Fourth Quarter Fiscal Year 2003 Earnings Release Conference Call Script
May 16, 2003

NU HORIZONS ELECTRONICS, INC. HOSTS:
Arthur Nadata
Paul Durando
DATE: May 16, 2003
TIME: 4:15 a.m. EST

Operator: Good afternoon and welcome, ladies and gentlemen, to the Nu Horizons Electronics Corp. fourth quarter and fiscal year 2003 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company, we will open up the conference for questions and answers after the presentation.

For purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, our statement today may include certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Such statements are based upon, among other things, assumptions made with information currently available to the management, including management's own assessment of the Nu Horizons industry and competitive landscape.

At this time, I would like to turn the conference over to Mr. Arthur Nadata, President and CEO of the company. Please go ahead, sir.

Arthur Nadata: Thank you. Good afternoon everyone, and thank you for joining us. I am Arthur Nadata. Here with me today are Paul Durando, our Chief Financial Officer; and Richard Shusta [sp], President of our NIC component subsidiary and Vice President of Nu Horizons. As for my opening remarks, Paul will report on the financial results for the fourth quarter of fiscal year ended on February 28, 2003. I'll then review a few of our current initiatives and finally open the floor to your questions.

Continued gross margin pressures in the semiconductor marketplace more than offset a seven percent increase in sales volume and a seven percent decrease in expense and interest costs, resulting in the operating loss for the quarter in the fiscal year as reported earlier today.

The electronic component industry continues to demonstrate difficult, short-term predictability. Calendar year 2002, however, appears to have been a stabilizing year for the industry as a whole. We believe we see the beginning of a moderate improvement in the component marketplace worldwide and in our current book to bill ratio, which is now better than one to one. Price erosion continues but appears to be slowing as some manufacturers are holding the line.

Before I comment further, I will first turn the call over to Paul for a review of the financial results.

Paul Durando: Thank you, Arthur. Net loss from continuing operations for the quarter ended February 28, 2003 was $1,776,000 or 11 cents per share as compared to a loss of $2,259,000 or 13 cents per share for the prior year quarter. Our top line sales from continuing operations increased during the quarter from 64 million in the fourth quarter of fiscal 2002 to $70.9 million in the fourth quarter of this fiscal year.

For the year ended February 28, 2003, net sales from continuing operations increased to $302.1 million from $281.9 million in the comparable prior year period. Net loss from continuing operations for this fiscal year was $2.5 million or 15 cents per share versus the loss of $2.8 million or 17 cents per share in the prior fiscal year. Included in the fourth quarter and prior fiscal year 2002 results is a one time charge of $1.1 million, representing impairment for the valuation of goodwill. This impairment accounted for a loss from continuing operations for both the year and fourth quarter in fiscal 2002 of seven cents per share. There was no comparable charge in fiscal 2003, nor is there any remaining goodwill on the balance sheet.

On August 23, 2001, the company sold its contract manufacturing business in Springfield, Mass. There is no net income from this discontinued operation in this fiscal year for the quarter or the year ended February 28, 2003 or for the quarter ended February 28, 2002. Net income from this operation was $799,000 or five cents per share for the prior year ended February 28, 2002 and in addition to an approximate $4.2 million after tax gain in that period.

The balance sheet was further strengthened during the year as a result of $31 million in free cash flow resulting from continued reductions in accounts receivable and inventory in our core component distribution business. This has allowed us to liquidate our remaining long-term debt and generate a cash position of approximately $31 million at year end. We continue to maintain a strong equity position of approximately $124 million with a working capital ratio of 6.2 to one. Now I will turn the call back over to Arthur.

A. Nadata: Thank you, Paul. Before I turn the call over for questions, I just wanted to make a few additional comments relating to our ongoing initiatives and investments for the future.

Truly, the last two years have been extremely disappointing for ourselves as well as our entire industry. We believe we have and are investing in strategies and initiatives to best take advantage of our strengths, to expand into new markets and technologies. Among those are our strong balance sheet to finance our strategies.

We continue to focus our line card heavily on non-commodity, high technology, high ASP products. An equally focused sales and engineering staff dedicated to providing our customer product solutions and design assistance and not just electronic components. Our manageable size, which allows for quick decisions, as well as changes in strategies and general flexibility, which may be missing among many of our competitors in the marketplace.

