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Edited Transcript of AVT earnings conference call or presentation 8-Aug-19 8:30pm GMT

Q4 2019 Avnet Inc Earnings Call

PHOENIX Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Avnet Inc earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Burke

* Philip R. Gallagher

Avnet, Inc. - Global President of Electronic Components & Member of Executive Board

* Thomas Liguori

Avnet, Inc. - CFO & Member of Executive Board

* William Joseph Amelio

Avnet, Inc. - CEO, Member of Executive Board & Director

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Conference Call Participants

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* Joseph Daniel Meares

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Madison Suhr

Raymond James & Associates, Inc., Research Division - Research Associate

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Paramveer Singh

BofA Merrill Lynch, Research Division - Associate

* Shawn Matthew Harrison

Longbow Research LLC - Senior Research Analyst

* Zhen Yang

Citigroup Inc, Research Division - Assistant VP

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Presentation

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Operator [1]

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Our presentation will now begin. I would now like to turn the floor over to Joe Burke, Investor Relations at Avnet. Please go ahead.

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Joseph Burke, [2]

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Thank you, operator. Earlier this afternoon, Avnet released financial results for the fiscal fourth quarter of 2019. 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 the 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 Forms 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 statement or supply new information regarding the circumstances after the date of this presentation.

Today's call will be led by Bill Amelio, Avnet's Chief Executive Officer; and Tom Liguori, Avnet's Chief Financial Officer. 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?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [3]

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Thank you, Joe, and thanks, everyone, for joining us for our fourth quarter and fiscal year 2019 earnings call. I'm pleased to report that our fiscal fourth quarter, we delivered sales of $4.7 billion. This was the midpoint of the target guidance range we provided to investors in April. We closed our fiscal year with sales growth of 3% despite the deceleration we saw in the second half of our fiscal 2019.

Since April, companies across the industry have seen signs of slowing due to macroeconomic headwinds and tariffs. Avnet was no exception. We remained agile as market conditions worsened, and we acted quickly to accelerate cost-reduction programs that were already part of our long-term plan.

By taking these swift actions, we met our commitments to keep SG&A expenses on a downward trend. Year-over-year, spending was down meaningfully, and we remained very disciplined in our spending and our investment priority.

Pricing and margin pressures certainly were greater than anticipated. This was due to multiple factors. These include the shortening of lead time that reduced average selling prices or ASPs. This occurred at Farnell, which happens when supply rebounds and demand moves back to broadline distributors. The pricing pressure is felt broadly across the catalog space and is expected in a down market. Based on our supplier and our outside analyst check, Farnell's decline was equal to or less than the market. Assuming working conditions improve, we see a clear path to achieving Farnell's long-range goal of 15% operating margin. Now I'll talk about that more in a few minutes.

Let me first finish reviewing some of the key metrics. Avnet's adjusted operating income margin for the fourth fiscal quarter was 3.3%. This is down from 3.6% a year ago and down from 3.8% in the March 2019 quarter.

We delivered another quarter of strong positive cash flow from operations at $335 million, and this was on the heels of solid positive operating cash flow of $259 million we recorded in the March quarter.

Overall, our performance this quarter reinforced that regardless of market fluctuations, our ecosystem strategy and the plan we presented at our 2018 Investor Day remains the right course for the company. We are building on our core expertise in Electronic Components distribution, supply chain and logistics in ways that allow us to expand into new market opportunities for solutions with the higher margins we've got.

Over the long term, this plan will enable us to return value to our shareholders and capitalize on several important trends, including IoT, artificial intelligence and 5G.

Now I'll provide updates on our core elements of our strategy. They encompass amplifying our Electronic Components distribution business, scaling higher-margin segments, extending digital capabilities, leveraging our ecosystem for growth and driving continuous improvement.

Let me start with the result of our Electronic Components business. For the fourth quarter, our Electronic Components business had sales of $4.3 billion. What's notable here is that this business unit held operating income margins fairly steady at 3.3% despite a 7.1% sales decline from a year ago.

Over the course of this past year, the Avnet Integrated business, which is reflected in the Electronic Components financials, improved its mix of customers. We expect that when Avnet Integrated completes the transformation activity, we will see margin gains as well. As you may know, the primary focus is on embedded board solutions, displays and data center solutions.

When we look at their pipeline of embedded solutions, the margins are higher than in our Electronic Components business. It's this progress that we'll build upon in fiscal '20 and beyond.

