Ina McGuinness - The Abernathy MacGregor Group, Inc. William J. Amelio - Avnet, Inc. Thomas Liguori - Avnet, Inc. Philip R. Gallagher - Avnet, Inc..

Joe Quatrochi - Wells Fargo Securities LLC Shawn M. Harrison - Longbow Research LLC Matthew John Sheerin - Stifel, Nicolaus & Co., Inc. William Stein - SunTrust Robinson Humphrey, Inc. Jim Suva - Citigroup Global Markets, Inc. Param Singh - Bank of America Merrill Lynch Steven Fox - Cross Research LLC Mark Delaney - Goldman Sachs & Co. LLC.

Greetings and welcome to Avnet's Fourth Quarter and Fiscal Year 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ina McGuinness. Please go ahead..

Thank you, operator, and welcome to Avnet's fourth quarter fiscal 2018 business and financial update call.

As we provide the highlights for our fourth quarter and fiscal year 2018, please note that in the accompanying remarks, we have excluded certain items including accelerated depreciation, intangible asset amortization expense, goodwill impairment, 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 we translate Avnet's non-U.S. dollar-based financial statements into U.S. dollars. When we refer to organic sales, we have adjusted the prior periods to include the impact of acquisitions.

For additional information, refer to the non-GAAP financial information section of our earnings press release available on our website at www.ir.avnet.com.

Before we begin the presentation, let me remind you that today's remarks and presentations contain 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 are set forth in Avnet's filings with the Securities and Exchange Commission. Today's call will be led by Bill Amelio, Avnet's CEO; and Tom Liguori, Avnet's Chief Financial Officer. Also here today to participate in the Q&A session is Phil Gallagher, President, Electronic Components.

With that, let me turn the call over to Bill Amelio.

Bill?.

Thank you, Ina, and good afternoon, everyone. I'm very pleased to share our fiscal fourth quarter and full year results. It was not only a strong quarter, but a promising ending to an important transformative year for Avnet.

Our fourth quarter results showed continued strong demand around the world with our Electronic Components Group delivering the strongest results of the year, growing nearly 6% sequentially and 10% year-over-year. Premier Farnell also had an outstanding quarter, growing 13% from a year ago.

Q4 was our strongest adjusted operating income quarter in the last five quarters, which demonstrates that we not only are growing again, but growing profitably. This is a sharp turnaround from where we were one year ago and is evidence of our significant transformation underway at Avnet.

Avnet's transformation is the result of us focusing efforts on five key strategic priorities. Let's take a look at how we're doing as a company on these five strategies. The first is accelerating our Electronic Components business. We exited fiscal 2018 having replaced all of our revenue from supplier program changes that affected us a year ago.

We made up the entire gap with both revenue and gross profit in just a few quarters. That rebound came about to a very focused attention to expanding our line card and finding innovative ways to support our customers through the transition, demonstrating our agility as an organization.

Our customers have noticed, as demonstrated by the fact that our Net Promoter Score has rebounded back to previous high levels. As a result, our Americas component business has significantly improved. This quarter, we saw the Americas region grow 5% sequentially with operating income that grew 19%.

We further strengthened our Americas business by adding Tony Roybal, as President of our Americas Electronic Group. Tony is a strong and seasoned executive, bringing over 25 years of semiconductor channel experience to Avnet and is ideally qualified to lead our Americas region to continued growth and profitability.

We continue to add suppliers at a meaningful pace. Just this past quarter, we added three new supplier lines to our Electronic Component business and four new supplier lines at Premier Farnell. The biggest addition was our recent announcement that Microsemi is once again a part of the Avnet line card.

We have deep knowledge of their products and expect to see revenue from that line grow over the next several quarters. In addition, this quarter Avnet – we're named to the Gartner Top 10 High-tech Supply Chain list, another proof point of our outstanding execution and world-class capabilities.

This recognition demonstrates Avnet's unique ability to consistently serve our customers and suppliers on their terms anywhere in the world. Our second key strategy is to scale the high-profit businesses of Premier Farnell, Avnet Integrated and IoT solutions. Let me start with Premier Farnell.