I'd like to review some of our strategies and initiatives for the future. General domestic developments: recently due to industry developments and opportunities, we're able to further upgrade our sales and engineering staff with the addition of highly qualified personnel that became available in the marketplace. These additions, coupled with hubbing of our inside sales functions in specific markets should provide us with more feet on the street and less related administrative costs.

RF microwave effort: our intention is to provide stronger technical and system solutions to our customers, utilizing RF microwave and wireless technologies and to enhance our future sales prospects. The RF microwave segment of the component market represents the North American detam [sp] of $1.5 billion with substantial market growth predicted to anticipate significant demand for wireless devices and wireless broadband access.

We are now in the final stages of negotiating several new franchise suppliers to support this initiative. Tightened supply chain services concept, which is to provide contracted supply chain solutions on a project-by-project and customer-by-customer basis, continues to show promise with additional acceptance among component manufacturers desiring to out source the direct non-distribution business. This was further evident with the test semiconductor announced last Fall, the selection of Titan to provide their direct customers in Asia with local order fulfillment and logistic services. Most recently, the test has expanded the use of Titan Services to include the North American market. In addition, Titan has also added Toshiba and Motorola to its customer base and has been making steady progress and increasing its business as a supply chain service provider.

Our Asian initiative: As we discussed in our last conference call, the company believes we must strongly engage in the Asian semiconductor market. We successfully entered the market several years ago through our passive component subsidiary, NIC Components. We are now continuing the process of implementing our entry into the market with our subsidiary, Nu Horizons Asia. I am pleased to report that the initiative is progressing smoothly and successfully. Nu Horizons, not including NIC Asia, is currently employing over 35 people and has opened offices in four countries, including Singapore, Hong Kong, Mainland China, Malaysia and Korea, and we plan to open two additional offices in Taiwan and India.

We are also on the verge of expanding to a new and larger warehouse facility in Singapore, as well as a warehouse right near Shanghai. Coupled with this progress, it is a record book to bill with each of the three last months showing double-digit sales increase.

In conclusion, on a positive note, it should be noted that while the market declined 58% from its peak over the last two years, we have moved from being 65% reliant on telecom to less than 40% while expanding in the industrial, medical and security and instrumentation segments. In addition, we have increased our market share of the North American distribution total available market over the past year by 43% to 5.3% of the total market. We continue to be optimistic about the future but cautious in the near term. I will now open the conference call to questions.

Operator: Thank you, sir. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. If you have a question, please press star, one on your push button telephone. If you wish to withdraw your question, please press the star, two. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Matt Sheerin with Thomas Weisel Partners. Please state your question.

Matt Sheerin: Thank you. Hi, Arthur. It sounds like you folks are a little bit more positive in terms of the demand environment that you've been in a while. It sounds like book to bill is pretty positive. Could you just tell us where you're seeing the strength? Any particular end markets or regions? And then also, what kind of sales are you seeing in Asia right now and as a percentage of overall revenue, and where do you think that can go?

A. Nadata: First of all, as I mentioned, not that the telecom market is dead by any means, but we have shifted a lot of our initiatives and customer base into areas of industrial segments. As I security, [unintelligible] and medical. But overall, I just think we're penetrating more of the detam [sp], the top customers in the detam that really are growing today. And that's been a strong focus for us, is penetrating into that customer base. Obviously, the networking in wireless is still pretty strong, and certainly the military has picked up for us as well.

M. Sheerin: OK. And what about Asia?

A. Nadata: Well, as far as Asia, the last three months have been up into the right both in bookings and in sales. Last month it was their best booking month. They booked in excess of $2 million. They'll do better this month. And I believe they shipped -- Paul, do you have that number?

P. Durando: For last month?

A. Nadata: Yeah.

P. Durando: They shipped about a million, two I believe.

A. Nadata: A million, two shipment.

P. Durando: We're talking Nu Horizons now.

M. Sheerin: Sure.

A. Nadata: [Unintelligible] not NIC.

M. Sheerin: Gotcha. OK. So it's off of a low base, obviously, but lots of room to grow. And what, in terms of -- it sounds like, you said book to bill shows where you're looking at double digit increase. You only have two weeks to go in the May quarter. What kind of growth are you looking for sequentially in the May quarter, roughly? I mean, single digits, low single digits?