Now let me break down our fourth quarter for Electronic Components performance by region. The Americas continued to gain momentum and was a bright spot for the quarter. The Americas Electronics Components business grew its sales sequentially. Year-over-year, they achieved nearly 10% growth in demand creation design-win dollars. They also continue to gain market share. The quarter also saw another significant increase in Americas Net Promoter Score, clearly indicating customer satisfaction remains on the rise, despite challenging market conditions. The Americas exited Q4 with a book-to-bill ratio above parity.

Turning to EMEA. Europe in particular saw market factors take their toll and on our EMEA book-to-bill that remains below parity. For the year, EMEA's IP&E segment saw faster growth than semiconductors and finished ahead of target. We believe IP&E remains an under-penetrated, high-margin opportunity, and we're looking to grow it at even a more accelerated pace than last year, recognizing that ASP pricing pressure is still a factor. This past quarter, our EMEA team recognized for delivering strong growth for our suppliers in Q4 and received more than 20 awards as a result.

In Asia, revenue was up sequentially, but down from a year ago. The inventory correction that started in Asia and worked its way across other geographies persists. Book-to-bill in the region ended the quarter below parity.

Our Farnell business was hard hit by market declines. In addition, demand shifted from the high-service catalog business back to volume players as their inventory stabilized. Fourth quarter sales in Farnell were $343.5 million, down 6.5% sequentially and down 12% from a year ago. Discussions with outside analysts and our suppliers confirmed that revenue and pricing pressure was felt broadly across the catalog space. Pricing pressure across the board also translated into lower margin. Farnell saw a decline in sales of higher-margin products in IP&E, especially passive. We expect the pricing pressure to persist through the end of the calendar year and into 2020.

At the end of the fourth quarter, Farnell sales benefited from the launch of new Raspberry Pi 4 Model B computer. This is the most powerful Raspberry Pi model ever made. Farnell continues to be the largest licensed distributor of Raspberry Pi single board computing.

Our exclusive customization agreement allows us to develop the Avnet SmartEdge Industrial IoT Gateway. Interest in this secure industrial gateway is high, and it has applications in vehicle monitoring, building automation, predictive maintenance and Smart Factory. The successful launch reinforces Farnell's position as the market leader in Raspberry Pi. It's a testament to the strong partnership between Farnell and Raspberry Pi Foundation.

During the quarter, Farnell added 159,000 SKUs to its website, while also adding 3 new supply lines, including Renesas. E-commerce global order penetration also rose for the 11th consecutive month. Today, e-commerce represents 70% of all Farnell orders. Our new warehouse in Leeds is expected to come online in December. This will enable us to reduce cost, dramatically increase our SKU count and improve service. And as the market turns around, we will be able to capture market share as it rises, due in part to the increase in [C count].

Our optimization programs will deliver margin improvement. We remain extremely pleased with the opportunity Farnell has created for us in the catalog space, and we believe Farnell is well positioned and will continue to grow.

Next I'll take a few minutes to cover our digital transformation. Expanding and deploying our digital capabilities this year was critical to driving growth, customer satisfaction, and of course, efficiency. For example, we released 53 robotic process automation projects in fiscal 2019. We're now in the process of launching our artificial intelligence pricing tool, Vendavo. We also deployed sales force in the Americas and in Asia Pacific. Europe will come online later this summer.

At the same time, Marketo, our marketing automation tool, has already generated thousands of leads and millions of dollars in revenue, and it's still in its early stages. Combining these tools gives us a 360-degree view of our customers worldwide and have led us to 20,000 leads being shared between Farnell and our Electronic Components business in the fourth quarter alone.

We also continue to get better penetration into the demand creation category versus the fulfillment category with the implementation of our AVAIL tool.

Now let's turn to how we are leveraging our ecosystem to expand opportunities with both existing and new types of customers. As the larger technology trends around data-driven economy takes hold, Avnet is well positioned to add value as an end-to-end solutions provider.

In IoT, we have a unique ability to help customers unite their device, gateway, network, cloud and analytics insights in a seamless way. This is creating opportunities for us to help customers achieve their business objectives and create new business models. Opportunities are expanding within our existing customer base too, as we focus on the connecting the unconnected. Two, we're helping customers add new connected technologies to their existing equipment in such areas as industrial and manufacturing (inaudible).

We closed the year with approximately $7 million of sales in IoT. This includes end-to-end solutions that encompass device, software, gateway, security and cloud applications. It does not include device or component sales. Our 3-year IoT pipeline has now reached $630 million. In a market with a TAM that exceeds $150 billion today and it is growing, this demonstrates the significant potential of scaling this high-margin business.

