Vince Keenan - VP of IR Bill Amelio - CEO Kevin Moriarty - CFO Gerry Fay - President of Electronics Marketing Patrick Zammit - President of Technology Solutions.

Alvin Park - Stifel Louis Miscioscia - CLSA Adam Tindall - Raymond James William Stein - SunTrust Shawn Harrison - Longbow Steven Fox - Cross Research Mark Delaney - Goldman Sachs Jim Suva - Citi Param Singh - Bank of America.

Please stand by. Our presentation will now begin. I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations..

Good morning and welcome to Avnet's Second Quarter Fiscal Year 2017 Business and Financial Update. As a result of the pending sale of Technology Solutions and having met applicable requirements, Avnet began reporting the TS business as a discontinued operation in the first quarter of fiscal 2017 and prior periods have been adjusted for comparability.

Additionally, the year-over-year comparisons reflect adjustments to the first quarter of fiscal 2016 for the transfer of the embedded computing solution business from TS to EM.

As we provide the highlights for our second quarter fiscal year 2017, please note that in the accompanying remarks, we have excluded certain items, including intangible asset amortization, restructuring, integration, and other items and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-US-dollar-based financial statements into US dollars. When we refer to organic sales, we have adjusted the prior period to include the impact of acquisitions.

In addition, when addressing return on capital employed, return on working capital, and working capital velocity, the definitions are included in the non-GAAP section of our press release. Before we get started with the presentation from Avnet management, I would like to review Avnet's Safe Harbor statement.

This call contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. There 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 is set forth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Bill Amelio, Avnet's CEO, will provide Avnet's second quarter fiscal year 2017 highlights.

Following Bill, our Chief Financial Officer, Kevin Moriarty will review some financial highlights and provide third quarter fiscal 2017 guidance. At the conclusion of Kevin's remarks, a Q&A will follow.

Also here today to take any questions you may have related to Avnet's business operations are Gerry Fay, President of Electronics Marketing; and Patrick Zammit, President of Technology Solutions. With that, let me introduce Mr. Bill Amelio to discuss Avnet's second quarter fiscal 2017 business highlights..

Thanks Vince and hello everyone. Thanks for taking time with us and your interest in Avnet. It was an exciting and very busy quarter at Avnet. We continued our strategic transformation to become a standalone electronic component distributor with a broader suite of products and services spanning the entire product lifecycle.

After completing the acquisition of Premier Farnell on October 17, our teams went to work evaluating how best to leverage the strength of both companies to accelerate our growth.

While we intend to keep Premier Farnell separate in the market to maintain the unique value proposition in the small order space, we will link digitally the front end of both companies to provide customers a seamless experience as they move from idea to design to prototype and onto volume production.

Our goal is to deliver the Avnet experience by allowing designers to tap into our deep technical and supply chain expertise due to our digital platform with new tools and innovative services. On November 14, we further enhanced our digital platform with the acquisition of Hackster.io.

Hackster.io provides engineers and makers with the web-based forum to learn how to design, create and program Internet connected hardware. With a growing community of close to 200,000 users, Hackster.io further expand our reach into the idea phase as technology spreads into more products especially through the Internet of Things.

Our goal is to build an ecosystem that provides a true end to end experience to the widest customer base, the low cost to serve model and we believe we are well on our way to achieving this vision. They've also been investing in new tools and services to support our demand creation business.

Our [indiscernible] which provides field application engineers quick access to reference designs and product information about FAEs to quickly e provide customers with plot diagrams that highlight the best solutions for their design challenges.

[indiscernible] will all our FAEs to be more productive, which will become increasingly important as your workload grows with a new lead from our digital platform.

We also introduced a new web-based tool that allows engineers to quickly perform parametric searches and populate their bill materials with accurate, and cost and product availability data.

Together these tools will not only help customers speed their time to market but will also allow us to improve the efficiency of our demand creation resources and convert more leads into design wins and revenue growth. Before I turn the call over to Kevin I’d like to acknowledge the contribution of our technology solutions team.