P. Durando: It will probably be in the low single digits.

M. Sheerin: OK. With better growth in August if things continue?

P. Durando: Yes.

M. Sheerin: OK. Then can you just give us some color, Arthur, on just NIC. I know there's been a lot of pricing pressure on impassives. What percentage of sales is NIC of the overall business now and how do you see NIC position to you in terms of pricing and revenue going forward?

Man: Well, I have Ritchie Ritchie [sp] sitting here with me, so I'll let him pick up on the NIC.

Ritchie Ritchie: It's running around 15% of the total sales [inaudible] buyer. Our [inaudible]

Operator: Mr. Durando, I'm sorry to interrupt; your line is no longer clear. Have you done something different?

P. Durando: Our line?

Operator: Yes, sir.

P. Durando: No, not at all.

Operator: All right. You may proceed.

R. Ritchie: OK. Now can you hear me?

M. Sheerin: Yeah, I can if you can speak up just a little bit.

R. Ritchie: Sure. OK. I'm sorry. As I -- just to reiterate, our sales are about 15% of the total number, 15% or slightly higher, and our profit levels have been actually holding steady, but the ASP of past components continues to come down; we still see price erosion. We're starting to see these up, however, and we believe that it should stabilize over the next quarter or two. In the meantime, our factory course will come down, so we've been able to keep our margins steadily where we think they should be.

M. Sheerin: And then are you looking at a positive book to bill as well, Ritchie?

R. Ritchie: Yes, we are, actually.

M. Sheerin: OK. Great. Thanks a lot, guys.

Operator: Thank you. Our next question comes from Rob Damron with Worth West Securities. Please state your question.

Rob Damron: Good afternoon. Just a question about the gross margin trend. If we look back a few years ago, a company enjoyed very nice gross margins in the low 20's and now we've kind of seen it pull back into the 17-1/2, 18 percent range. Maybe you could talk about your mix between fulfillment and demand creation currently, and then if we get into a better environment and some of the demand creation services actually result in production, the price going into production, will that raise the gross margin, or are we expected to see kind of the 18% gross margin going forward? Just give us some thoughts on that perspective.

Man: You know, yes, we have been doing more fulfillment business, and as a percentage our design win revenue, though, has been increasing, but it's not high enough, and the design win margins have been really staying fairly stable, in the low 20's. So, yes, part of it is because some of the designs have not come to fruition, some of the larger engagements, but when I say a design win revenue, a bigger piece of our revenue sales today are coming from inception of our design wins. It's just not the larger pieces of business. So I think it's mostly some of the large fulfillment deals that we're doing today that has really affected the margin and hasn't been on the demand creation site.

R. Damron: What is the split in revenue between fulfillment and the design win revenue?

Man: Tough -- I don't have that number in front of me, Rob, to be honest with you.

R. Damron: OK. And then just in terms of the pricing environment, you mentioned a little bit about the passive business, but how about semis? Are you seeing any stability in pricing from that perspective?

Man: I think in most areas of the semis, certainly on some of the proprietary product, pricing has stabilized. You know, you still see a little bit on the low end commodity, but I think that has also gotten to a point where the suppliers are just really have hit bottom. And I think that they're just really starting to stick to pricing. And we've seen some lead time start to go out. So that in itself is going to stabilize the pricing. I mean, you always get just one or two deals maybe on a piece of flash or something where there's real pricing pressure because there's one particular big deal on the market and everyone is all over it. But the prices have not gone down to the level they have, and it's a question of relationship and servicing of a customer and that's really winning the business today.

R. Damron: OK. And last question, in terms of the additional investments in Asia, should we assume slightly higher SG&A expense going forward as a result of that, or maybe you could quantify for us how much incremental SG&A that might be.

Man: I'll take a shot at answering that. I think you've got to figure on the SG&A going forward in the range of 15.7-1/4 to 15.9 tops, but 15.7 probably more likely, and that's now with almost everything in place, including additional personnel, even the states and most of the people are going to be hiring in Asia. So, yes, this is --

R. Damron: Wait. We were just at 14.6 this quarter.

Man: Right.

R. Damron: So we're -- you're expecting the May quarter the SG&A to be in the 15.7 range?

Man: That's right. Because almost all of the incremental expense came on I would say in the last few weeks of February and the beginning of March. So you're going to see a bump here, but if you'll recall, back in the Fall we indicated the bump might even be larger than that, and I think we've kind of contained it to where we may -- that level may be where we're going to be for a while.