Our strategic partnership with Microsoft is an important part of our IoT strategy and continues to deliver customer opportunities. We are seeing strong pickup since we started delivering tens of thousands of feed units of our Azure Sphere Starter Kit in July. Azure Sphere Kit supports rapid prototyping of highly secure end-to-end IoT solutions.

And finally, I'll provide an update on our continuous drive to operational excellence. We're continuing to mine the data we now are able to collect, given our increased level of transparency insight into each customer. This improves our visibility and lays the foundation for driving excellence across Avnet operations.

Looking at Avnet's performance by vertical for the fourth fiscal quarter. We saw new and emerging opportunities in retail, health care, specifically in medical devices. Signals continue to be positive for defense and aerospace. Industrial and automotive are among the verticals that were hardest hit when the market slowdown began, and we first saw this in Asia. These verticals were further impacted by slowing that we see more recently in Europe.

As for how macroeconomics will play out, as I indicated, we believe the correction will persist through the end of calendar year 2019 and potentially into 2020. Some of the key indicators that we're watching to gauge whether the market has turned the corner include: how quickly excess inventory gets worked through the channel; any pickup in demand in Europe and in China; and momentum in automotive and the industrial vertical.

Regardless of what the market does, we're focused on the areas that are within our control. We've already made plans to put in place to navigate through the challenge ahead of us, and we'll continue to be agile and respond to any new ones that arrive.

There is significant opportunity ahead for Avnet, and we are committed to our long-term strategy to deliver a great customer experience, improve execution and deliver our long-term growth target. This includes our long-term target to achieve 4.5% to 5% operating income margin.

With that, I'll let Tom give you more details on the financial benefits of the actions that we're taking and how the contingency plan we have put in place pays off significantly when the market recovers. Tom?

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [4]

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Thank you, Bill, and good afternoon, everyone. This quarter, we effectively managed those variables that were within our control by responding to shifting market dynamics with well-executed strategies and contingency plan. We were disciplined in our efforts to control costs and improve cash flow. But pharmacy customer demand was negatively impacted by external factors.

Let me take you through our key metrics for the quarter on Slide 14 and discuss in more detail how our fourth quarter operating margins and earnings were affected and the actions we took to mitigate those impacts.

We delivered revenues of $4.7 billion, in line with our guidance. This was down 7.5% from a year ago and down 0.4% from the prior quarter. Gross margin declined 30 basis points year-over-year to 12.7% predominantly due to lower sales and margins in Farnell. We continued our focus on managing costs, with SG&A expenses declining $40.6 million year-over-year. Our tax rate improved to 18.9% in the quarter, to 20.5% for the total year.

We continue to opportunistically repurchase shares at attractive valuations. We ended fiscal year '19 with diluted shares of 106 million, down from 118 million a year ago. Adjusted earnings per share totaled $0.95, a 4% decline year-over-year, reflecting the items just discussed.

Turning to business performance on Slide 15, starting with Farnell. Revenue declined 12% year-over-year to $343.5 million. With inventory and the lead time stable for captive components, the market demand shifted from catalog distributors, including Farnell, back to high-volume distributors. This drove price erosion during the quarter as well. Farnell operating income decreased $12.4 million sequentially, primarily due to the decline in captive. Q4 Farnell operating margins were 9.7%. More on Farnell later in the discussion.

Electronic Components results were fairly solid in a slowing demand environment. Revenues were flat sequentially at $4.3 billion, and operating margins came in at 3.3%. Year-over-year, Electronic Components revenues were down 7%, though operating margins of 3.3% were within 20 basis points over the prior year. While we see revenues decrease year-over-year, stable gross margins, coupled with lower SG&A cost and an improving Americas, helped stabilized operating margins close to prior year level.

Sales for Avnet by region were as follows. Asia, which first saw the macro decline in the March quarter, shows signs of stabilizing, as revenues were up sequentially by 7% to $1.8 billion, but still 8.5% lower than the prior year period. EMEA revenues of $1.6 billion was down sequentially 5.9%, as expected in our guidance, and 7.9% lower than a year ago. Americas with revenues of $1.27 billion was down 2.4% sequentially and 5.4% year-over-year. So the Americas EC business managed to expand operating margins with an increasing gross margin and good leveraging of expenses compared to the prior year.

We ended the quarter with a book-to-bill of 0.92. By region, Americas was above

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Our conservative approach to macroeconomic factors leads us to guide revenues in the range of $4.4 billion to $4.7 billion and adjusted EPS in the range of $0.60 to $0.70.

