Please stand by, our presentation will now begin. Welcome to the Avnet Second Quarter Fiscal Year 2020 Earnings Call. I would now like to turn the floor over to Joe Burke, VP, Treasury and Investor Relations for Avnet..

Thank you, operator. Earlier this afternoon, Avnet released financial results for the second quarter of fiscal 2020. The release is available on the Investor Relations' section of the company's website.

A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet's website.

Lastly, some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict.

Such forward-looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC.

These forward-looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Today's call will be led by Bill Amelio, Avnet's CEO; and Tom Liguori, Avnet's CFO.

Also, Phil Gallagher, Global President, Electronic Components joins us to participate in the Q&A session. With that, let me turn the call over to Bill Amelio.

Bill?.

One, increasing SKU count and new product introduction; Two, enhancing the pricing and quoting process; Three, expanding market programs and initiatives; Four, achieving operational excellence and five, improving the web user speed and stability.

We believe the combination of these actions will lead to sales growth with best-in-class profitability and we remained bullish on the opportunities at Farnell as we make investments to grow our online catalog business.

Our commitment to achieving operational excellence at Farnell is clear and we're excited that the Farnell, new distribution center in Europe is complete, and shipping from this facility will begin in the next few months. We expect these benefits of this investment almost immediately.

These benefits include lower costs, improve customer service, and the ability to greatly increase our SKU count. In the first-half of fiscal 2020, we've already added more than 47,000 SKUs to the inventory.

We're about one-third of the way through our SKU expansion, and we're ramping-up our distribution center which will allow us to accelerate the remainder of the expansion. Furthering our commitment to making it easier for customers to do business with us, this quarter we started rolling out new ways to pay.

In Europe we're rolling out PayPal and in China we are implementing WeChat Pay, Ali Pay and Union Pay. We're also in the process of evaluating similar opportunities in the Americas as we focus on better customer service and satisfaction. And Farnell ecommerce global order penetration continues to be a notable success.

We also consolidated more than a dozen of our private label products into one unifying brand Multicomp Pro. This will make it much easier for our customers to obtain the best quality and greatest value, electronic products available in the marketplace today.

Through the Multicomp Pro brand, we are also well-positioned to leverage this powerful marketplace differentiator and unique IP to drive additional revenue with higher margin. Some of the cost savings that Tom will outline, include the further integration of back office functions between electronic components and the Farnell business units.

Lastly, the sales a Raspberry Pi were strong at the end of the quarter. Farnell has sold more than 50 million units and grew this revenue source more than 11% from a year ago.

Based on our sales information provided by our suppliers, Farnell continues to outperform our competition during the downturn, and coupled with our five-pronged plan, we are well-positioned to outperform during the next market upturn.

As discussed on our first quarter earnings call in October, we believe operating margins of 8% to 10% are achievable for Farnell by the summer and a 15% operating margins are achievable by the end of the fiscal 2022.

Making it easier for customers to do business with us as a key aspect of our transformation efforts, we're keenly focused on areas of operations that would benefit from digital transformation which extends far beyond Farnell and is a high priority across all of Avnet businesses.

For example, we have 125 robotic process automation projects either completed or in progress. We anticipate these projects will save us approximately 5,000 hours per week. Turning towards Avnet Integrated, in the second quarter we were encouraged by sequential order activity at Avnet Integrated.

On a dollar basis, our wins increased 46% quarter-over-quarter, and most importantly, they will higher margin solution wins, which are well aligned with our strategy.

Now for an IoT update, the work we're doing to transform into a technology solution company will allow us to diversify our business and maximize, high margin opportunities and reduce a vulnerability to performance type revenue fluctuations.

At the same time, we remained committed to delivering on our core component distribution value proposition and support of our supplier partners. Expansion in the IoT solutions will not only help drive incremental growth, but it will expand the customer base for both Avnet and our supplier partners.

Work is progressing on our IoT initiatives and during the quarter, we established a comprehensive team of IoT experts around the globe. This team will help us to accelerate our progress in this critical and growing market.