The TS business has been an important part of Avnet success for many years even though there was more work to do to prepare for the carve-out of TS operations, the team stayed focus on running the business and delivering a strong December quarter.

TS sequential revenue was near the midpoint of our seasonal range and operating income margin improved materially. I'm confident they will continue to realize future success as they become part of Tech Data. Now I’d like to turn the commentary over to Kevin Moriarty, who will provide more color on our financial performance.

Kevin?.

Thank you bill and hello everyone. Now I would like to review the financial results for Avnet’s continuing operation which is essentially the combination of our electronics marketing business and Premier Farnell.

In the December quarter, reported revenue of $4.3 billion was approximately $75 million below the midpoint of our guidance as a result of the decision to reclassify $92 million of embedded computing solutions revenue to discontinued operations.

This business which was included in our guidance was part of the 450 million of annual embedded revenue that we transferred from TS to EM at the beginning of our fiscal 2017 when we were consolidating our global embedded business.

Given one of the key suppliers to this business was on the technology solutions line card, it made more sense to move this business back to TS after we evaluated the customer and financial impact resulting from the sale to Tech Data. As a result, the business being transferred to EM is closer to $100 million per year on a go-forward business.

Turning to the income statement. Our December performance validates the financial performance and benefit to the Premier Farnell acquisition as both gross profit and operating income margin expanded from the year ago quarter.

On the top line, Premier Farnell exceeded our expectations this quarter and contributed to a 2.7% year-over-year increase in revenue. Organic revenue declined 2.9% year-over-year in constant currency, primarily due to our decision to exit select high volume supply chain engagements in the Asia region.

If you exclude the decision to exit lower margin business, organic revenue grew approximately 4% from the year ago quarter. At a regional level, our EMEA region continued to see strong growth as reported revenue including Premier Farnell increased 21% and organic revenue increased 11.6% in constant currency.

The 14th consecutive quarter of organic growth. In our Americas region, reported revenue grew 7.5% from the year ago quarter, while organic revenue declined 2.1%, primarily due to a decline in the embedded business.

Excluding the decision to exit select high volume supply chain engagement, our Asia region was essentially flat with the year ago quarter. Now turning to gross profit.

Gross profit dollars increased 16.1% from year-ago quarter to $586 million and gross profit margins expanded 158 basis points to 13.7%, primarily due to the addition of Premier Farnell and improvements in our Asia region.

Adjusted operating income increased 7.9% from the year ago quarter to $164.5 million primarily due to the addition of Premier Farnell as well as the 15% increase in the EMEA region. Adjusted operating income margin increased 18 basis points to 3.8%, primarily due to the inclusion of the higher margin Premier Farnell business.

Excluding Premier Farnell, the EMEA and Asia regions increased operating income margin over 30 basis points year over year. Adjusted earnings per share of $0.77 increased $0.02 from year ago quarter as the increase in operating income was partially offset by higher interest and other expense which had a $0.04 negative impact on EPS.

The year-over-year comparison of our results from continuing operations were negatively impacted by several one-time acquisition charges. Operating income from continuing operations declined 8.7% year over year due to $24 million increase in restructuring, acquisition and amortization expenses related primarily to the Premier Farnell acquisition.

On the bottom line, net income from continuing operations was further impacted by $32 million of hedging and bridge financing costs related to the acquisition of Premier Farnell. The cash outlays related to the Premier Farnell acquisition was reduced by approximately $75 million as compared to the original bid price due to our hedge strategy.

As a result of these charges, GAAP diluted earnings per share from continuing operations declined 67% to $0.25. In the December quarter, our working capital increased 2.3% sequentially due to addition of Premier Farnell.

If you exclude the impact of Premier Farnell, working capital declined 9.7% led by a 13% decrease in the Americas region where working capital had been elevated during the ERP implementation. Cash flow generated from continuing operations was approximately $192 million in the December quarter.