While we continue to monitor all geographies, our guidance today reflects a sequential decline in Americas and EMEA, Asia stable and continued revenue and ASP pressures across all businesses.

So in summary, we continue to manage the factors that are within our control: cost, working capital, cash flow and buyback. We believe the actions we are taking today will make us financially stronger when the demand environment improves.

With that, let's open the line for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Param Singh with Bank of America Merrill Lynch.

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [2]

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So just wanted to, first, dive into your guidance and how -- your EPS guide in particular. It would just imply that on a flat -- on a sequentially flat revenue guide, you'd probably have to see a significant dip in the electronics marketing margin and possibly even Premier. Maybe you could help me bridge the gap. And then I have a follow-up.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [3]

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Sure, Param. I'll take it first, and I'll pass it on to Tom. So what we saw in the back half of the quarter was a falloff in the catalog space. And as you know, lead times are coming in significantly. And then there's a migration, as I pointed out in my remarks, from the catalog space back to broadline guides, which affects our margin, because the mix then changes between Farnell and the core. Core held up pretty well with respect to margin. So in the next quarter guide, which you'll see is a full quarter of Farnell, at a different place that we saw into this quarter. And that explains the majority of why the guide is down the way it is. Tom?

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [4]

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Yes, Param. Demand softened throughout the quarter and pricing softened throughout the quarter. Pricing was somewhat across the board, but most notably in passives. So what you're seeing from Q4 to Q1 is Q1 has the full effect of what we saw.

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [5]

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I'm sorry, before my follow-up, just to get the breakdown. If I were to assume that [EM] margins are down only marginally year-over-year, that would imply a significant falloff in Premier Farnell margin, probably even lower to -- when you acquired them, unless my math is off. And then I also wanted to have a follow-up after that.

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [6]

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Yes. So Farnell is in the 7% to 10% range, so still higher than when we acquired them, but most likely down sequentially from our fourth quarter.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [7]

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And most importantly, we see this as a temporary thing. As the market rebounds again, we're positioning ourselves extremely well to be able to play heavily in the upside. And we also did channel checks with what's happening with all the catalog suppliers. This is not a phenomenon that's Farnell-only. It's essentially across the entire catalog space. Each of the catalog players, all saw significant declines quarter-over-quarter for this particular slowdown that we're seeing. And then as the market rebounds back, which is looking like something towards the end of the year or into next year, we'll see this respond well. And as you know, we're putting in our new warehouse and we will have lots more SKUs, as I mentioned, bringing onboard a lot this quarter, but we plan to bring on even more by the end of the year and just in time for when the market rebounds.

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [8]

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Got it. So as my follow-up, I mean, you had previously alluded to getting towards a 4% margin by the end of the year, so you can keep on your trajectory for 4.5%, 5%. Do you think that 4% margin, even exiting fiscal '20, is possible? And if so, what would be the moving pieces to get those back? What would be the core improvement, particularly in Americas, maybe EMEA volume, Premier? Maybe you could help me bridge that if you still think that's possible.

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [9]

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So Param, this is all about -- the work we're doing today has positioned us for when the demand picks up. And that's why the focus on OpEx, working capital, cash, buyback. I don't want to put out a time frame, because we clearly would need markets to stabilize and pick up to where they were to hit the 4%. But when we think of this as far as what are we executing to our plan, really what we're missing is we're missing the top line growth and we're missing the mix, because Farnell is bearing the brunt of a lot of this downturn. The good news is, when you do your models, take our metrics, take what we're talking about, and I think you'll see where we plan to land.

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Operator [10]

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Our next question comes from Shawn Harrison with Longbow Research.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [11]

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I wanted to.

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The 15% EBIT margin target, does that require to get back to a similar scenario that was out there in '16 to 2018? Because pricing and lead times don't get that far out of whack very often in semis and passives. And so wondering what type of environment you really need to be at to hit that 15% operating margin?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [12]

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So if you recall, last earnings call, I laid out the investment plan that we have within Farnell. We still are very bullish on getting to 15%. I think in the near term, we'd be back to 12% to 13% first and then more like 3 to 5 years to get us to 15%. But what we're investing in is more SKUs. That was one of the areas that if you looked at our growth gap with the other competitors, it was because we didn't have the same SKU coverage that they did. So that's going to be fixed as we move into next year. We also invested in some improvements in pricing and quoting tools, our web speed, our infrastructure, which was one of the things that we pointed to when we acquired the company that we had to start changing our systems that were relatively old. And finally, we've done a really solid piece of work on marketing, so pay-per-click and how we do SEO more efficiently and more effectively in order for us to be able to get more traffic on the site, more conversion at a higher margin.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [13]

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Okay. And then as a follow-up, you pulled forward $50 million of savings. Tom, if you could talk about just what were the savings realized last fiscal year? And are you or what is the total target of savings that you're forecasting for this fiscal year?