We added Premier Farnell in order to combine the capabilities for small order quantities for customers in the development phase, with Avnet's traditional volume-based capabilities as customers then ramp into production.

When we acquired Premier Farnell, they had exited their fiscal 2016 with negative 4.4% revenue growth and operating margins under 6%. Now, the story is quite different. Exiting fiscal 2018, Premier Farnell is growing at double-digit pace with operating margins nearly 12%. The improvement trajectory of this business is far more than just cost synergy.

The benefit of being part of Avnet is paying off in better overall customer experience and in the development and sharing of customer leads and inventory across Avnet and Premier Farnell.

Our Avnet Integrated business has spent most of the past year merging global operations from design to supply chain and manufacturing to establish a truly global business capability serving the integration needs of customers around the world. The fruits of this effort are starting to pay off.

In Q4, revenue of our Avnet Integrated business grew 7% from last year, with operating income growth of over 60% and operating income margin improvement of over 150 basis points from a year ago. In our IoT area, our end-to-end solution pipeline is growing rapidly.

In Q4, the number of new customers in our pipeline grew 59% sequentially and the dollar value with of that pipeline grew nearly 300%. These are solutions that combine hardware, software security, cloud and analytics that leverage our ecosystem's capabilities.

Our third key strategy is extend and deploy digital capabilities to drive growth and customer satisfaction and efficiency. I am pleased to report that our digital performance continues to grow at a rapid clip. Web-based sales more than doubled from a year ago and were up 18% sequentially.

Digital transactions now represent 55% of Avnet's total transaction. This digital transformation lowers our cost to serve and provides truly unique omni-channel support capability, serving our customers on their terms.

We're also supporting our customers through artificial intelligence with a tool called Ask Avnet that operates across our entire ecosystem helping customers find all the information they need to simply and effortlessly transact business with Avnet.

Just this quarter, the number of Ask Avnet sessions across our ecosystem grew 200% with the vast majority of users rating their experience positively. Avnet is leading the industry and offering AI tools to enhance the customer experience of our expanding customer base.

Overall, our digital transformation efforts are by creating key strategic differentiators from transactional functions such as inventory management, to how we price and quote our customers, how we manage and qualify customer leads, to how we design solutions with our ecosystem assets and so much more.

We've already seen both top and bottom line improvements over the past year as a result of these initiatives, and this is just the beginning. Our fourth key strategy is to leverage our ecosystem to expand customer opportunities. Let me start with a recent example of how our ecosystem is working to bring new customers and new revenue streams to Avnet.

We recently signed a deal with a crypto currency customer to design and manufacture our hardware wallet for crypto currency storage. Up to this point, the company only dealt in the software space.

They reached out to an important part of our ecosystem that specializes in manufacturing solution, dragging innovation to provide consultation on developing and manufacturing our first hardware product.

After finding out about all of Avnet's capabilities, they chose to have Avnet do the design engineering and manufacturing rather than doing it themselves. Because of Avnet's expertise, the time to market will be much shorter with lower risk and at lower cost.

This is just one example of a growing list of new customers being served across different parts of our ecosystem, providing multiple revenue stream at higher profit margins. Remember that (09:25) these cross-ecosystem opportunities is growing and will continue to feed both top and bottom line growth opportunities for Avnet.

I also want to highlight an important point about our engineering communities of Hackster and element14. We announced just this quarter that these communities have crossed over the 1 million registered member mark. This is a significant milestone. We now have a million engineers and innovators helping to reshape the R&D model of the future.

They are creating an increasing pool of business opportunities for Avnet and its ecosystem. The communities form an increasing valuable opportunity to our suppliers who are looking to engage engineers with their technology, as well as for customers of all sizes looking to speed their time to market and lower their cost.

Our highly respected communities have unlocked access to several Fortune 1000 brands that are non-traditional but carry a lucrative revenue opportunity. And finally, our fifth key strategy is to drive performance and operational excellence with continuous improvement.