And Avnet’s total cash flow from operations was approximately $240 million. As a result of the strong cash flow generated from operations this quarter, Avnet’s trailing 12 months cash flow from operations increased $122 million sequentially to $380 million.

On October 17, we used approximately $100 million of offshore cash and $660 million of debt to fund the acquisition of Premier Farnell. On November 14, we issued $300 million of five-year note at a rate of 3.75%. We use the proceeds of those notes to pay down the acquired Premier Farnell debt as well as some floating rate debt.

We still intend to use approximately $1.5 billion of proceeds from the sale of TS to pay down additional floating rate debt in order to reduce our credit statistics to a level that solidly supports our investment grade rating.

These series of actions will leave us with a strong balance sheet that when combined with our cash generation will allow us to fund future growth and consider ways to return additional cash to shareholders. Going forward, our intention is to maintain the same capital allocation priorities we have pursued in the past.

Number one, maintain and grow our dividend; two, invest in organic growth; three, pursue value creating acquisitions that enhance our competitive position and fourth, return excess cash to shareholders via our disciplined share repurchase program. Now turning to our outlook.

Looking forward to Avnet’s third quarter of fiscal 2017, we expect Avnet sales to be in the range of $4.3 billion to $4.6 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.80 to $0.90 per share.

This guidance does not include any additional acquisitions, the amortization of intangibles, any potential restructuring, integration and other expenses, and certain income tax adjustments. The guidance assumes 130 million average diluted shares outstanding and an effective tax rate in the range of 23% to 27%.

In addition, the above guidance assumes an average US dollar to euro currency exchange rate of $1.07 to the euro. This compares with an average exchange rate of $1.10 to the euro in the third quarter of our fiscal 2016. With that let’s open up the lines for Q&A.

Operator?.

[Operator Instructions] Our first question comes from the line of Jerry Scribner with Deutsche Bank. Please go ahead with your question..

Hi. It’s [indiscernible], thanks for taking my question. My first question would be just your comments suggested that Premier Farnell revenues came in ahead of expectations, which would suggest sales north of the 230 to 250 million range that you had suggested last quarter.

I'm just wondering what drove some of the upside and how we should think about the cadence of sales going forward.

And also if you could comment if margins were more in line with your prior projections?.

This is Gerry, what I would say is, yes, they - Premier Farnell performed quite well last quarter. They've met the high end of expectations. As I said on our last time, they had arrested their margin erosion and now have actually improved our margins. So we look to see continued margin improvement from Premier Farnell going forward..

We're also on track with the synergies we talked about last quarter call as well and we are pretty excited to see some real good potential there..

And just as a follow up, I was wondering if you could comment if you're seeing any effect on your business or you anticipate any effect on your business from the new White House administration policies, for example from tax benefits?.

This is Kevin, I guess what I would say and as you know and [indiscernible] reading, I would describe the topic as a very fluid situation and I'm not going to speculate.

So areas we're watching closely are overall tax rate, taxation on passed unremitted earnings and future foreign earnings, destination based taxes, interest expenses, deductions in areas like cash repatriation. The one thing I would point out is that for Avnet, often recall that we are not the direct importer of goods..

Thank you. Our next question comes from the line of Matthew Sheerin with Stifel. Please go ahead with your question..

This is Alvin Park speaking on behalf of Matt Sheerin.

Just in terms of Premier Farnell, could we just get some color on the geographic mix of it?.

This is Gerry. The geographic mix about 50% of the business is in Europe, 30% in the Americas and the balance in Asia..

In terms of seasonality with the Premier Farnell, I mean do you see significant changes going forward from what you provide in the past.

I mean any color we could see in terms of going forward seasonality in the business?.

I think we will be looking at seasonality and will update that in our investor conference that's coming up in May..

Our next question comes from the line of Louis Miscioscia with CLSA. Please go ahead with your questions..

Yes. Getting out of the Asia high volume business, I guess throughout the year as we've heard well I guess different vendors like yourself in this area, take some of this business and then when obviously you discard it, you said, geez it wasn’t really worth it, it was not, the margins just weren't good.

