information on that and the expectation for the inventory in the December quarter.

So, Shawn, let me talk about Thailand and HD business a little bit, and I'll ask Ray maybe to comment on that payables inventory. So first of all, just to remind everybody, our HDD business is really concentrated for the Americas, it's at EM and for EMEA, it's actually at TS.

And in rough magnitude for the September quarter, the total HDD revenue for us globally was just somewhere below $200 million. We're staying very close to the developments with all of our key suppliers there, so we have relationships with Seagate, WD and Hitachi.

We're keeping an eye on the developments overall, trying to make sure we stay close to the expectations. In the short term here, we don't expect any material impact on our overall business.

And in the very short term, any impacts from units or shortage point of view seems to be somewhat offset by the fact that we've got rising ASPs in -- particularly for those that are buying on the spot market, some margin increase opportunity. So in balancing out the potential impact from any of the Thailand impact through the HDD business to us, in the December quarter, we think, there's very little impact on the horizon.

Ray, you want to talk about the AP?

Sure. So, Shawn, relative to AP and cash flow, we kind of curtailed placing orders during the quarter, and as a result of that, a lot of the accounts payable came due and we didn't get more built up, quite frankly, that would have offset that to some extent.

But as we move forward, if you look at it from a cash flow perspective, we would look in the Q2 to be cash flow positive. And we would also expect that inventory would decline.

And as you know, inventory primarily a factor within EM, more so than within the TS organization. And just very roughly speaking, we would think that inventory would decline in a range similar to what you're seeing the sales level declining sequentially.

So just to give you a rough idea of what we would expect inventory to decline going forward into the December quarter.

Rick or anyone else, any way you can quantify what the operating margin impact was to EM in the September quarter given the whole move of the Lat Am computing business into that segment?

Yes. So Amitabh, if you try to isolate that out overall, the -- roughly 10 to 20 basis points would be a good number.

Okay. And then if I look at it on a year-over-year basis, the 30 bps decline, should I assume that on a year-over-year basis, as we move forward, that you'll probably continue to see some year-over-year downward pressure on margins, i.e.

in the sort of the 20, 30 basis points range?

Due to the transfer?

Yes, in general.

You're talking about in general due to being below seasonal?

No, mainly due to the transfer. I'm just saying on a year-over-year basis, EM margins were down 30 basis points.

Can we assume that, that sort of delta persists over the next 2 or 3 quarters on a year-over-year basis?

You can assume that, but I think it's a combination of factors, which may include Latin America.

Okay, got it. And then just as my follow for Harley.

Harley, can you -- you talked about bookings trends improving in the first weeks of October. Are we now back above 1 on a book-to-bill basis.

And then can you just give us any sense of how bookings, lead times and cancellations trended throughout the quarter?

Sure. Lead times continued to be normal to low.

So there really hasn't been any change in that. ASP is fairly stable, so not a big story in either one of those through the September quarter.

Relative to the comment, the opening comments around the booking activities, we have currently seen what I would call an improving environment in all regions. I, again, would caution as you just said a said, as in 3 weeks of data.

But we have seen an improving environment, and what encourages us, it is we have seen that phenomena in each region over the last 3 weeks or so.

This is probably a question for Phil. But when you look at the TS business in Europe, Phil -- when I look at Arrow's performance versus yours, there is quite a gap, and you mentioned deselecting is being -- deselecting from revenues as being part of the reason.

But can you maybe try and break that out a little bit more and why we're seeing such a wide discrepancy in year-over-year pro forma performance with you guys and Arrow? So maybe how much of the decline is deselecting versus the broader general market?

And then I have a follow-up, too.

Scott, this is Rick. I just want to jump in.

When you talk about the pro forma comparison, are you talking op margin? What's ...

I'm sorry, revenues.

It's revenue, okay.

Yes, Scott, it's Phil. We don't have that level of insight into our competitor's business by country and by product line.