Tom will cover many of the financial metrics, but I wanted to highlight just a few areas where our focus on operational excellence is paying off. We've reached our $120 million annual cost savings target and we're using these savings to not only reduce our cost, but also to fund important growth initiatives.

We made significant progress in managing our operating expenses this past year. Adjusted OpEx as a percent of revenue and as a percent of gross profit improved each and every quarter. Our adjusted operating margins overall increased 32 basis points from a year ago.

And our adjusted operating income dollars reached $187 million this quarter, which is up $45 million from our first quarter. We've lowered our net working capital days again this quarter by seven days, and we'll continue to focus on managing that in a disciplined manner going forward.

I'm pleased with the significant progress that we've made operationally, and we're set up to grow profits at a rate faster than revenue growth going forward. So, in summary, Q4 was a very solid quarter for Avnet and a solid ending to an important year. We're executing well and we're accelerating our Electronic Components business.

Premier Farnell is adding meaningfully to our profitability and our growth and our end-to-end solutions capability. Avnet Integrated and IoT have strong pipelines for revenue growth and at higher margins. Our ecosystem is truly unique and offers compelling value to our suppliers and our customers.

Our digital transformation is delivering new and improved ways we serve our customers. And our relentless focus on operational excellence continues to improve our financial performance.

The momentum we have exiting our fiscal 2018 is real and is why I am so optimistic about Avnet's future and our ability to hit the financial targets we laid out in our recent Investor Day.

Avnet is uniquely positioned to guide today's ideas into tomorrow's technology, providing full end-to-end solutions including hardware, software security, cloud and data analytics, all the way from idea to product and from product to market. With that, I'd like to have Tom give you some more color on our financial performance.

Tom?.

first, scaling our higher-margin business such as Premier Farnell, Avnet Integrated, demand creation and IoT; second, optimizing our cost structure and operating margins; and, third, deploying capital to the highest returns, which includes our working capital reduction initiative, capital allocation plan and share repurchase program.

We added the scorecards for our earnings call on slide number 17 to discuss our quarterly progress in these important areas. Our higher-margin business has continued to grow and be accretive to earnings.

To illustrate, in Q4, Premier Farnell and Avnet Integrated comprised just 16% of our total revenues, though contributed 34% of total operating profits.

While revenues from these two businesses grew 10% year-over-year, we've not yet seen an uptick in this overall metric, measuring the percent of total revenues coming from higher-margin businesses due to Asia's high growth rate, which this quarter was 20% year-over-year. We've made significant progress in managing operating expenses.

OpEx, as a percent of revenue and as a percent of gross profit, improved in each quarter during 2018. We further streamlined our cost structure at the end of June, implementing an additional $37 million of reductions as we enter fiscal 2019. This is on top of the $120 million, Bill already mentioned. Operating margin improved every quarter this year.

For working capital, we are ahead of schedule. This quarter, we had a 3-plus day improvement in both our inventory days and payable days. We expect very good progress throughout 2019. We redeployed the funds freed up from working capital to repurchase shares, reducing share count by 6 million or about 5% of shares outstanding during fiscal 2018.

Overall, we are one quarter into our three-year target of achieving $7-plus adjusted earnings per share. Our scorecard shows we're tracking well to our initiatives. We got tremendous runway available to optimize each of these metrics and create shareholder value.

Looking forward to Avnet's September quarter, we expect sales to be in the range of $4.8 billion to $5.2 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.95 to $1.05. At midpoint, guidance represents year-over-year revenue growth of 7% and adjusted EPS growth of 32%. With that, let's open the line for Q&A.

Operator?.

Thank you. Our first question comes from the line of Joe Quatrochi with Wells Fargo. Please proceed with your question..

Okay, great. Thanks and congrats on the quarter, guys. A couple of questions from me. First, I was wondering if you could kind of – I know in the press release it said book-to-bill is comfortably above 1. I was wondering if you could give us a little bit more detail around that and then kind of the puts and takes of the demand environment..