So would you [indiscernible] now that you're getting out of this that in the future your maturity shy away from future kind of sales in this area?.

No, I think as I've always said Lou, we saw that business as opportunistic and as you know you know we continue to look at financial returns we get particularly on big deals like that. So it had gotten to a point where the financials did not make sense anymore for us and we moved away from that business.

We also did that planfully, as you remember we had a big Broadcom win recently and we knew that that business which we felt was much more profitable for us and much more strategic would offset more than offset the loss in our high volume fulfillment business.

So if you look at that and you look at some of the change with our margins increasing, we think we made a good decision in that space..

So as we look at it - this is Bill, as we look at any business that we take, we look at how fast we can turn the business from an inventory point of view as well as the margin profile and we want to make sure we have the right returns, if that turns and drop down to a point where it doesn’t really return and that means we will exit the business..

Sure, I guess I understand that. I'm just trying to get to that very often when business first comes in, everyone is so excited about it and it's good.

And then a couple of quarters later it becomes bad and then for us to not consider it, I’m just, so it sounds like you would actually do something like that again even though you've had sort of bad experience here..

Yeah I wouldn't classify, Lou, as a bad experience. I mean we had that business for years, we didn't have it quarters.

So it was business that we looked at because of the strategic relationship we had with a partner and over time as we managed that business as you can imagine business runs through cycles and the margins got tight and inventory expectations changed and so we just looked at that and decided from a strategic perspective it didn't make sense for us anymore.

We look at our portfolio all the time and make changes in and out based on the financial you know realities of the situation. So in this case, this is a business we had for a long time and the financials didn’t make sense anymore. So we always look at our portfolio to balance it out based on the opportunities that exist in the marketplace..

And Lou, this is Vince, I’d just highlight, we didn't have a lot of dedicated headcounts, it was mostly freight and factoring, so it's not like headcount goes up and down because of this. As Gerry, it was very select..

Just trying to move on to getting a couple of numbers if we could.

From an absolute standpoint, how should we think about SG&A, interest expense over the next couple of quarters and maybe how fast synergies can kick in on cost cuts as you bring in Premier Farnell?.

Lou, it’s Kevin, what I would point to in terms of the looking out for the - our third quarter, SG&A in the range of $440 million to $445 million.

And when I think about Premier Farnell what I would say is, we closed the transaction as everyone knows on October 17 and we really have now really begun integration in earnest because at the time we don't want to run [indiscernible] UK takeover rules.

I think what Bill highlighted when we think about the revenue and the synergies that we highlighted in our October call, we pointed to $90 million to $110 million of revenue synergies and I think based on the early results in the engagement across the organizations we really feel that that is an achievable range at this time.

And on the cost side, we've highlighted on the October call in the neighborhood of 55 to 60 million of expense synergies, teams have been working on that.

And right now what I would say is we again think that that is an achievable target and as we get to the end of the March quarter, we would expect to have realized approximately 10 to 15 million of annualized savings. Again we’re continuing to make very good progress thus far on our integration planning and the execution of our plans..

Okay.

And then interest expense for, I guess, this quarter and then obviously after the deal closes and you're able to buy back that 1.5 billion that you’ve mentioned?.

Yeah. What I would say for continuing operations, I think in the range of, in the next couple of quarters, in the range of $26 million to $28 million. And then as we go forward, on an annualized basis, once we pay down the debt, we could probably reduce that annualized number in the neighborhood of $24 million to $30 million..

Our next question is coming from the line of Adam Tindall with Raymond James. Please proceed with your questions..

Okay. Thank you. You guys talked about a few benefits to EM in terms of less high volume Asia, you have the Broadcom win, you have the addition of Premier Farnell, but it looks like the March EPS guidance isn't implying just kind of modest operating margin improvement year-over-year.

So could you just maybe walk through the puts and takes that led you to this and perhaps any quantification of the ERP issue impact to revenue and/or costs?.