We don't have -- if you look at the portfolio, there are certainly some portfolio and product lines that they have that we don't, that certainly drives some of the growth, and there are some reasons that we're not. So it's really tough to look at it on an apples-to-apples comparison, and we also had the impact of some of the deselection in the area most notably within HDD, nothing to do with Thailand, but in HDD and the processors space where we saw, frankly, the biggest commodity, if you will, decline.

And to my knowledge, they don't play in that area. So it's really tough.

We are really focused, I could tell you, in Europe, frankly, on getting the op -- driving the op margin to a greater rate, okay? And we're going to continue to be focused on that.

Okay. And then maybe a quick follow-up here for Rick.

Rick, on the M&A side of the environment, are we seeing any changes with people's expectations as far as valuations go or anything like that? I know the markets have been rebounding here for a few weeks and I don't want to hold you to like a couple of weeks of stock market performance on what's happening on the M&A front.

But maybe you can provide some flavor around that. I'd appreciate it.

Yes. So I think we probably get this question just about every quarter on the call.

I would confirm we remained active with an active pipeline, looking at opportunities across geographies, whitespace and operating groups. And I would tell you that despite all the changes in the last 90 days, there has not been any major shift regarding either accelerating or decelerating the conversations at this point.

The estimates or the expectations on valuations tend to be fairly constant through ups and downs. And of course, as you know, we apply very strict guidelines, which include an analysis of the expected returns to our hurdle rate out in the 1-, 2- and 3-year timeframe.

So has not been a major shift in regarding any of the targets, regarding valuations of either accelerating or decelerating any of the activity.

I guess, probably for Rick and for Ray. I mean, what is the best way to think about OpEx and investment trends over the next few quarters?

Ray, I mean, I believe you kind of mentioned that always looking for ways to get more efficient and things like that. But I guess, given the macro is slowing -- given the demand is slowing, at least a little bit in the near term here and you still have programs that you're investing in, can you give us some sort of sense of how we should think about sort of your framework for investing in OpEx as we go forward, assuming that the environment stays a little softer for the next few quarters?

Ananda, I'll take a stab and maybe let Ray add on a few things. So when it comes to funding growth and continued investments in our opportunities, the way we think about it here, we talk a lot about drop through, and you hear us talk about that quite a bit.

In an up environment, we talk about performing businesses, we expect a 50% drop through, et cetera. So in a more normalized, or shall we say a more consistently upward trajectory environment, we utilize drop through quite a bit.

But in all environments, up, down or sideways, we also tap into productivity gains and repurposing as sources of funding to keep our profitable growth strategies going. And when it comes to an overall impact, from an expense point of view for Avnet, keep in mind that we really do manage our portfolio of businesses.

So very often, we will have expense impacts that maybe at the aggregate level are very small digits, single-digit percentages types of impacts. But what's going on in particular parts of the portfolio in Europe or Latin America or Asia, et cetera, these are very specifically defined and determined based on driving our overall portfolio goals across the globe.

So when we think about investing for growth here, it's not always just drop through, although that's a popular topic. Sourcing it from productivity gains and repurposing is very, very important part of the equation.I don't know, Ray, if you want to anything?

Yes. I guess, the only thing I'd add, Ananda, is we are a services company at the end of the day and therefore, the way we manage our expenses earlier not only from a productivity perspective -- not only from productivity as Rick just mentioned, but also, what we need to do to service our customers overall.

And as you move forward, we're not looking to make big investments from an expense perspective in this uncertain environment. But at the same time, we don't want to be overly draconian in an environment that's just slowing to a relatively mild degree, all things considered.

And so we're watching things very, very cautiously. And as we've done in the past, we'll manage expenses appropriately based upon what's happening in the environment.

And so in the current environment, it's not growing expenses, it's more moderating expenses, watching them closely and then selectively making adjustments that are necessary in those areas of the business that are underperforming.

That's helpful. And just, I guess, a follow-up on the EMEA line card exercise, where -- is this just part of sort of an ongoing scrubbing of the line card that you're doing?