Yeah. Book-to-bill is excellent across all regions. We're above 1.1 in every region and it continues good strength. So nothing more to say about that. We're pretty excited about the prospects ahead..

Okay. Fair enough. And then just kind of on the working capital management side, I know that you're working to reduce that.

But how do you balance, I guess, your inventory levels with the existing growth that you're seeing and the goal of bringing that down?.

Well, as you can imagine, we've got many SKUs across the world and we have an opportunity to be able to ensure that we optimize. Where we think that there is going to be additional demand, we can bring in product for that. But where there isn't, we want to move as fast as we possibly can.

So we're balancing across the globe, and that's one of the changing that we've made over the course of last couple years. And we have an opportunity to be able to manage not only in a region, but across regions where we have to..

Okay. Thank you..

Our next question comes from the line of Shawn Harrison with Longbow Research. Please proceed with your question..

Afternoon, everyone, and my congrats on the progress in 2018 as well. First question is maybe a bit for Tom here. You said you're ahead of schedule on the cash cycle improvement. I know the goal is less than 70 days.

Would you expect a linear improvement in fiscal 2019 toward that 70 days? Or since that you're running ahead of plan, could you get that cash cycle reduction more than five or six days as you move through 2019?.

When we were at Investor Day, we told you at the end of 2019, will be 83 days. So we're ahead of schedule for that and I think we're feeling good right now that we'll beat our 2019 number. That said, we're down 14 days I think in 6 months, which is really tremendous progress by all of the teams.

And you should expect – probably we'd hope to see sequential declines. We have to make it 14 days, maybe a few up, a few down. But overall it's in a great direction and gives us a lot of confidence to get to 70 or below..

Okay. And then, as my follow-up, the incremental $37 million of cost reductions you announced here on the call.

How much of that will be reinvested in the business versus a net number kind of leading to a decline in operating expenses?.

Yes. That was $37 million company-wide, right? That wasn't related to any specific business; company-wide. And the important thing to remember is our goal is, as we grow to we hold operating expenses flat, so a good part of it will be reinvested in growth which is the variable costs or distribution centers and commissions and things like that.

We have a really good project going on in this current quarter. We're opening our new distribution center in Asia, and that's a good example of re-applying some funds. And we're pretty confident by the second half of this year, we'll start to get some productivity improvements that you'll see in the financials from that..

Thank you..

Thanks, Shawn..

Our next question comes from the line of Matt Sheerin with Stifel. Please proceed with your question..

Yes. Thanks and good afternoon, everyone. So a couple of questions. The first, just following up on the question on book-to-bill and demand. Your guidance basically guiding relatively flattish quarter-on-quarter. It looks more seasonal than anything.

You've been running – particularly if you take out the market share losses, you've been running well above, as your peers have, seasonal for three or four quarters. So it looks like a return to seasonality. Is there anything to read into that? Talk generally about lead times. Your inventory days were down.

So it looks like there may be signs of stabilization in terms of supply.

So could you just give us more color on the demand environment?.

Well, our lead times, for sure they're still extended, but they are stable. So they haven't gotten worse. So that's for sure. And as far as our seasonality, we're in that range of the seasonality that we typically have, minus 2% to plus 2%. So there's nothing more to read into that..

Phil, do you have anything to add?.

Yeah. Hey, Matt. How are you doing? No, look, the book-to-bill is 1-to-1 (sic) [1.1], give or take plus or minus in each region. So we're really positive. The lead times, just to expand on those, not a big change from the last quarter, Matt. I mean, we know there's definitely some constraints out there. We're managing through it.

Even going back to the last question, our inventory, we're constantly optimizing our inventory against our supply chain needs from our customers when we get good forecasts. The demand environment's pretty good. I mean, the verticals, transportation/automotive, continue to be strong. Industrial continue to look really positive.

So, no, I think we're steady Eddie as we go into the next quarter as best we can see it..

Okay. That's helpful. And then, Tom, you talked about OpEx staying sort of flattish. And if we apply that to the September model and back into your – the gross margin looked like that's going to be down sequentially.

Is that also just a function of seasonality in Asia typically up and you're growing faster looks like in Asia than you are in other markets? Is that basically the reason why gross margin should be down?.

I don't think gross margins will be down. So I'm not exactly sure, Matt, how you got that number. One thing to keep in mind is, this is seasonally when Asia has the peak revenues, okay? So as we get into January, February, Chinese New Year, seasonality, that's their low point. That's where mix will help us.

And we're feeling pretty good about our operating margins getting to 4% or above sometime in the second half of the year..

Okay. So you expect margins, particularly – because you also talked about Premier Farnell and the Avnet Integrated also growing faster and obviously they have better margins. And I don't know if there is seasonality in those businesses as well..

Yeah, actually, Q1 is typically their lower seasonality. So if you look at our current quarter in the mix, what you saw in the results is fairly typical. Asia has a larger mix of the revenue..

Okay. Thank you..

Thank you, Matt..

Our next question comes from the line of William Stein with SunTrust. Please proceed with your question..

Great. Thanks for taking my question, and congrats on the good results and outlook. I'm wondering if you can give us an update on the ERP implementation. How far are we along? Maybe just remind us as to what's outstanding and what's the timing to complete this effort..

Yes. It's going great. Our Americas system has stabilized. And as I said on the last call, the strategy is that we will be implementing the next phase of it in Avnet Integrated business, and that will be happening as we speak. And that will be going live over the course of the next 18 months..

Okay. And then as a follow-up, if I can, any comments by end market in terms of the strength that you saw in the quarter and in particular any spots of weakness? We've heard from some semi and other component suppliers some mixed things about automotive in particular more recently, and wondering what you're seeing in that regard. Thank you..

Yes. Hey, Will. It's Phil. How are you doing? Let me just expand a little bit from Matt's question. So our two largest and fastest growing are – and we call it really transportation versus just automotive because it's further expanded beyond the automobile, right, with what's going on with the EC and the grid and ADAS.

I mean, across the board, farming equipment, et cetera, it's all getting more electronics, if you will, attached to it. So we're still seeing good demand there in all regions of the world. We play a little bit with the Tier 1s from a fulfillment – but getting into Tier 2, Tier 3, it's really an expanding market right in our sweet spot.

So that's actually going quite well for us. Industrial, if I combined with the applications of IoT expanding – it's actually expanding the industrial customer base really. It's getting a longer tail, I should say, as well as non-traditional customers coming in.

So, they're not start-ups, but they're traditionally customers that don't have electronics in them, okay, but obviously wanted to start using some more applications on IoT. So actually the industrial – always strong in Europe, continues to be strong in Europe and doing well here and in Asia.

I just got back from Asia last week and things looked very positive. There, of course, defense/aero, a bigger segment for us here in the Americas, is looking to be very strong and that's a sizable business for us here.

So, no, I mean, again, don't want to sound overly optimistic, as we never know, but right now things look pretty good in the different segments which is why we think we're not seeing as much of the typical cyclicality either that we've seen in the past..

Great. Thank you..

Our next question comes from the line of Jim Suva with Citi. Please proceed with your question..

Thank you very much, and congratulations on the results. This is kind of more a bigger picture question, but you can answer it however you want. In the past 12 to 24 months, the industry has changed a lot. Avnet lost some pretty big supplier contracts and Avnet won some very important supplier contracts.

Can you help us understand right now, is that state of the environment still pretty much in flux and (32:12) just happening in works? Have these calmed down? Are the suppliers looking for you to do more? And also, there was just so many changes in the past couple years. I just want to get a pulse on where we stand today because you've won a lot.

I wondering if there's a lot more left for you to win or have things kind of slowed down or just kind of a pulse on the industry from a supplier-distributor relationship..

I'd say it's more stable today than it was a couple years ago. And I think I would foresee it being that way with respect to supplier lines. With the exception of exception of some acquisitions occurring in the supply space, that could then change some of the rules of the game.