Sure. Hi, Adam. It’s Kevin. I’ll start. I think what I would start with is when you look at the gross profit percent, obviously, we’re going to be shifting more this quarter for the Asia, sorry for the Europe region, the gross profit percent will continue to, we think, sequentially improve.

I think the point you may be getting at is on the operating expense side, it will take time for us to really get to the realization of the synergy benefit associated with Premier Farnell.

So we're expecting to exit the quarter with some benefits, but I think over the next successive quarters, we would expect to continue to realize and recognize more of those synergy savings..

Okay. But even now, synergies -- Premier Farnell is still accretive.

So I mean that’s what I'm a little bit confused about?.

Sure. And I would also point out that in this quarter, we also instituted a merit program, given that’s the beginning of the calendar year. So there is a merit increase as well that you may not have been factoring in..

Okay.

Maybe on the capital structure, Kevin, how can we think about the right capital structure for continued operations, particularly given your comments on the strong cash generation that is displayed? I know you talked about the $1.5 billion debt pay down and we just take the existing balance sheet and take this off plus the remaining cash from the TS sale, I think your debt will be just under 2 billion and your cash will also be just under 2 billion.

So maybe talk about how you're thinking about capital structure?.

Sure. What I would point to is, we’ve been very public on our commitment to maintaining our investment grade rating. And the key thing that we've focused on is our gross debt to EBITDA, not net. It’s just more how the reading is if you look at it. So as you commented, our intent right now is to pay down a meaningful portion of debt.

And as we move forward, we definitely are looking at alternative capital allocation alternatives, returning cash to shareholders we don't think would be impeding our ability to invest in organic or inorganic growth.

So -- but when we look at the buyback, we are definitely going to be taking the continued approach post the sale of TS to sustain our disciplined approach on the buyback and then the actual method of the returns will depend on where the stock is and trading and the timing and other factors that we're going to consider.

So, our goal is to sustain, given our business model, somewhere between 2 and 2.5 times of leverage, just given again, we think it's important for us as a company, given where we play in the supply chain and it's really ultimately our goal is to maintain our investment grade credit ratings..

Our next question is coming from the line of William Stein with SunTrust. Please go ahead with your questions..

Great. Thanks for taking my question. It relates to the cost savings that you're undertaking to deal with the sale of TS.

You have the sort of stranded corporate expense, but I assume, I would assume going forward, you might not report segments so that might just sort of go away, but you still have that big expense and I'm sure there are expenses in the segment as well that you’re targeting reducing as well.

Can you remind us again of what the cost savings plan is and whether you've already achieved any of that savings in the quarter that you reported or the guided quarter and so we can figure out how much is left?.

Will, it’s Kevin.

I am also going to point back to what we had shared in our October call related to kind of broader expense reductions that we're looking to attain, partly for the Avnet Advantage program, but just also associated with the TS divestiture and we referenced that at that time, approximately $70 million to $90 million of expense reduction on an annualized basis.

Now, in the current quarter and as we’re guiding, from a timing standpoint, there really is no near term benefit in a meaningful way that we're guiding to with the numbers we provided today. Clearly, we are working on it and once the TS sale concludes, we'll be going forth with some actions..

We have some TSA agreements that we have in place, so some of that stranded costs will be with us for a while, but we will be compensated for that based on the cost of that service that we give to Tech Data after the sale is closed..

Understood. So the 70 to 90 is still in front of us and then you have the integration savings from Premier Farnell as well. And so maybe to follow up –.

That’s exactly right..

Yeah. Okay. Got it. So there is still a lot of savings in front of us.

And then when we think about what you've gone through in the last few years operationally, one of the big things is integrating these ERP systems, is that all done now with Premier, are they on a different system, is there a lot of work to do there and maybe just update us on that thinking?.

Sure, as we reported, we've had our issues with the implementation of ERP in Americas. We’ve done -- we’re just about through the issues, we've had some that we still are struggling a bit with our embedded business and that's only with the complicated configured order issues that we have.