R. Damron: OK. So if you -- if I do the math back in the envelope, it looks like the loss for the May quarter will be greater than the loss we saw in the February quarter?

Man: Slightly. Not that much, because we should have some additional sales to offset some of that increase.

R. Damron: OK. All right. Thank you.

Operator: Thank you. Our next question comes from Elliot Glazer with Du Pasquier & Company. Please state your question.

Elliot Glazer: Yes, gentlemen, can you give us some further details or color on the book to bill? Was it closer to 1.2 or 1.1, for example?

Man: It was closer to 1.1, Elliot.

E. Glazer: OK. All right. Thanks an awful lot.

Operator: Thank you. Our next question comes from Hank Erlich with Trident Partners. Please state your question.

Hank Erlich: Yes. The stock price has been somewhat of a disappointment, you along with others. Can you comment on some levels of where you think you have to get to turn this into a growth story? I mean, what kind of increases in revenue and maybe some bottom line earnings and get back to some of the old glory days, or at least a positive trend?

Man: Well, yes, even though you hear a lot of people, and certainly we're all waiting for the industry to turn, but we do feel that with some of the infrastructure we've put in place that we as a company could start to turn and hopefully become profitable with some of the initiatives that we have instituted. Certainly the industry turnings have been making a big difference for everyone. It's certainly taken many more quarters than any of us have anticipated. So it's very hard to predict at this point, to answer your question, when some of those things will happen. I can tell you that we have taken a track that the company does have cash, we have no debt, very strong balance sheet. There's some major opportunities that we have taken advantage within the company, the position of the company and strengthen it, and that's been both on the supplier to customer side as well as additional people, primarily people that are in the face of the customer.

Obviously, I know everyone is sitting out there and saying, you know, when does it get to a point where these investments are going to turn into an ROI, and do we have a contingency plan if things don't work out, and the answer is yes, we do. We have chose not to have a layoff within the company. Many of our competitors and other companies have so-called thrown the baby out with the bath water. We've taken advantage of that.

Recently, we've hired a number of very strong people that, because of changes within the industry, through acquisitions, became available. Already we're seeing very strong new customer base coming to us because of their relationships, very new bookings of types of business we never would have had. So we feel that this is just -- you know, it's a snowball kind of rolling and I think that we're going to be getting stronger very soon.

H. Erlich: Yeah, is there any percentage -- like do you feel like if your earnings -- I'm sorry, if your sales were to go up five or 10 percent, or do you need like 30% increase in revenues to spot hitting something on to the bottom line?

Man: We could give you a number. We probably need, depending on the gross margin -- right -- about another 20% growth in sales revenue. And of course, that's dependent on the GP to really start to show profit. Obviously, if we can get the GP up a point then you're going to need less sales. So we're focusing on both very carefully now. We're certainly focusing very strongly on our cost of sales.

I mentioned in the script that we have done some hubbing as far as inside sales, which we think makes a lot of sense; a lot of our competitors are doing it as well. We're still keeping bricks and mortar and engineering and our staff in the strong markets we have to be, but we feel this would be more cost effective and we'll be able to service our customers better. So there's a lot of things we're doing in the background that are helping us.

As far as the Asia expansion, if we were no in Asia today, we probably wouldn't have any of those sales because most of the sales we're engaging with are designs that we've done in North America. So we're very happy with what Asia is doing today, and we feel they're growing even faster than our budget plan has been. Actually, Asia over the last couple of months has been close to an operating -- they have been in operating break even, which for us was a very good surprise.

H. Erlich: Could this take a few years to become a growth story again, though?

Man: No. I really -- God forbid. I can't put a date on it, but we're certainly much closer to getting better than --

Man: You know, you have to remember something; statistics are a funny game. Right now coming off of $70 million factor, when Arthur says 20 million, we're really only talking about 15 million in sales.

Man: Twenty percent.

Man: Yeah, 20%. So it's 20% of a number that's fairly low right now. So it's a very doable thing if we get any kind of pop in the marketplace and any kind of success in Asia. So we certainly would be disappointed with a two year schedule; that's for sure.

H. Erlich: OK, thank you.

Operator: Our next question comes from David Heger with Kennedy Capital. Please state your question.

David Heger: Thanks. I was just curious about inventory levels overall in the industry and do you feel like they're under control now and is that one of the reasons why it looks like book to bill has been rising and pricing pressure seems to be coming down?