Or is this a little bit of pruning incremental prior initiatives that you've undertaken? And how far through do you think you are?

I assume that's for me at the Technology Solutions. So a part of it is pruning of the line card, which we constantly do.

I mean, that's just both groups -- I don't want to speak for Harley, but we're always evaluating our line card for not only technology And solutions, but for the lines that align well with us from a value standpoint. And it's only by customer, frankly.

So it may be by line or by contract with customer and into a country. So it's a little bit more complex than just the line card.

So the answer is yes, we're always evaluating the line card. We're also going to evaluate the business relationships we have by customer as well.

And yes Phil, I might add that I think very often when we speak about revenue deselection, we're actually talking about specific customer engagements, right, that very often, there are profitable parts of certain engagements with suppliers, and they're profitable at some segments that are more volume or less oriented to our value proposition. So very often with revenue deselection, it's not just about line card pluses or minuses.

It actually is specific customer engagements.

Okay. So with what happened this quarter, was it just -- it sounds like you got to say, and it was a bit of the routine process, but it just happened to manifest itself in such a way that it was felt a little bit more this quarter.

Well, I think, Ananda, we've been clear that we have higher expectations for the performance for TS EMEA, and we are pleased that we're able to actually talk about some tangible progress there. And the team is really working hard and very focused on what we believe are the right goals for the long-term.

I wanted to ask about what you're seeing in the TS business as we move into the fourth quarter? I think your competitor talked about expecting a budget flush.

And you are guiding for generally normal seasonality in that segment, but it looks like revenue was down year-over-year. So wanted to see what you're seeing in that segment.

Yes, Sherri, I'll ask Phil to make a comment as well. And by the way, there's a reminder that the TS business is typically very much a quarter-to-quarter-driven business.

And we do have some insight into some indicators as the VARs are working their deals regarding quotations, proposals, configurations, et cetera, that often give us some headlights into what we're seeing and expecting for the quarter. But Phil, anything you want to add there?

Yes. And we don't typically give regional guidance, but certainly, we'll give you a bit of color with regards to the question.

So in the Americas, we continue -- including Latin America, we continue to see, frankly, bright spots. I mean, it's been very positive.

It's been very consistent. To Rick's point, on the VAR base and the pipeline, it looks solid going into this quarter.

So we feel good with the guidance, very good with the guidance, within the Americas, as well as of Asia Pacific. Asia Pac has continued to show growth, which is positive and looks that way going into the December quarter.

If there's any -- a little bit of yellow light that we just talked about, that might be pull our guidance a little bit more to the midpoint or just a couple of points less than midpoint, it would be Europe, okay, and then again, as we see it today. So that's -- we're overall pretty confident about the quarter.

We're confident with the guidance. We may be a little bit more cautious than others, but that's just how we're looking at the business given what we see today.

And understanding what we know about what's happening in our business and specifically, in Europe.

And Sherri, I would add, I think you mentioned you're quick calculation is reflected at year-on-year flat. And if you take a look on a pro forma basis, most notably, the process business was part of TS last year and in the Latin American transfer business that we've moved to EM.

We actually believe it's more of a mid-single-digit year-on-year growth for TS at the midpoint of the guidance.

When you exclude the -- okay, great. that's helpful.

And then I had a question about your expectations for any changes to your business in terms of headcount reductions. We've seen kind of slowish growth here.

It sounds like EMEA is somewhat soft. Do you have any plans to reduce headcount or make changes to your employee base?

So, Sherri, it's Rick again. As Ray alluded to earlier, and the end of the day, if we have major expense issues to address, with 70% of our SG&A and people, it's going to be impossible to not have an impact.

However, there are various steps, and I think we've talked about these on the previous calls, that we are taking to be able to manage the discretionary expense and then the differences between having an expense freeze versus a headcount freeze versus a hiring freeze. Hiring freeze, for example, a little more dramatic because then you typically use attrition to be able to generate some savings in the shorter term.