The rest of its running relatively fine, but we also indicated that we still have some additional expense in the range of $3 million to $4 million a quarter for some period of time until we work out all the details and all the teams associated with that embedded business.

Secondly on the Premier Farnell, that area is one where we will absolutely spend some time with their IP strategy.

There probably will be some investments that we will make there with respect to upgrading some other systems and that will be in front of us, but that -- should that be included in part of our overall budgeting that we do and I don't see that as one that you have to model any differently than what you’ve modeled in the past..

Our next question is from the line of Shawn Harrison with Longbow. Please go ahead with your question..

Hi. Good morning. I guess, this question is for Gerry to start off with, but maybe you can just kind of speak to some of the booking trends you saw globally as you moved through the December quarter and now through January.

It seems like that we're maybe getting some industrial momentum in the world and wanted to just see if what you're seeing in the book to bills, highlight any of that..

Sure, Shawn. We closed the quarter with a book to bill ratio of 1.07 to 1 and our current book to Bill is actually stronger and it's positive in all regions. This is somewhat to be expected, given the fact that we're running up the Chinese New Year.

So this is a pretty common seasonal phenomenon, but if you think where we ended the quarter, we’ve had now about three quarters in a row of positive book to bill at the end of the quarter. And I do think if you look at regionally, we've seen industrial strength in EMEA and Asia.

The Americas is still fairly flattish from an industrial market perspective. So that’s how I would characterize it..

Okay. And then Bill, as a follow-up, I guess, now that it’s about I guess six months or so in to your tenure as CEO, as you brought on Premier Farnell, and now you have Hackster, can you maybe just comment on how you view the portfolio right now, are there additional holes you see that need to be filled and maybe how you can address those areas.

Is it organic, do you have to look at M&A to fill any additional holes in the portfolio?.

We're pretty excited about where we sit right now and we have work to do for us to make the seamless connection between Hackster into Premier Farnell and then into volume production and volume shipments into Avnet.

And however, we will continue to look at opportunities as they present themselves, especially in the areas where we think there's potential to disrupt the models of distribution and therefore we’ll make the necessary investments.

Other place I’d say where you could potentially see us do acquisitions in is in the design area, where we have opportunities to be able to reduce time to market of our customers and get the appropriate souls, whether they’re digital or whether they’re design skills, they augment what we do today..

All right. That’s helpful. Kevin, if I may, just one clarification, the 70 million to 90 million net, did that include some synergies that would have been associated with TS, are you going to transfer the Tech Data.

I guess how much of that 70 million to 90 million really stays with Avnet?.

It’s all of it Shawn that meaning in terms of, it’s reductions that we’re going to need to make in the cost structure..

Our next question is coming from the line of Steven Fox with Cross Research. Please go ahead with your questions..

Thanks. Good morning. First question, I just was wondering if you could provide a little bit more color on Europe. It sounds like the core Avnet business was up healthy double digits and you also got some gross margin expansion year-over-year.

So, can you give us a sense for what markets were driving that and how that business looks into the New Year and whether the gross margins improvement was all related to volumes or is there more cost savings going on and then I had a follow-up?.

Steve, this is Gerry. I’ll take that one. And so, in Europe, I congratulate our European team. They continue to perform quite well. We saw growth in automotive and industrial automation, particularly in the German marketplace and then medical and renewable energy markets were strong for us also.

I think if you think about gross margins, the team continues to do a very nice job of managing their business, given the realities today of supplier consolidation and things like that. So again, our European team continues to be strong and our book to bill is supporting that. So I look for continued growth out of our European region going forward..

Great. That's helpful. And then just to make sure I'm clear on the Premier Farnell improvements, on their standalone basis, that was all actions that they had undertaken. Can you give us a sense for how far along those are or whether you would get some more benefit from some of those cost actions in this current quarter? Thanks..

So I think Kevin teed it up pretty well, but what we can expect coming in the next quarter getting to attend the $15 million run rate in the March quarter, as we shared with you on our October call, there are two forms of synergies from the transaction.