Man: Yes, we feel our inventories are fairly well under control. We feel the mix is very, very good. We watch it very closely. We have very strong systems and history in the computer. So inventory for us is not an issue right now.

D. Heger: And as far as the industry as a whole?

Man: The industry, there's probably still some excess in the commodity world, but it's certainly down quite a bit from the 15 billion it was in excess two and a half years ago. So once in a while you find a pocket. But we're seeing that has certainly gone down and we feel inventories have gone down in many of our supplies as well.

So, therefore, you better have a good inventory control because this still -- you know, even thought the market has taken two and a half years to turn and it certainly could be a slow turn, it could also be a strong "V" turn. We could all wake up one day and we're doing this a long time and before you know it there's panic in the streets and the lead times are way out. You know, fabs have been cooled down. So that could happen as well and I wouldn't be surprised if it did. You know, it's been three years since Y2K and IT has been upgraded and cap ex and at some point that's all going to hit.

D. Heger: Have you guys found that just because companies themselves have been keeping such lean inventories that you're starting to run into some short lead times and kind of scrambling around just because everyone through the chain has been trying to keep things leaner?

Man: Yes, I think that's a situation. Also, you know, today we have the contract manufacturing customer base, which we haven't had years ago, and that kind of changes the picture also because they got their way of purchasing inventory and part of the problem we had the glut was a lot of a duplicate of inventory and purchasing and so you've got to be very careful of that as well. You know, fortunately for us a lot of the products that we handle are proprietary, they're specific to a customer application, non-commodity, and you don't get double or triple ordering in that. So we try to watch that very carefully.

D. Heger: OK, thanks.

Operator: Our next question comes from Joe Goldstein with Goldstein Associates. Please state your question. Mr. Goldstein, sir, your line is live [No response]. Our next question comes from Brian Alexander with Raymond James. Please state your question.

Brian Alexander: Thanks. Good afternoon. Just a follow-up on the pricing question earlier. I guess a couple of your larger competitors had pretty different trends in pricing in their business in the March quarter, so I guess what it sound like you're saying is you're more in the camp of stability than what one of your competitors said, which was double digit declines in certain parts.

Man: Yeah, and you know also you've got to take the passives and the actives and really kind of look at them a little bit differently as far as the pricing stability. And certainly as we said on the Nu Horizon side, our mix is more -- higher ASP items than most of our competitors and more -- made by less manufacturers than a lot of the commodity items. So you don't have as much of the pricing pressure. I mean, you take Tomati [sp] Linear, the same parts made by 10 different manufacturers, and a lot of product we sell is made by maybe one or two, maybe three in some cases. And on the passive side, Rich, you may want to comment on the pricing there.

R. Ritchie: Well, there's still price erosion, as you know, and I think you'll continue to see some. But quite frankly, it has definitely slowed down. Where you might have seen 10% price erosion in the quarter, you're now seeing maybe three or four percent. And I have to tell you that I am seeing some of our competitors walk away from business at certain price levels. So I believe you're pretty close to rock bottom right now, and while we see some of our competitors in the passive arena losing money, we're starting to see some push back and say, you know, we're not going to take the business at a loss anymore.

B. Alexander: And Arthur, you mentioned that there are certain instances where lead times are expanding. Any way to quantify that and give us a little bit more color on where you're seeing lead times extend?

A. Nadata: You know, we're seeing, certainly in the analog space to some degree, some of the wireless networking products. Some of the high end at PGA areas. When I say expanding, I'm not saying lead times are drastic, but they have moved out from a book, ship type of thing.

B. Alexander: OK, thank you very much.

A. Nadata: Sure.

Operator: Our last question comes again from Rob Damron with Southwest Securities. Please state your question.

Rob Damron: Yes, I just had a question for Paul. If you look at the minority interest line, that number has kind of jumped around a little bit, especially in this latest quarter. What should we expect, or why did that occur this quarter and what should we expect [crosstalk].

P. Durando: Well, we bought back a piece of the minority interest and I had a little catch-up to do on that from an accounting viewpoint so that the number was a little higher than you would normally see. But that should go back to normal.

R. Damron: OK, thank you.

Operator: If there are no further questions, I will now turn the conference back to Mr. Nadata for closing comments.

A. Nadata: Well, thank you all for being on the call. We appreciate your support and we look forward to updating you in the future. Thank you all very much.

Operator: Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 293089. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

(conference concluded)