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [14]

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So we're still on the $245 million plan, and the $50 million is part of that $245 million. So we're planning -- like we said, we should be in the high $100 million. By the end of this year, we have a line of sight to $210 million of the $245 million. We have a number of projects to pull in the $245 million. To help everybody with the model, expect that this quarter, we'll be flat to slightly up perhaps. You'll see the $50 million reduction in the December quarter and all of it being in our financials by the March quarter.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [15]

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And how much did you receive this past fiscal year in savings? Sorry.

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [16]

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We were down $117 million net of...

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [17]

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Investments.

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [18]

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Investments.

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Operator [19]

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Our next question comes from Adam Tindle with Raymond James.

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Madison Suhr, Raymond James & Associates, Inc., Research Division - Research Associate [20]

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This is Madison on for Adam. So I think you mentioned on the call, you expect some of these pricing pressures to persist throughout calendar year '19 and into '20. So should we think about similar levels of negative operating leverage during these quarters? Or are there some accelerated offsets where negative leverage should begin to be more muted?

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [21]

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Well, the $50 million of cost reduction will definitely improve our OpEx and GP ratio going forward.

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Madison Suhr, Raymond James & Associates, Inc., Research Division - Research Associate [22]

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Okay. Fair enough. And then...

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [23]

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So that's your question, Adam (sic) [Madison]? Does that answer it or not, clarify enough? Trying to help you.

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Madison Suhr, Raymond James & Associates, Inc., Research Division - Research Associate [24]

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No problem. I'll go over to cash flow, which has actually been fairly robust over the last several quarters. I know you have generally thought about cash flow as converting greater than 75% in net income. Is this something we should continue to see on a forward basis? And as we think about fiscal year '20, what are the puts and takes to cash flow that you are thinking about?

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [25]

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Yes. I think you should continue to see more of what we're doing. We've explained before our buybacks based on our pricing grid. So the lower the share price, the more we buy back. The higher the share price, the less we buy back. So it'll fluctuate a bit every quarter. We still have plenty of opportunity for the working capital reduction. So that will contribute to the cash flows going forward on top of our operating income, net income.

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Operator [26]

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Our next question comes from Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [27]

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Just following up on the questions around the margins and how they may play out over the next few quarters. It looks like sort of backing into your -- the gross margin number, it looks like it's going to be in the low 12s or a bit lower. And so it sounds like it's -- the ASP and pricing impact you're seeing is clearly affecting both businesses. I guess the question is, as you look forward for the next couple of quarters, particularly given that December should be a down quarter, at least in your higher-margin regions, why should we not expect margins to be depressed here, gross margin at least for the next few quarters?

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [28]

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We would agree with your assumption. I think what we were trying to say, Matt, that we expect the softness to continue at least through December. It's hard to predict when it will recover. You're correct, the gross margin percentage will most likely decline in the current quarter due to pricing. Again, so therefore, in the meantime, focus on put into place hard metrics that will land us in a good place once the recovery begins. But -- so clearly, our margins will be at this or lower level for the next quarter or so.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [29]

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And exactly the reason, Matt, that we pulled in some of the OpEx improvement. We're going to continue to look for opportunities to do even more.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [30]

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Okay. And then, I mean, just on that and the OpEx and as we roll through FY '20, on an absolute dollars basis, do you expect operating -- or sorry, OpEx or SG&A to be down significantly like in the $50 million to $80 million range?

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Thomas Liguori, Avnet, Inc. - CFO & Member of Executive Board [31]

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Yes.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [32]

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Okay. And just lastly, just on the -- your commentary about the more stable demand in Asia, that sounds encouraging. But you're also guiding, I think, kind of stable in Asia and is typically up sequentially. So you're -- are you seeing sort of the tail end of inventory correction? And would you expect the December quarter to be up sequentially at this point?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [33]

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I'm going to let Phil take that one.

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Philip R. Gallagher, Avnet, Inc. - Global President of Electronic Components & Member of Executive Board [34]

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Matt, as far as Asia goes, we see it stabilizing, not stabilized, there's still so many variables playing there. Seasonally, we're actually up in Asia a fair bit this quarter, which is good news. Tough to call December quarter yet, but we're pretty optimistic about it then stabilizing plus a bit of a bump in the December quarter. But just really tough to call with everything going on. I was just talking to our team there the other day. It's stabilizing at a lower number, what we did there in December and what we did there last quarter. So it's still down substantially, but doesn't appear to be continuing to fall. And I think there's some -- and we're starting to see the book-to-bill stabilize there as well, including Japan, by the way. We're back to 1:1 book-to-bill in Japan.

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Operator [35]

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Our next question comes from Tim Yang with Citi.

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Zhen Yang, Citigroup Inc, Research Division - Assistant VP [36]

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It seems like you are 1 to 2 quarters lagging versus component vendors in terms of seeing the end of demand weakness. So my question is, based on your experience, if the end demand recovers maybe next year, would you still be a lagging indicator to see that in recovery compared to the vendors? And if so, are you using any tools to monitor or increase your visibility of seeing the end demand? And I have a follow-up.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [37]

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Yes. Let me talk about the visibility of end demand. One of the things that's great about having a catalog company with us is we've got a lot of data that we can look at. And whether it's actual lead times versus stated lead times, whether it's gross margin, ASP decline, book-to-bill, you name it, we have a lot of indicators that we're looking at. We're hopeful we'll be able to sort this out and be able to give better headlights on when this starts to turn back around again. And we don't think there's going to be much of a lag between us and our suppliers. We think we'll come right back again. And I think a little jump ball is what's happening with the China tariffs and Brexit. Those 2 are major overhangs on the entire market. And hopefully, we'll get some certainty sooner than later.

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Zhen Yang, Citigroup Inc, Research Division - Assistant VP [38]

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Got it. That's very helpful. You mentioned softness in industrial and automotive. Can you talk about other segment, particularly in communication, as some of your component vendors actually mentioned the demand softness in that space as well?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [39]

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Our exposure to communications is a lot less. And I will give you another vertical that's still doing well. Mil/Aero is still doing well. It's very healthy and continuing to be robust. And we have seen pressure in the industrial and automotive, as you pointed out. But hopefully, as things turn back around, we'll see more robust growth there. And I pointed to IoT as a real bright spot for us. We're seeing the pipeline increase dramatically there to $630 million 3-year pipeline. We expect that, that -- well, half of that will convert over the next 3 to 5 years. So that's really encouraging signs for our solutions piece of our business, which is a much higher-margin opportunity for us. That's more like a 15% operating income business.

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Philip R. Gallagher, Avnet, Inc. - Global President of Electronic Components & Member of Executive Board [40]

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Yes. Bill, I can jump on that. Defense/aero clearly a strength for us, a strength in the market and a strength for Avnet, which is great, and then tying to Bill's last comment and with IoTs and the new solutions, we're also seeing quite a diverse amount of opportunities in the medical too. So medical is one that, particularly when it comes to IoT, definitely seems a nice opportunity with some new customers emerging in that space.

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Operator [41]

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(Operator Instructions) Our next question comes from William Stein with SunTrust Robinson Humphrey.

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Joseph Daniel Meares, SunTrust Robinson Humphrey, Inc., Research Division - Associate [42]

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This is Joe dialing in for Will. You've done a good job of explaining like what's going on at Farnell. I'm just wondering if in the process of doing your channel checks with the catalog guys, if you've put any reason why customers are shifting to more broad-based players?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [43]

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Yes, sure. This is a common phenomenon. We thought we should have described it in earlier calls. But when lead times are extended, what happens is our suppliers will shift more of the allocated supply into the catalog guys, because it's a higher-margin opportunity for them, and of course, higher-margin opportunity for the catalog guys. And you saw those catalogs that they actually put all the catalog companies together, you see that outweigh our group, the broadline at the same time. When the lead times start to collapse, what happens is supply becomes more available and then becomes -- gets back into the broadline guys, and customers will naturally shift from something that costs them more to something that costs them less. And that's the phenomenon that you're seeing.

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Operator [44]

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There are no further questions. I would now like to turn the call back over to Bill Amelio for closing remarks.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board & Director [45]

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So in summary, I'd like to make the point that we are controlling those areas of the business where we can make an impact, regardless of the macroeconomic situation. We firmly believe that successful execution of the strategies that we put in place will add significant value to all of our stakeholders, including our investors. We look forward to reporting to you on our progress in the coming weeks and months ahead. And I want everyone to have a great day. Thank you.

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Operator [46]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great day.