What we're seeing right now, we are seeing stability with all our top suppliers. We spend a lot of time with them. Phil and I, we've visited over hundreds of our decision makers out in the supply chain and we have regular ops reviews with them and make sure that they understand exactly what our commitments are.

And we work diligently to ensure that we achieve those commitments..

Yeah. Jim, I'll jump on that as well. For sure, you're right, in the last couple of years there was a lot of movement, okay? And a lot of it caused by accelerated M&A and consolidation on the supplier side. It was accelerated, but it wasn't new. If you go back 25-30 years, unfortunately some of us have been around that long, these things happen.

I mean they just seem to happen. There was a lot in a short period of time, okay? So yins and yangs back and forth. So you are absolutely right. But right now to Bill's point, we don't sit in the supplier board room, so we don't know what they're absolutely thinking when the next shoe may drop.

But we feel very good – never comfortable, but we're confident, okay, on where we are sitting with our supplier relationships right now and particularly with bringing the Microsemi back is a big win for us..

Okay. Thanks very much for the details and clarification, and congratulations on the results..

Thank, Jim. Appreciate that..

Our next question comes from the line of Param Singh with Bank of America Merrill Lynch. Please proceed with your question..

Hi. Thank you for taking my questions. So, guys, looks like you're doing phenomenal with Premier Farnell margins there.

But we have learned from the channel that a lot of companies like Premier and its competitors are benefiting from some sort of shortage where people instead of buying from traditional distributors, because they are getting allocated, are buying small lots from companies like Premier and overpaying for it in some ways.

So do you feel that's part of the reason why you're getting such phenomenal margins in the Premier business? And are you saying that this 12%-ish margin is sustainable ex that?.

Okay. Short answer to your question, no. No. With respect to sustainability, our game plan is to get that number higher. That's what we want. We think there's some more room to grow operating margins in the Premier Farnell space, and we're going to do it.

We demonstrated now we've almost doubled the profitability in that business unit, and we went from one that was shrinking to one that was growing. So we're very comfortable with the position that we're in. We're really comfortable with our competitiveness. And this whole play with ecosystem plays extremely well at Premier Farnell.

And the lead sharing is really phenomenal between Premier Farnell and our core component business. So it's going better than we expected. So I'm very bullish on that acquisition and what it brought to Avnet..

Have you guys quantified any metric on what lead generation from the Premier business is going into your core business and how that's benefiting you? Or is that....

Yeah, I'll give you some color.

We just saw something that we weren't expecting to happen, that's happened, that's pretty exciting is the fact that we're registering designs from Premier Farnell early in the life cycle and they get passed on to the core component business and the amount that get approved are higher than any other leads that we have in the business.

They're getting approved at a rate of 66%, which is pretty phenomenal. Now, prior to that in Europe we're already at the $12 million that have been approved and that's going to grow pretty substantially over the course of the next several quarters. So that's one example.

I gave you an example in my remarks earlier about how the leads get moved around the ecosystem. I use Dragon as one example. But that happens not only in Dragon, it happens with Hackster, it happens with Premier Farnell.

All of a sudden, we get a non-traditional company lead that we're able to capitalize on and bring it into the core and start ramping up production. And there's plenty of that that's going to happen. And in future earnings calls, we'll flesh that out a bit more to give you an idea of exactly why that means so much for the company..

Yeah. Param, this is Phil. The other direction of leads if you are aren't just familiar to the Avnet core, but it's also Avnet core back to Premier. Well, recall on engineering where a lot of our traditional customers are doing NPI, new product introduction, where we have leverage and scale, we're extending with Premier Farnell into the core base.

It's really going back and forth both ways. And the teams are really working really hand in hand out there in the field..

Okay, great. Thanks for the color guys. And then really quickly I have a follow-up. Based on the guide, it looked like – I understand that Premier looks like that. The core business margin might be flat to slightly down sequentially in your guide.

Is that based on mix of region or is there something that I might be missing there?.

Yes. That again would be higher mix of Asia business..

Understood. Great. Thanks a lot, guys. Really appreciate it..

Thanks, Param..

Thanks, Param..

Our next question comes from the line of Steven Fox with Cross Research. Please proceed with your question..

Hi, good afternoon. First question, I was just curious on the positive cash flows for the quarter. How much would you say was result of just your own internal improvements on working capital versus just natural improvements in growth, et cetera? And then I had a follow-up..

A good part of it, $140 million-$150 million-ish..

And so, when we look at going forward proportionally on the days improvement you're talking about, is there any reason to think that you shouldn't annualize to something similar as we go through this fiscal year?.

So I think what we've said before, Steve, which is true, every day it's worth about $50 million. But what you see is right. We're growing. So we talked about Investor Day and getting to $7 a share. We're assuming that we're going to reduce working capital, but it's roughly I think half will get reinvested for growth.

So we had a really good cash flow quarter. Are we going to have four in a row of $230 million? No, I don't think so. I hope so, but it's in the right direction..

Got it. And then just on the gross margins, I was wondering if we can get a little more detail on how much of the gross margin decline was directly due to the Asia mix? And maybe how much of the positive offsets were related to the Americas profit improvement and the Avnet Integrated growth? Thanks..

So the good news on this is just about all of it is due to mix. And if you look at the gross profit percentage by business, they're generally improving. So that's a good sign for us going forward..

Great. Thank you..

Thanks, Steve..

Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question..

Yes, good afternoon. Thanks for taking the questions. First question is a follow-up on the Asia region and I was (40:01) for a little bit more color about why Avnet thinks that region in particular has been growing at such strong rates and even faster than some of the other regions.

And on the topic of Asia, especially for China, how are your customers thinking about potentially managing through some of the tariffs and has that changed the demand patterns at all?.

I'll take the tariff question first, and then we'll go to the first question. The good news is it only represents a small portion, 1% of our overall line card is impacted by the tariffs based upon our evaluation to-date. That could obviously change if the rules change.

Our Americas business will be most affected, and our expectation is that product price increases that come our way will be passed on to the customer. So that's kind of the overall game plan which we see with tariffs..

Yeah. I'll jump on the Asia in general. Greater China, we should say, is the fastest growing part of the region. As I said to Matt, I was just there last week. It's just strong. I mean, right now the demand is just good.

And, of course, this quarter, as Tom pointed out, a ramp-up quarter in Asia-Pac, getting ready for – some of that's consumer based and getting ready for the holidays in December. But as I look at Asia today versus many years ago, many years ago – and still a big part was outsourced, right? A lot of it was outsourced from the U.S., predominantly U.S.

and Europe as well into Asia-Pac, starting in Southeast Asia, working itself to China and Vietnam, et cetera. So you still have that element that's there, okay, which is terrific. And we track well over 1,000 OEMs that do design in other regions into Asia, and we have a great tracking system. So that continues to grow.

But what you really see is the organic growth now in China, particularly China. I was there last week. The amount of innovation, okay, that's going on in engineering and their own designs and their own products, that's continuing to expand. So just to summarize – and of course, consumer is strong.

We don't play as much in that, but we do still play in that. But it's the diversification of the market. So automobile is a perfect example. I mean, ADAS, there's a ton going on in indigenous Chinese manufactured automobiles that we're playing in today that wasn't there many years ago. So I think that kind of sums it up..

So great strength in Taiwan, great strength in China, great strength in Southeast Asia. So we're hitting on all cylinders over in Asia at this juncture in the verticals that Phil mentioned; both industrial and transportation, we're doing extremely well..

That's helpful. And a follow-up on Microsemi, which you mentioned a few times now on this call is a positive development.

Can you give a sense how long that will take to fully ramp? And then should we think about that coming in at fulfillment margin and just given that – I'd imagine you're maybe starting to (42:50) having potentially lost your prior design registrations? Thank you..

Sure. That's exactly right on that. We expect to see revenues picking up in the back half of the year. So stay tuned. So that's a great pickup for us, as Phil mentioned, and we're pretty excited about having the line back. We have great expertise.

As you know, we had that line for a long time and we were in fact the best demand creator in that line for Microsemi, and we will continue to be that way as we move forward..

Thank you..

Our next question comes from the line of William Stein with SunTrust. Please proceed with your question..

Thanks for taking my follow-up. First, a clarification.

Bill, I think when you were asked about book-to-bill before, the press release said above 1 and I think your comments – I wasn't sure if you said 1.1 or 1-to-1?.

1.1..

1.1. So that's what it was globally. And okay, so that....

No, I said it was greater than that in every region..

Greater than 1.1 in every – okay..

Yes..

Okay. That's great. And one more, if I can. I apologize if this was asked already, but we all know that there have been shortages and extended lead times, in particular in capacitors, but also discretes.

Is that influencing the bookings? Has that extended it at all? I know the last time we asked it sounded like this is a problem that's being managed reasonably well and customers weren't in line down situations. But if you could provide any update on that, it'd be helpful. Thank you..

Yeah. Will, it's Phil. First of all, on the bookings. We track as best we can the bookings and make sure we're sanitizing and cleansing the bookings as they come in. So we keep it as accurate as possible we can, our backlog and our book-to-bill. So we do watch for what you talked about very closely. And so do our suppliers – as do they.

As far as some of the caps that you're talking about, MLCC, some discretes, yes, it's tight out there. And we're all expediting and we're all doing all we can to keep our customers' lines moving forward. There's some challenges for sure, but I wouldn't call it a significant impact or a threat to future revenues at this point in time..

And I usually quote to you the cancellation rates and expedite rates across the world, and they're pretty stable. So there's no shocking news with respect to that. And you would see that jump up one way or the other if we were starting to see issues with our customers..

Great. Thanks, guys..

Our next question comes from the line of Shawn Harrison with Longbow Research. Please proceed with your question..

First, if I may, a clarification.

Tom, did you say that you're expecting the EBIT margin to be north of 4% in the back half of fiscal 2019?.

Yes..

Okay. That's a nice positive..

The operating income to be exact..

We said operating margin..

Operating margin..

Operating margin in excess of 4% in the back half of 2019..

Okay. That's – go ahead..

I am sorry..

Part of that is mix related, right? Because when we get to second half, we're going to have lower percentages of Asia, greater percentages of the other businesses on top of just the continued transformation efforts we have every quarter..

Okay. And then two clarifications, additional details. What is the expected CapEx number for fiscal 2019? And then also, should we expect kind of the ongoing dynamic has been that Tech Data proceeds have been used to buy back stock.

Is that what we should expect for the latest level of proceeds?.

The CapEx is about $150 million for 2019. And, in general, we're going to stick to the capital allocation plan, which is about 50% to share repurchase over the long-term..

Okay, thank you..

Thanks, Shawn..

Our next question comes from the line of Adam Tindle with Raymond James. Please proceed with your question..

Good afternoon, guys. This is actually Madison (47:40) on for Adam. I know gross margins were impacted in the quarter by the mix of the Asia region.

Could you guys just give us an update on how some of the other aspects are trending from a gross margin standpoint, whether it's Avnet Integrated or demand creation?.

Yes. Generally, the decline in gross profit is because of mix which is because of Asia. The good news is, if you look at the gross profit percentage in each individual business, they are generally increasing quarter-over-quarter..

Okay, thanks. And then I know in the press release you mentioned that online sales doubled year-over-year.

Can you just give us an update on what that run rate is?.

For the digital sales?.

Digital sales. Digital sales are up 18% and we had an absolutely great quarter and we look forward to having a great year coming up. So essentially if you look at our core business, we actually doubled digital sales year-over-year. So that's really great.

And we have Premier Farnell and all of our electronic transactions that we do, almost 50% of what we do now is handled digitally..

Okay, great. Thanks, guys..

Roughly $1 billion..

Roughly $1 billion, Adam (sic) [Madison]..

Okay. Thank you.

Roughly $1 billion you said?.

Yes..

Okay. Thank you..

Ladies and gentlemen, we have reached the end of our question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..