The acquisition of Witekio which we closed during the quarter brought immediate customer wins in the IoT space, including a major European appliance manufacturer. This would not have been possible without our ability to fully offer a solution with our IoT capabilities. To that end, at CES, we announced our new IoT partner program.

This new program accelerates time to market for systems integrators, [bars], ISVs, and OEMs, who are looking to develop and scale IoT solutions faster. They're able to do this by leveraging Avnet's IoT Connect platform and our ecosystem of experts. Our new IoT program allows partners to accelerate time to market with rapid deployment of IoT solutions.

Scale quickly to a multi-level partner model, realize complete solutions and services beyond SaaS, encompassing security, hardware, logistics and beyond. Manage their cost effectively to a lean OpEx model and create awareness within Avnet's global customer base.

In addition, Avnet will launch an IoT marketplace this spring, which is designed to help our partners expand their reach and generate additional revenue streams to Avnet's reoccurring billing platform and global IoT marketplace.

For customers, it gives them access to trusted and certified IoT devices developed by our partners as well as Avnet's smart applications to speed their time to market. It will also enable developers to writing the platform and sell their solutions into the marketplace. Our first partner in this program also happens to be one of our customers.

Capstone United States based water management company. In addition to using Avnet's IoT connect platform to power their award winning IntelliH20 smart water metering solution. They're using our IoT partner program to deploy the same solution to thousands of municipalities.

This allows them to change their business model to deliver water as a service and create an ongoing revenue source for their company. As a result, they expect to have 35,000 devices installed by the end of 2020.

As you may have heard, I had said previously, we're confident, our IoT connect platform can become the iTunes of IoT, that's how powerful it is. As we've discussed over the course of this call, our five key strategic initiatives are on track to deliver enhance customer experience and long-term growth for the company.

Halfway through the fiscal year, we remain committed to those five priorities. Amplifying our electronic component distribution business worldwide, scaling high margin business segments including Farnell, Avnet Integrated and IOT, aggressively extending our digital capabilities with the implementation of robotic process automation and AI pricing.

Continuously finding new ways to leverage your ecosystem for the growth, with existing customers and attracting new customers, and driving continuous improvement through the business which is fundamental to our success.

Overall, as the first-half of our fiscal year is completed, we are pleased to have delivered second quarter sales above the midpoint of our guides and adjusted EPS at the midpoint of our guidance. We're confident that we have the right mechanisms in place to drive growth the second-half of the year.

With that, I'll let Tom report the financials for the quarter in more detail, Tom..

Thank you, Bill. And good afternoon, everyone. While macroeconomic factors impacted our performance this quarter, we continued to execute our strategy and manage those factors under our control.

We made further progress this quarter, optimizing our costs by implementing our $50 million annual cost reduction initiative, generating $149 million of cash and buying back stock, adding two smaller strategic acquisitions to our portfolio and managing debt.

We executed our near-term plan and generated sales and adjusted EPS at the midpoint of our guidance. During the quarter, we delivered revenue of $4.5 billion. Gross margin held relatively steady sequentially at 11.6%. While we have not yet seen margin recovery.

The steady gross margin reflects a level of stability and demand in pricing, which is encouraging. Adjusted operating expenses increased $7 million sequentially to $443 million in the second quarter.

This is primarily due to a reserve for a potential bad debt, which is unique to one customer and we do not believe is representative of a broader credit risk exposure. We continued to manage costs and achieved our goal of removing an extra $50 million in annual costs from our operations.

Working Capital days continued to decline, ending at 83 days than one day sequentially, and contributed to cash-flow from operations of $149 million. We've repurchased $88 million or 2.1 million shares of common stock. While the average diluted share count for the second quarter in our financials was $101 million.

We ended the quarter with $99.3 million of common shares outstanding, achieving our goal to be below $100 million. Book-to-bill ratio is improved, ending the quarter at 0.99, with all regions showing improvement. By region, Americas ended the quarter at 1.0, Asia was just below parity at 0.99, and EMEA was 0.94.

Turning to business performance on slide 17, electronic components performance reflected the slow demand environment, with revenues of $4.2 billion, down 2.1% sequentially and 10.2% year-over-year. You see operating margins declined 39 basis points sequentially to 2.2%.

The decline in operating margins is attributable to the slightly higher operating expenses with lower revenues. Gross Margin was flat sequentially. Sales for Avnet by region were as follows. Americas delivered revenue of $1.2 billion, down 2.4% sequentially and 8.8% year-over-year.

Despite the slowing, revenues in the second quarter were better than expected and appear to be stabilizing, a good sign that we may be near the bottom of the downturn. EMEA revenue of $1.4 billion was down 3.1% sequentially and 14.6% year-over-year. In constant currency performance was a bit better down 2.9% and 12.1% respectively.

Overall, EMEA performance was in line with our expectations. Asia revenue of $1.9 billion was down 1.1% sequentially and 7.6% year-over-year. Constant currency results were similar, down 0.9% sequentially, and 7.7% year-over-year. Overall, Asia appears to be stabilizing. Turning to Farnell, revenue for the quarter totaled $331 million.

This compares to $336 million in revenue in the first quarter and $368 million a year ago. The quarter was a bit weaker than expected in both revenue and margins reflecting pricing and demand pressures that persisted during the quarter. Operating margins were 6%, compared to 6.5% in the first quarter.

On the positive side, Farnell operating expense continued to decline this quarter, and we completed the new European distribution center which should lead to further productivity improvements this calendar year.

Turning to the balance sheet and cash-flow statement on slide 18, this quarter we generated $149 million in cash-flow from operations and totaled $948 million over the trailing four quarter period or $9.39 cash-flow per share.

We used our cash to buy back at $88 million of stock, pay $21 million in dividends and invest $51 million in two strategic acquisitions Witekio and Phoenics, that Bill described earlier. We anticipate annual revenues from these two acquisitions to be in the $160 million range annually.

We reduced our revolving debt by $144 million, maintaining our investment grade rating is a priority, requiring a gross debt leverage in the mid twos. After the debt pay down, we ended the quarter with a gross debt leverage of 2.6.

With macroeconomic factors depressing EBITDA to maintain our leverage, we will make periodic debt repayments as necessary. Going forward, we expect to have a balanced capital allocation that includes share purchases, dividends, smaller strategic acquisitions, and periodic debt repayments.

At the end of the second quarter, we had $506 million remaining in the share repurchase authorization. Regarding the Texas Instruments transition, our revenues from TI [Technical Difficulty] sequentially in the quarter, and $106 million from a year ago. We expect to see some further decline in March and then continuing through the calendar year.

Meanwhile, the reduction in costs, which totals approximately $35 million annually, will follow in step with a TI sales pattern. Although we may need to incur costs as we execute our recovery plan. Our goal remains to achieve EC operating margins in the 2.2% to 2.5% range starting this summer and onwards. We will continue to update you on our progress.

Looking ahead, we remain focused on returning Farnell to double-digit margins, expanding EC revenues and growing higher margin businesses, as we continue to manage costs and focus on generating cash. Turning to Guidance on slide 20, we are guiding revenue in the range of $4.1 billion to $4.5 billion and adjusted EPS in the range of $0.38 to $0.48.

These estimates reflect similar market conditions to the December quarter, and the impact of the TI transition. With that, let's open the line for Q&A.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Adam Tindle with Raymond James. Please state your question..

Okay, thanks. Good afternoon. I just want to start on Tom's last point on guidance, you talked about it being inclusive of the estimated TI impact and I'm trying to help quantify that. You sound at least, more positive or similar on market trends.

So if I run kind of normal seasonal revenue in the March quarter up, call it mid-single digit sequentially, I think it suggests you're kind of assuming essentially the full revenue impact from TI in guidance. So, I want to confirm that.

And if so, why is that the case given you really haven't seen much impact thus far? Is it just, we want to assume kind of a worst case at this point and let the rest be upside?.

First of all, the seasonality is plus or minus 2% typically going into the March quarter. And as far as TI, we anticipate sequentially going down another $50 million to $70 million of revenue. So we had to go down $43 million in Q2, then further $50 million to $70 million in Q3..

Okay, and maybe just staying on that point, Tom on cash-flow - trailing 12 months operating cash-flow is almost $1 billion like a quarter of your market cap. I think the TI change was supposed to be a couple hundred million dollar benefit.

Has that been recognized in cash-flow or is that still on the come?.

No, very little of that's been in cash-flow. So that would be over the next few quarters..

Okay. And then a question quickly on Farnell, I think on the last call, you had talked about pricing and demand slowing in July but appear to be stabilizing in August and September. On this call, you talked about those pressures showing signs of receding.

But if we looked at the Farnell operating margin, it was still down sequentially in that December quarter, which is typically a little bit seasonally stronger quarter.

So I'm just - maybe Phil can weigh in here, but footing some of the positive qualitative commentary that we're hearing on the backdrop with the quantitative data, and any color on the deceleration in operating margin..

Yes, Farnell was a little slower than expected this quarter, growth revenue and I would say with pricing and margins as well. That said, we do anticipate that March will pick up and as Bill said, we have the new distribution center that is beginning operations, which has higher capacity and lower costs.

We continue to work on the cost structure with integrating back offices, streamlining our real estate portfolio, things of that nature..

Yes, hey Adam, it's Phil, just to add to that, we actually had a lot of optimisms for the quarter on Farnell. It really just dropped off in the end of December, as where we saw the impact. And we just kind of typically don't have a lot of visibility to backlog. We're in a core business.

We will shift the backlog to book but the incoming bookings tend to drop off with the shutdowns and whatnot from the customer. So we saw a little bit more softness in that last week and a half or so in December, which drove some of that down.

A lot of the other metrics are looking positives, the SKU counts are coming up, the activity so far, from January looks pretty good. So we are optimistic that the March quarter is starting to show some progress on the top and bottom line in Farnell..

And I'll make a comment on that too Adam. We still are bullish that in the summer we should be somewhere between 8% to 10% operating income, and we still are committed that as you move into the up cycle you are back to 15%. So, we are well on our way to implement the five-pronged approach I talked about in my remarks.

And I think that that's going to bode well for us to be positioned extremely positively as we see the upswing in the market..

Okay, it sounds like a lot of positive ahead. Thanks, and best of luck..

Thanks, Adam..

Our next question comes from Shawn Harrison with Longbow Research. Please state your question..

Hi, afternoon. Based upon I guess, there's limited visibility right now but the trends in the book-to-bill you saw in the December quarter.

Would you expect your book-to-bill the above parity or at parity exiting the March quarter?.

Yes, I'll take that. This is a Phil. How are you doing? Short answer is yes, and so far as the early days, we're in that 0.98 to 1 right now as we sit. And again, that first week of January was a little slow with the coming off the holiday. So as we see it right now, the answer would be yes, pretty much across the board.

Europe might still be a little bit less as they catch up a little bit, but short answer, yes..

Okay, great. And then Tom, just on the on the cost take out exclusive of what will happen with TI.

Where are you at now on a run-rate basis? And just remind me where you'll exit the fiscal year in terms of run rate cost take out?.

Thanks, Shawn, we will end at $190 million of the $245 million by the end of Q4..

Okay, and as of the December quarter, what was the run rate?.

$175 million approximately..

Perfect. Thank you..

Thank you..

Our next question comes from Ruplu Bhattacharya with Bank of America. Please state your question..

Hi, Bill. Hi, Tom, thanks for taking my question. The first question just on TI, so from the commentary, you said should we assume that nothing has changed with respect to the timeframe for the revenue to go out? I think last time you said by the end of December is when we were targeting that $2 billion to go out.

Is that still the case or is it running slower or faster?.

So it's more like $1.6 billion in revenue. And yes, we saw some decline quarter-over-quarter but it's definitely a slower than we would have expected it to be and it will pick up towards the back-half of the year. And it most likely will be gone by the end of the year..

Okay got it..

Calendar year..

Okay, got it. And then in terms of verticals, I think you talked about aerospace and defense being strong.

Can you talk about retail and healthcare and other verticals? What did you see there?.

Yeah, this is Phil. Again defense and aero continues to be strong and we believe that will continue through the year at this point in time. The automotive still a little bit slower than the historical. Goodness is the contents going up between automotive and industrial what we had the medical it's roughly 27% of our business across the region.

So we have seen good opportunities as Bill touched on IoT which has a lot of good opportunities in the core and IoT world in medical applications. So, that again continues to be pretty good strong suit for us. In industrial and particularly strength in Europe, starting to see a slow a rebound in the industrial segment as well.

Consumers find out our largest play, although we do play with some guys there and that's actually been pretty steady, particularly in the December quarter where you see that pick up in Asia, and you will start to see that in September, October due to the holiday season. And that was strong for us in the consumer space..

Okay, thanks for the color on that Phil. And maybe my last one for Tom, you've done two small acquisitions so far, and I think you said $150 million in revenues per year.

Given you're trying to replace so much of TI inventory, should we expect the acquisitions to continue and that be a larger part of your cash priorities going forward?.

I wouldn't say a larger, I mean, it's always been a priority. The nice thing about the two acquisitions it’s a $160 million of revenue. So that's about 10% of the TI business. And to the extent that we find, targets that strengthen our core business by either more customers or different verticals, suppliers, we'll continue to do that..

Okay, thank you..

Anyways, thank you for looking that. You got that..

Okay, thank you..

Our next question comes from Matt Sheerin with Stifel. Please state your question..

Yes, and thank you. Your commentary regarding a gross margin stabilizing was certainly encouraging. And when you look at the March quarter, you're typically stronger, sequentially in Europe in North America and weaker in Asia, which would benefit your margins. I know now, it sounds like you're up a little bit less in seasonal.

But are you expecting gross margin to be up here? And as you go forward the next few quarters, what's going to drive that gross margin in terms of what you're seeing with demand creation in the mix of the business?.

Sure. So Matt, yes, on large, seasonally, Americas and EMEA would be stronger, and Asia as Chinese New Year, so we should see a margin uptick. And then going forward, it's what you just said, demand creation, we anticipate AI and IoT continuing to ramp.

And really Farnell, I mean, high priority within the company to get Farnell back, first 8% then 10% operating margin and 12% and up to 15%. And a fair part of that is in their gross margin, they haven't seen really any recovery in pricing and typically, after a downturn, there is some recovery.

Phil?.

With the demand creation I would also say we're very encouraged where we sit right now. We’ve seen some real positive signs on improvements, in registrations and approvals. So that's really great..

Good point..

Yeah. Okay..

And actually premiere for that was my follow-up question, just regarding your targets to get back to double-digit margins next year. It seems somewhat optimistic given that at this lower base, a little bit of optimism in terms of business, and I know there's OpEx, but still relatively tough environment without a lot of visibility.

So it just seems a little bit optimistic here..

Well, we definitely need some macro improvement to get back. I think the highest or peak was 12% from Farnell. So we would need some macro recovery get to 12%. But keep in mind, the new distribution center just opened up that has more capacity at lower cost. Bill talked about the SKUs.

And we continued to leverage the OpEx Matt, with the back office integration with the support cost. We continued to work on our facilities rationalization through several of the cities we have got both Avnet and Farnell.

So we're actually pretty optimistic that we'll get to the 8% to 10% by the summer and that we’ll get to 12% not too many quarters thereafter..

Additionally, Matt, we mentioned the five-pronged plan that we have, all those things are making great progress and all those position us to either get more business or get business at higher margins.

For example, our pricing AI tool, it gives the people that quote the opportunity, make sure that we were quoting at the highest possible price to get the best margin possible still win the deal. And we've been seeing some real favorable results with that as we implement across Avnet's core business.

That's going to be totally implemented across Farnell in the coming months..

Got it. Okay, that's helpful. Thanks a lot..

Thanks, Matt..

Our next question comes from Tim Yang with Citi. Please state your question..

Hey, guys, thanks for taking the question. You mentioned Asia is stabilizing but the growth remained negative in the region in the last quarter. I think one of your key competitors have seen year-over-year for December quarter.

So can you talk about what are you seeing in the region and why you don't have the growth that like your competitors?.

Yes, I'll take a shot at that Tim, it's Phil Gallagher, how you doing? And we're very careful of words we choose for Asia-Pac and saying stabilizing because there are so many different factors that can affect Asia. I can't speak to our competitors, I can only speak to what we're seeing and where we play.

Some parts to the market in Asia we don't play in as I said a little bit earlier. We play in some consumer but we memory and processor for example, is out of our margin model okay in Asia Pac. So we will be a little bit more selective there as well. But again, stabilizing is the right term.

We saw the book-to-bill come back into a net positive one to one little bit over. And we'll just track it as we go. That's just what we're seeing..

So building on, Phil's point, the market and markets that we're playing in we're either holding share or gaining share in Asia, so we're doing well. We just don't participate across the board in every particular market..

Great. My next question is on the timing for the recovery. If I use the midpoint of your guidance and then adding back the TI impact, I think you're still guiding March quarter below normal seasonality. You mentioned some strong results from semi vendors and you have to be always improving as well.

Can you talk about based on your experience how soon we'll see the demand come back and for Avnet to see those are big [ph] trend from vendors?.

Well, the midpoints $4.3 billion of revenue and $0.43 EPS. What we're seeing and this is as of today, more in March, April type timeframe for recovery continuing through June. I think that's consistent with what others are seeing as well..

Great, thank you..

You got it..

Thank you. Our next question comes from Joe Quatrochi with Wells Fargo. Please state your question..

Yes, thanks for taking the question.

I was curious on the TI replacement, if you could give us any update on your visibility into some of the potential shares shifting that that occurs they could benefit Avnet?.

Yes, this is Phil, Joe. It was early days yet and now we have a very clear three-pronged approach and strategy we're driving across all regions, all cities. And we have it narrowed down by account by account manager. And the three things are one, where pin for pin replacement.

We got suppliers lined up to help us there and we're working with each of the suppliers on packages. We have some suppliers adjusting their technology because there's some slight tweaks that you have to make to try and get the design in the socket out.

Two, is the complete new design that's a [longer polling attempt] a lot of customers on the design out something in the current product, they don’t have the engineering resources or the cost to the board layout. So the wait for next generation design. But again, we've got our key suppliers work with us there with a dedicated resources.

We are actually adding some dedicated resources based on suppliers, specific programs. And then the third is share ship, okay. With any account base, there's opportunities whereas very few customers, anywhere that are exclusive of anyone distributor to distributors.

So the customers, as we've seen in the past will modify their share shift okay, and there's a lot of reasons for that one from strength, parity, and also sometimes could be shared credit line. So, those are the three areas we're tracking, and we've got it by account, okay, revenue by account manager all the way up to the global level..

Yes, I would add to that so is management system and this is really tight. And the enthusiasm with our team and the suppliers couldn't be better..

Okay, thanks for that. And then Tom just more of a housekeeping. I think on the scorecard that you've previously given in the slide deck you've given the percent of revenues come from higher margin businesses that's for Avnet and the quarter.

So I was curious, I don't think I saw that this quarter, could you provide that or any kind of commentary in terms of like the growth that we saw there?.

I think the percentage is very similar to last time, which is probably roughly 43%. It could be misquoted here. We're focused on getting back to the low 2%, 2.1% to 2.5% operating margin by the summer. And therefore, that's our focus, and that's why we did we elected to take it out this time..

Okay, fair enough. Thanks..

Our next question comes from Steven Fox with Cross Research. Please state your question..

Thanks, good afternoon. Just two questions from me. First of all, off of the stabilization that you're seeing in your end markets, I guess, when you think about the next few quarters and the recovery that you sort of pointed to starting to show in earnest by March or April.

How do you envision that happening, like where are you most confident that business trends come back? Or do you need to see more evidence? And then just as Tom as a follow-up to the question about getting back to the 21 to 25 margins.

How much can you do if the market stay at these levels? How much do you control your own destiny on how much you need a little bit of lift in terms of demand? Thank you..

So I'll go first. Steve, thanks. I'm going to assume you're asking about which regions from a stabilization standpoint, I'll comment on that plus give you a little bit of vertical as well. So, as Tom said in the script, we started to see book-to-bills come back in all regions, and not crazy over one to one but come back close to one to one.

So that's good news. Starting here in Americas, Americas started seeing the downturn. We started to see it in the late summer timeframe and dropped off pretty quick from a book-to-bill standpoint, and that we're already starting to see firm up. So relatively quick.

And again, why that driven by you know industrial cores with the defense aeros we pointed out a few different times and we're playing more and more in the transportation space here and although that's still soft, that's still a pretty strong segment for us.

Asia Pacific, stabilizing again very careful word we're using but we're seeing it kind of steady as she goes. It's steadied out at a lower base number. No, mistake about that. But again, the book-to-bills starting to move in the right direction there. And we feel great about our team in Asia-Pac. Again, there's a lot of political environment there.

We got to watch very closely, particularly in China. And Europe, European leadership team, again is starting to feel I wouldn't say bullish but definitely more optimistic as it came out of the December quarter. And as Tom said, we're thinking March April in Europe again that's heavy based on industrial.

We're very strong in the central as well in automotive. And there are some signs of starting to turn there as well that we're going to watch closely. So that's kind of the regional color for us. And Asia-Pac separates Japan. Japan, still a little bit of a challenged market overall, I think as everybody knows..

And Steve, on your margin, we gave a fairly wide range 2.1% to 2.6%. So the 2.1% was assuming no market recovery. And even in this quarter, if you go through our guidance it will be at or about 2%.

If you think about where are we with the TI transition? Well, you take the two sequential declines we talked about, that's about a quarter of the way through. So, we feel we're tracking very well to it.

If there is no market recovery we will be at the 2.1% and the high-end is assuming market recovery with both some level of revenue and some level of pricing recovery to get to the full 2.6%..

That's really helpful. I appreciate that color. Thank you..

Thank you, Steve..

Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Please state your question..

Yes. Good afternoon. Thanks for all the details that the committee provided and I appreciate the opportunity to ask the questions.

I guess first, I do want to make sure I understood where the TI business was running at for revenue in the December quarter? And I think not this call but the last call I think you said a little under $500 million and then last $43 million, $44 million so it's kind of roughly in the $450 million range or a little under in the most completed quarters, is that correct?.

Well, it was running in the $450 million range. So now down $43 million would be about $400 million at the end of December and they were guiding to March down another $50 million to $70 million, which would be in mid-$300 million range Mark..

Okay, no, perfect, thanks for level filling that. And then also I'm trying to understand just the timing and impact as some of these cost reductions a little bit better. So, we back out the $7 million one-time SG&A expense in the December quarter, and I think about the use of savings of the $50 million cost reduction program.

I know there's probably some other puts and takes in March around maybe merit increases, but the TI revenue going away. I'm quoting now something like $425 million for SG&A, it's kind of baked into guidance.

Am I thinking about SG&A properly for March or the other factors I should be considering?.

Mark, we think of it being in the $430 million range. And part of that is we do expect some sort of uptick in March-April, but that's the way I would model it. That’s the way we think of it in the mid-430s..

And is that kind of getting the full benefit of the $50 million cost reductions, and so the $430 million is sort of a good baseline? I know there are some other cost reduction plans?.