Kevin talked about the revenue synergies at about 90 million to 110 million and then we have worked well through the integration planning with PF at this point. And so, we see a clear path to get to the expected $55 million to $60 million of expense energies going forward. So we feel good about the plan.

Premier Farnell had done some things before the acquisition, we’re now paying off for them. So I think if you look at what they've done, the synergies between our two companies, we feel really positive about the future of both PF and Avnet together..

That's helpful. And then just to clarify on those comments.

So is it safe to say that all of the actions that PF, Premier Farnell was planning before they were acquired are completed?.

I would say that once that they had identified to complete in the timeframes before the acquisitions were completed..

Thank you. Our next question is coming from the line of Mark Delaney with Goldman Sachs. Please proceed with your questions..

Yes. Good morning and thanks very much for taking the questions.

First question was on the embedded business and additional business that you moved that from continuing operations into discontinued operations, Kevin, I know you said 92 million have been included in guidance and ended up not being counted as part of continuing operations, what’s the EPS impact associated with making that move for that amount of revenue? And then related to that, can you help us understand what the plan for that additional business is going forward, is that a business that you're now looking to divest or what should we be thinking about there? Thank you..

I’ll take the first one. It’s really negligible, very minor impact on a EPS standpoint for the quarter..

And then I'll answer the second part. So if you look at the business that we had, it was primarily with one big supplier, a TS supplier today. And we did work with them to see if they would give the EM business going forward, a franchise agreement and it didn't make sense, given the size of the business.

So I think it was felt between both Tech Data and Avnet, the best place for that business to go to support of long term was to transition to Tech Data as part of the overall transition..

And I’d say from a portfolio point of view, we’re giving [indiscernible] every piece of our business and ensuring that we have a strategic way to grow it and if we don't have a strategic way to grow and it’s not meeting our returns, we will make the appropriate decisions..

Okay. That’s helpful. For a follow-up question, I was hoping to better understand some of the business dynamics in EM as you guys try and increase your mix of demand creation, I guess it’s a two part question.

One, can you just help us understand how much of your EM business today is demand creation and where that may go going forward now that you have all these new tools.

And then the second part of the question, Bill, you talked a bit about doing some front end integration, I’m just trying to understand in terms of that the tools that Hackster has and Premier Farnell and Avnet, how much integration work does there need to be and in the front end offerings or can you deploy those on an independent basis relatively quickly?.

We’ve been deploying on an independent basis relatively quickly. Each one are our standalone, but what we want to be able to do is make sure that the digital platform seamlessly transfers leads from one part of the company to another part of the company.

So that's where some of the magic will come from and we have spent the last 18 months in Avnet, really developing our digital platform and all of the work that we've done there will apply to what we're going to do in Premier Farnell as well as Hackster.

So we’re pretty excited about the new ecosystem nobody put in place that allow us to be able to cast the wide net to capture lots of customers and for a very low cost to serve model and as they grow from a small tiny company to much larger, we’ll be able to then serve them with our field application engineers more effectively..

And then on the question on the percentage of overall revenues and demand creation, it’s a little over 30% today and our goal is to continue to increase the percentage overall..

Thank you. Our next question is coming from the line of Jim Suva with Citi. Please proceed with your questions..

Thank you very much for all the details so far. It's quite useful. I have a couple of questions or probably quite easy. You talked about Premier Farnell doing better than expected in the integrations and such, but yet your total sales looks like it came in on the lower end of guidance.

So can you help me understand the range that you gave out and kind of bridge why you came at the lower end? And then my follow-up question is, I believe that Texas Instruments and some of the chip suppliers were going through some changes to the economics that they're giving to the distributors.

Can you help us understand, has that occurred with your yet. Are you fully adjusted to it or is that yet to come or how we should think about those changes? Thank you..

Okay. This is Gerry. So I’ll take the first question and then I’ll answer the second question about Texas Instruments and other suppliers. As we said earlier, our embedded business suffered more than our core business did and the impacts of some of the ERP challenges we had highlighted particularly around our more highly complex integration business.