So depending on the performance of the businesses in the portfolio where they're at in relation to the long-term goals and where they're at by the way based on their recent developments in their market places, various elements of the portfolio are implementing various responses to the -- reaction to the market conditions, so there isn't a company-wide or a broad Avnet-based, we've got to do this. What we're doing is working through the portfolio, and where we have the gaps, we're making sure to use all the lever and tools available to respond.

Okay. But it doesn't sound like there's anything that's so bad that you would expect to have a significant headcount reduction at this point.

That's the way we see it right now.

Rick, can you just walk us through just your customer interactions and their tone as you went through the quarter, how it changed and any particular products or segments that stand out in terms of where you ...

Yes, Craig. I'll also let Harley and Phil chime in along the way.

We talked about some of the product and segment highlights particularly, I think, in the TS sector, won't repeat those right now. The customer -- we talked on the August call, I think, about a cautious tone in environment, and I would tell you from my perspective and the opportunity I did have during the quarter, to actually talk to some customers directly, I would say that, that tone continued through the September quarter.

Nothing notable in a shift to one way or the other. And by the way, the fact that we were still coming in here now on the September quarter with the revenue within the guidance and EPS just within the guidance that we laid out, we didn't -- there were no new developments that brought in any particular concerns or for that matter, positive changes to the type of outlook that we had been portraying.

I don't know, Harley, Phil, you guys want to speak anything more detail around the our customer interface, reactions or highlights?

Yes. I'll add to that Rick, what you touched on a little bit earlier.

The overall VAR base, customer base, we're interacting with are pretty optimistic, okay, about the future, and it worked through the September quarter. We're seeing good growth in government, frankly.

Financial markets are still going well. And in healthcare, of course, our HealthPath, some things driving that per quarter around that vertical.

From the technology, as you just mentioned we highlighted that storage, the networking security continues to grow, and it is going to continue to be a bright spot of opportunity from a TS standpoint. But that's high-level coverage, anyway.

Harley, anything on EM?

Rick, I would agree with your opening comments around a cautious tone from our customer base. It's difficult in this environment not to contrast to the last downturn, we shifted through with the last change in environment of any significance.

And when I think about how it feels today and where our data is telling us in contrast to previous, I think the biggest difference for me, Rick to, maybe, reinforcing your comments around caution, is we are not spending a lot of time discussing canceling backlog, taking back parts, swapping out inventory for other inventory. And that has been -- that was a reality in the last significant change we had in the market.

So for us, that signals to us, really reinforcing your comment, that our customers continue -- maybe similar to Phil's comment about VARs, continue to feel positive about their position in the market. But clearly, they're acting relative to management of their working capital and are very cautious in a measured way.

Okay. All right.

And then just as my follow-up for Harley. You mentioned that bookings picked up in components in October.

Did you state the book to bill for that period? And then also, just if you can give any color around just what the pricing environment you're seeing in the components business given that you are taking inventory down and demand has slowed a bit?

Yes. A positive note at this point is that we have not seen a significant pressure on ASPs in the market.

And I would theorize that, that may be due to the fact that in this particular environment, a higher portion of the inventory available for sale today -- or a lower portion, it might be a better way to say it, is in finished goods, with a higher portion being in unfinished dye, et cetera. So we think that may be impacting, positively impacting, not reoccurring what we've seen before relative to pricing pressures.

So, so far, there has not significant ASP effect. Some -- I wouldn't mislead, there has been some but not in the dramatic amounts.

And the other part of your question?

Book to bill.

Yes, as I mentioned before, clearly, we see improvement across our multiple regions, at least through the last 3 weeks or so. And I'd say, no, I didn't mention the number only because I'm cautious to make a strong statement on 3 weeks of data.

But since you asked, it is in the neighborhood of parity.

Harley, maybe in your sector, in your business, can you talk about strength and weakness by end market? And then in the TS business, maybe if we can hear a little bit about the weakness in EMEA.

Is it different by product or product category? Or is this more of a caution around enterprise spending?

Okay. Will, as we often say, EM's business is so broad, and our customer base is so broad, that we don't typically monitor by in-segment.

One that does that jump out to me that produced very strong results actually in the September quarter was the growing business we're seeing around alternative energy, customers all around the world actually. So that one actually posted a fairly strong quarter.

One interesting data point that may surprise you actually is we saw a relatively good quarter, at least relatively from the perspective of better than our overall business, in our global contract manufacturing space. So they turned in a relatively strong quarter.

Geographically, I would say similar to what I believe Rick mentioned in his opening remarks, I would call Asia and America as slightly less than what we would expect from a seasonality perspective. And maybe the greatest weakness from a geographic standpoint at this point would continue to be in Europe.

Will, this is Phil. Let me just give a little color on the TS Europe from a technology and then maybe geographic.

Overall, I would not say that a general statement. I mean, Europe, you really need to break out by region within Europe and then by country within Europe.

So it's a -- might be a very different story on what you see happening in eastern Europe than what you see in southern Europe, okay, as an example, or what you might see in the Middle East. So it really does come down to different pockets or regions within Europe.

We did see some weakness in southern Europe, and we did see some weakness in U.K. Other parts of Europe look pretty good.

So it's really -- you really need to look at the whole portfolio.

I meant more by -- sorry to interrupt, but I meant more by product category. Are you seeing -- for example, servers or storage or software, any of those categories particularly, let's say, driving an outsized portion of the weakness you saw in TS EMEA?

Actually that was my next comment. If you look year-on-year in servers, we are up close to 50%.

Storage was in the 50-plus percent range. So that's going to be the second part of the question you asked from an enterprise, from commodity technology standpoint.

We're not seeing an all out drop or reduction there. So it's actually not too far off from what we see as a percentage anyway from the Americas or Asia for that matter.

Harley, how much credence do you place in the improved book to bill? You said a few times it's only 3 weeks of data.

Couldn't it just be that we're comparing to a weak September billings period? Or is there something else you could point to in the bookings patterns themselves that make you more confident that we're at an inflection point?

Brian, first, if I'm not sure I used the term inflection point. I was cautious a couple of times in 3 weeks, because 3 weeks is 3 weeks.

But no, I don't believe it is reflective of a weak compare. And the reason I say that is, it just is -- it would be very atypical and it would be unusual to see it across all regions.

So I do think there is a stabilizing environment. Our business again is so broad that we do have that luxury of looking at thousands of customers across 4 major regions.

And it just would be entirely coincidental to see it across all regions.

Are the bookings moving out further in time?

As a general comment, they did prior to this period. But no, that's not the phenomenon that's causing this to happen, no.

Okay. And then a follow-up on the drives the doesn't sound like you're adjusting your outlook, Rick, for the described situation in Thailand.

Could you maybe talk about the expected allocation percentage you would receive in December and maybe the magnitude of price increases that you would expect?

Yes. So again, Brian, it's a very fluid, very dynamic situation overall.

We do believe there could be something in the neighborhood -- as I told you, the overall business just less than, say, $200 million for the quarter. Even if we were going to be down in the neighborhood of, say, 20% to 30% on an apples-to-apples basis, we still got ASPs rising, and potentially, profit is going up on this opportunistic, more of the spot buying business that's been part of our equation because our team did do some strategic buying towards the end of the quarter prior to August news breaking out.

That's put us in a good position. So net-net, that's why we believe there's really not a material impact to project.

And we'll keep you posted as we continue to learn -- as we all continue to learn what the ripple effects from this latest disaster are.

So just to ask a question on the inventory. I'm just curious why the EM inventory was up sequentially when you had guided it to be -- the revenue to be at the low end.

I know it turned out to be worse than that. Just trying to figure out at what point did you start pulling back orders to the suppliers?

And how far along are you now in terms of the inventory at 3 weeks or so into the quarter?

Matt, this is Harley. We started adjusting our pipelines, our inventory quantities as we saw the book to bill turn negative right at the end of June.

So if you think of that behavior occurring through the July, August timeframe, that would tell you why -- well, I think Ray earlier commented that we have a strong expectation that inventory will come down in the December quarter because of that behavior that occurred in that July, August timeframe.

So is there just backlog that was coming in? Is that why?

Absolutely. Remember, it is never our strategy or culture to treat inventory in an abrupt manner.

Inventory is our lifeblood, it's what we sell. And unless we believe we are in a strong recessionary environment, we would manage pipeline as opposed to shutting backdoors.

So we adjusted those pipelines that does not take effect immediately. The inventory increase that we saw really is more primarily resultants or driven by the fact that revenues came in at the lower end of what we expected.

And is that skewed more towards actives or passives? Or is that across the board?

Typically, in this kind of environment, Matt, non-semiconductors, interconnect, passive, electromechanical fluctuate at a lower rate than semiconductors do. So therefore, the behavior modification in this kind of environment would be stronger on the semiconductor side.

Is that just because of the dollar value basically?

I think it's the nature of how customers typically manage that product. Oddly, it's always been that way.

Okay. Got you.

And then just a question, again, to you, Harley, regarding the semiconductor business, TI's recent acquisition of National. I know they had some changes in their distribution channel.

They had a big distributor, National did, that's no longer selling those products. Is that a benefit for you and have you seen any share gains there?

It is a significant benefit for us, and we're very excited about the future. Those share gains which will occur would not have happened as quickly.

Keep in mind, there's inventory in the pipeline. The particular distributor that you're referring to typically carries a strong backlog of inventory.

So I would expect you'll start to see positive benefits of that move probably the latter part of this quarter.

The question I have is -- maybe my memory or age is getting a little slow or old, but I remember I think we're coming up now on close to 1 year when you started doing work for Cisco, and maybe you can update us on the progress, the magnitude. And importantly, is that of our below corporate average profitability?

Yes, Jim, this is Phil. Actually it will be 2 years this December, that it was -- at our Analyst Day in New York that we found out.

I got the press release Cisco that we're awarded that RFI here in North America. And I can say, at that conference, we estimated that within 2 to 3 years.

The revenues for Cisco would be between $200 million and $300 million run rate. And I'm pleased to we're on that track, and the relationship is going well.

And it's meeting the hurdle rates for Avnet.

Great. And then just a quick follow-up on Oracle.

They've been going through some changes both taking work away from the North America region for both distributors? Now we're hearing that they may be giving some work back in Europe or something.

Can you just kind of update us on that relationship?

Yes, I think, it's,again, the pendulums tend to swing, the last year to 18 months prior, following the acquisition of Sun. Make no mistake, it was a challenged business relationship.

And so today, it's certainly markedly improving. They are rationalizing their value distribution channel around the world, and we are now starting to see a better performance with Oracle in all regions of the world, including Europe.

So the trend and comparison year-on-year will certainly look better, okay, as we get Ontrack with Oracle and they implement and execute to their plans for distribution in the channel, as well, that they put in place.

Right. And Phil, they put those stakes on the ground concurrent with their new fiscal year, which was June 1, right?

Yes. That's right.

It was talk about, discussed, et cetera, and they're really just several months into play.

Question for you on the gross margin, apologize if I missed this. So the swing between EM and TS gross margins in the quarter, let's say, the EM gross margin is down 107 bps, I believe you said.

How much of that is related to the shift in revenues from TS in and out of TM -- or EM, excuse me ?

Yes. So Brendan, I'll let Harley comment as well.

Generally, I think there was 3 influences contributing to that 107. There was the mix shift of less Western influence overall.

And then there was the Latin American transfer that we talked about. And then there was also, in my opinion, it was a great fourth quarter on behalf of the EM team overall.

There was some great performances and numbers in that they contributed. So Harley, I don't know, anything else to put?

That's it.

That was really the story.

You can't quantify what the mix shift?

I think we prefer not to quantify.

So then the other question I have for you is, the TS margins that we saw on the September quarter, should we see TS margins improve like we normally do in the December quarter?

Now by margins, you're talking about operating, again?

Gross, I'm sorry.

Okay.

Operating margins?

No, he's talking about gross margins, Phil.

We're planning on continued -- plan right now is for us to -- from an operating margin standpoint, given the current guidance, that we'll get the leverage that we typically get in the quarter of December on an operating margin standpoint.

Yes. Brendan, what I would add is, historically, put the story it had from TS point of view, there wouldn't be a reason to expect a margin expansion.

However, as Phil has talked about, as some of the portfolio improvement process will include some deselection of revenues, et cetera. You may assume, in many cases, we're deselecting probably lower margin business.

That would have a beneficial effect, but that's just part of the portfolio management process, not really due to a seasonal expectation for December.

Okay. And then, I guess, my last question is on inventories, again.

So if you take revenue -- inventory is down, call it, 77% in December quarter. You're getting your days back to kind of below historic levels, call it, 37, 38 days.

Do you think that's a bottom that your inventories in good shape heading into the March quarter, it's not going to be down any further?

Well, Brendan, the real question there is, can we expect normal seasonality for the March quarter. Something we're not calling at this particular point.

But yes, if we had normal seasonality coming out of it and we can keep inventory and then sale with -- I mean, in line with the sales for December quarter, then we ought to be able to hold inventory turns relatively flat here, and then maybe get a little bit of a boost heading into the March quarter.

Two quick questions. You've covered a lot of good detail on the call, but given what little we know about the economy going forward.

But distribution within the channel, are you seeing any changes in terms of competitive environment, not necessarily at the whole market but within the channel maybe smaller distributors getting more price competitive? And then secondly, Ray, just to be clear on the working capital flows.

The rest of the year, are you saying that you expect working capital, if revenues are in similar ranges we're in right now, to be positive for the rest of the year? Or does it still kind of depends?

Let's start with the working capital.

When you said working -- are you talking working capital or cash flow?

Working capital and cash flows. So the cash generated from working capital is a negative, and you're saying it's going to get better.

But are you saying that for the next 3 quarters, rest of the year, it's going to be a positive?

Well, I wouldn't go as far as the next 3 quarters because a lot depends upon what happens with the environment. We'll go as far -- as Rick just said, we're not forecasting what's going to happen in March yet.

But if I look at the December quarter, certainly, it will be a positive cash flow generation overall, with working capital coming down a little bit.

And Steve, back to the question on the distribution developments. Obviously, doing business in 70 countries and it's quite different set of overall competitors and different competitive marketplaces.

I'm not sure exactly how to answer the question, but there's not been any major new entrants our developments that hit on our radar the have caused any particular change in strategy or response on our part, at this particular point. I don't know if Harley or Phil, do you want to add anything else?

I think your comment -- your question was around, are we see some competitive behavior from small distributors?

Yes, because, I mean, you're seeing -- you guys are seeing negative cash flows from working capital. I would imagine there's other guys that are, as well.

and Maybe you're seeing some pricing pressure. That's sort of where I'm...

Yes. I don't think so.

I haven't seen much. Again, my theory, and again it's my theory, as I said before, is those pricing pressures are often more resultant from having inventory you've got a get rid of than trying to steal.

We typically -- not to arrogant, we typically don't lose a lot of business to a small competitor on price. So that's not behavior we're seeing a lot of.

Thank you for participating on our earnings call today. As we conclude, we will scroll through the non-GAAP to GAAP reconciliation of results presented during our presentation, along with a further description of certain charges that are excluded from our non-GAAP results.

This entire slide presentation, including the GAAP financial reconciliations can be accessed in downloadable PDF format at our website under the Quarterly Results section. Thank you.