Yes, [Multiple Speakers].

Okay. Got it.

And there's some other cost reductions out of that plan, but there's also investment to the company will be making, so we shouldn't think about below $430 million in future quarters?.

Correct..

Okay. And then just lastly, those two acquisitions that you mentioned, I wasn't sure what margin profile that they may have and I'm trying to think about the EPS contribution from those two acquisitions over the - not only just the near-term, but how to think about EPS contribution from those acquisitions longer term? Thanks..

When I said the revenue for the two, it's about $160 million, most of that is on the component distribution as opposed to the software company. Operating margins of that company are accretive to what we currently are. But it's electronic component distribution company..

Yes, I'll jump with some color on the company, Phoenics, based out of Boston. They're more of a niche player really focused heavy in the demand creation and very strong in the comps, space comps, wireless communication space.

And we think we will be operating that separately, okay? And as Tom said they're definitely accretive to earnings from an op margin standpoint..

So the operative word there is demand creation..

Correct..

So we have a high percentage of demand creation, which makes some [Indiscernible]..

That’s very helpful. Thank you..

Thanks Mark..

Our next question comes from William Stein with SunTrust Robinson Humphrey. Please state your question..

Great, thanks for taking my questions. First, something that I haven't heard come up on your call or any others yet is the potential effects of the city shutdowns that we've seen in China owing to the coronavirus.

Has that begun to influence your business in any way? Do you anticipate any impact or is this something you think somehow doesn't - shouldn't affect the electronic supply chain meaningfully?.

Well, it depends how large the problem becomes. Right now, we actually have our people that are in that city working from home. And we were monitoring it very carefully. We'll see what happens with some of the supply lines coming out of China. But at this juncture, we have not seen an impact.

But if it gets worse, and they start shutting down airplanes, et cetera, then that will have a different effect on shipments of the China..

Is it a meaningful region from an electronics manufacturing perspective?.

Yes, of course it is. Yes..

Yes, Yes. Okay, great. Well, not great, but thank you. Another question I want to ask was about cash-flow. Earlier in the call, there was a very sort of optimistic discussion about free cash-flow levels today.

However, I think investors understand your counter cyclical balance sheet and cash-flow relative to demand in the P&L, right? So when you have a significant customer that's going away, you're turning a lot of AR into cash or you're generating a lot of cash.

And with the rest of the business still not in a great part of the cycle, you're generating a lot of cash from that as well. You're also at the same time doing acquisitions, which seem very important to you. Your debt rating is important, restructuring, expenses are important.

And so the question is, when you come out of these conditions, let's say three plus quarters or so from now. What sort of cash-flow do you anticipate being able to generate on a sort of stable basis? Does that give you an opportunity to continue to support and potentially raise the dividend, or would it challenge it? Thank you..

Sure. First of all, your commentary is spot on. And, the 900 plus million, yes, that is in the downturn, countercyclical, good job to everybody at Avnet. Normalized, we've always talked about a $400 million to $500 million type annual cash-flow number, Will. I think that's a fair number going forward to think of at an annual basis.

We're really hoping that we see some further evidence and uptick in March and April and that'll affect our cash-flow. I'd love to report on the next call that we use some cash for working capital because our order rate is up. The dividend is very important to us.

And I think we've always talked about growing that annually in 5% plus range, on an orderly basis. And you're correct on the remaining uses of cash continue to look at, smaller size acquisitions that complement core or IoT as well as we continue with our buyback program..

Thank you..

Thanks, Will..

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll now turn it back to Bill Amelio for closing remarks. Thank you..

Thank you, operator. While the quarter reflected the expected ongoing correction the industry has experienced, we are pleased to see good signs of stabilization across key geographies and business units.

In addition, our transformation initiatives are helping drive significant cost savings and our new way of doing business will keep us nimble and better equipped to serve our customers over the long term. We look forward to updating you on our fiscal third quarter results in a few months. Thank you, operator..

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