We see that business still in the seasonal range this quarter, but remember we're coming off as we talked about a lower Q2 number. So while seasonal growth, so that kind of talks about some of the improvements we’re making, but from a seasonal perspective, it looks seasonal, but it's from a lower base.

So that's why the number may look a little bit muted. When it comes to Texas Instruments or other suppliers, there's very limited impact this quarter. We normally don't discuss supplier specific programs, but as you can imagine, when suppliers change their programs and demand creation, there's opportunities that pop up from other suppliers.

So there's also usually a grandfather period those changes occur, so that gives us time to either move our resources to higher margin opportunities with those suppliers or at times we have to reduce those resources.

When you see the investment though that Bill has talked about around our digital strategy, we think that's going to help customers shorten their time to market and enable customers to take advantage of our capabilities. So we believe we can also offset the margin by providing solutions to our customers.

So that's really how we see things going forward. That's why we continue to invest in demand creation with some of the tools that Bill highlighted earlier..

Our next question is coming from the line of Param Singh with Bank of America. Please go ahead with your questions..

Hi. Thank you for taking my call. So firstly, want to get some color on the margin. If I look at your guide, it would imply you're still below your peak margins you got a little over a year ago. And given the mix of Premier, I would have expected that to be much higher, probably closer to 5%.

And then longer term in that segment, what would you expect margins to be outside of synergies you’re talking about, which means what benefit could you get from improving current operations or legacy operations and then I have a follow-up?.

This is Gerry. I’ll take the questions. So if you look at gross margins overtime, we actually, first of all, we have a mix change as you can imagine with, we've, if you look at what has happened in Asian in our high volume fulfillment business so that going down, that improves the Asian margins overall and shifts more of our mix back to the West.

I did speak and highlight about our embedded business, which we've had some struggles with due to the ERP implementations. So that’s muted our core margins a little bit. And as you pointed out, Premier Farnell’s margin improvement will help offset some of that..

Okay.

And then actually taking a step back, on the revenue line, so one, your book to bill is 1.07 and you’re seeing a better number, so wouldn’t your revenue be, guide should be a little better, even though you're in the high end of seasonal and then when would you expect the negative headwind from Asia fulfillment to overlap? And I have one more question..

Yes. So I'll start with the Asia fulfillment piece first. That should lap in Q4, our fiscal Q4 this year. So that should be totally out of the number. If you look it, it was down 1% sequentially and 72% year-over-year. So, you have to bake that into the number.

And when it comes to guide, I think as you pointed out, we're guiding to the high end of the range and given where the book to bills are, we feel that that's a comfortable place for us to be and demonstrates what's happening in the marketplace today..

Okay. And then my last question was, obviously your cash conversion cycle is pretty elevated right now. How much of that is because of the ERP, how much of that is Premier and when do you expect to get back to a 70 something cash conversion cycle rate, I’d say, this would just be for Kevin..

Sure. So again, yeah, we definitely benefited this quarter from the drop in the working capital, but I do want to thank the broader organizational team for delivering the cash flow from operations this quarter.

What I would point to I would say going forward as we get into the next fiscal year and probably we’ll be operating from in the range of 55% to 65% of net income on a cash conversion cycle..

Got it.

And then on days basis, could you give some clarity on what was two factors bringing it up, like [indiscernible] what was ERP and what was Premier?.

Well, I think generally what I would point to is Premier Farnell, EM just naturally has a higher working capital number of days associated with just a higher level of inventory.

And what I would point to is you do the math, we’re probably elevated above the 80 days right now on working capital, but our goal is to clearly, even with Premier Farnell to drive that back down to the historical range, somewhere between 70 to 75 days..

Okay. Thank you. Gentlemen, there are no further questions at this time. Thank you for participating in our earnings call today. Our second quarter fiscal 2017 earnings press release and related CFO commentary can be accessed and downloadable PDF format at our website under the Quarterly Results section. Thank you..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation..