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Edited Transcript of AVT earnings conference call or presentation 9-Aug-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Avnet Inc Earnings Call

PHOENIX Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Avnet Inc earnings conference call or presentation Wednesday, August 9, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin Moriarty

Avnet, Inc. - CFO, SVP and Member of Executive Board

* Philip R. Gallagher

Avnet, Inc. - Global President of Avnet’s Core Distribution Business

* Vincent Keenan

Avnet, Inc. - VP of IR

* William Joseph Amelio

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

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Conference Call Participants

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* Adam Tyler Tindle

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

* Adrienne Eleanor Colby

Deutsche Bank AG, Research Division - Associate Analyst

* Garrett Barkley Clark

Goldman Sachs Group Inc., Research Division - Research Analyst

* Jim Suva

Citigroup Inc, Research Division - Director

* Matthew Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Paramveer Singh

BofA Merrill Lynch, Research Division - Associate

* Shawn Matthew Harrison

Longbow Research LLC - Senior Research Analyst

* Steven Bryant Fox

Cross Research LLC - MD

* William Shalom Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, please stand by. Our presentation will now begin. I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations. Thank you, and over to you.

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Vincent Keenan, Avnet, Inc. - VP of IR [2]

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Good morning, and welcome to Avnet's Fourth Quarter and Fiscal Year 2017 Business and Financial Update. As a result of the sale of the Technology Solutions business, which was completed in February 2017, Avnet reports the TS business as a discontinued operation and prior periods have been adjusted for comparability. Additionally, our financial reports reflect our new segment reporting comprised of the Electronic Components and Premier Farnell operating groups.

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

When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U. S. dollar-based financial statements into U.S. dollars. When we refer to organic sales, we have adjusted the prior period to include the impact of acquisitions. In addition, when addressing return on capital employed, return on working capital and working capital velocity, the definitions are included in the non-GAAP section of our press release.

Before we get started with the presentation from Avnet management, I would like to review Avnet's safe harbor statement. This call contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. There are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission

In just a few moments, Bill Amelio, Avnet's CEO, will provide Avnet's fourth quarter fiscal year 2017 highlights. Following Bill, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide first quarter fiscal 2018 guidance. At the conclusion of Kevin's remarks, a Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations is Phil Gallagher, President of the core distribution business.

With that, let me introduce Mr. Bill Amelio to discuss Avnet's fourth quarter fiscal 2017 business highlights.

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

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Thank you, Vince, and hello, everyone. Thank you for taking the time and your interest in Avnet. I'm pleased to share our results this quarter as Avnet delivered a strong top and bottom line performance exceeding our expectations for Q4.

But before I get into the details of our results, I want to take a moment and talk about the news of our Chief Financial Officer, Kevin Moriarty's decision to step down that was announced earlier today. Kevin leaves Avnet after 4.5 years of outstanding service, and he has contributed to Avnet's strategy and direction in a number of important ways. Kevin will be taking a nice, long break to reconnect with his family and friends and most importantly, to focus on his health.

As all of you know, there has been a series of significant changes at Avnet over the past year, and Kevin poured everything he had into this role, and now, he needs to step back and refocus on what's important for him and his family. Kevin leaves a tremendous legacy at Avnet, having completely reprioritized our portfolio with the sale of the TS business to Tech Data and the critical acquisitions of Premier Farnell and Hackster.io.

Avnet is on sound financial footing with a strong balance sheet and a differentiated strategy. This will help us grow in the future and is all due in part to Kevin's leadership and his vision. With the results we're announcing today, we are confident that we are on the right path to return to profitable growth and have a very bright future indeed.

Kevin has also done some fantastic job building a strong bench of outstanding financial professionals that allows us to ensure this transition will be smooth and seamless. I'm pleased to announce that [Ken Jacobson], Corporate Controller of Avnet, will become the interim CFO reporting to me. Ken brings a wealth of experience in this role. In addition to his 4 years at Avnet, Ken has over 12 years of Big 4 accounting and industry experience working with a variety of public, private and international companies. The Board and I have full confidence in Ken, and we are fortunate to have such a strong bench of financial professionals on our team.

We are also initiating a full search process immediately, where both internal and external candidates will be considered. Please join me in wishing all the best to Kevin in the future and welcoming Ken to his new and important role.

Let's return to our financial results. We closed out fiscal 2017 with a strong top line performance as revenue grew 17.9% year-over-year in constant currency to $4.6 billion with organic revenue up 8.4% in constant currency. Leading this growth was our Electronics Components team in EMEA, where revenues increased 18.6% year-over-year in constant currency. This is their 16th consecutive quarter of year-over-year growth.

I would also like to point out, they continue to outgrow the market as annual revenues grew over 10% in constant currency to a record $5.5 billion. Our Electronics Components team in Asia also grew double digits as organic revenue increased 11.6% over the prior year in constant currency when you exclude the impact of our decision to exit certain high volume supply chain engagements due to declining returns.

The benefit of that decision are evident in our profitability metrics as gross profit margins and operating income margins in our Asia region increased 41 and 45 basis points, respectively, from a year ago quarter.

Premier Farnell continues to exceed our initial expectations as organic revenue increased 4% year-over-year in constant currency, and it delivered double-digit operating income margin for the second consecutive quarter. Our digital revenue for the quarter grew to an annual run rate of over $750 million as we continue to see healthy growth in customers, website visits and lead generation.

As this quarter demonstrates, we have many different parts of Avnet's enterprise that's generating consistent revenue growth. Now I'd like to tell you about some of the initiatives and investments we are making to accelerate that growth going forward.

Our digital ecosystem comprised of Premier Farnell, MakerSource and Hackster.io is one of the largest and fastest-growing online communities that cater to the entire hardware developer life cycle. As an example, Premier Farnell's element14 just [passed the] 500,000-member mark. This community provides engineers with: rich technical content, including product data sheets; design tools; development kits; user-created blogs; and access to field application engineers.

MakerSource is an online resource directory that provides our digital community access to all support required in each step of their product life cycle. This includes: funding; engineering; traditional and [out of] manufacturing; marketing; supply chain management; and even website development. Everything you need to start a company.

The Hackster.io community, which has increased 50% since we acquired them in November, is a global community on target in the next few months to exceed 300,000 engineers and makers focused on learning how to design, create, program Internet-connected hardware devices. Through a combination of Hackster.io's live ambassadors and user-created content, members can access forums and projects that address design challenges and get real-time feedback as they progress through their design process.

Our suppliers are excited to participate in these growing communities, and we are adding new supplier participation quarterly. Communities are important as they drive customer engagement. They capture new opportunities and touch many customers at once and identify new trends. As more businesses go digital, we feel these investments will allow us to stay ahead of the industry in understanding what our customers' needs are both now and in the future.

A recent enhancement to our digital ecosystem is our Ask Avnet intelligent agent. Ask Avnet is the industry's first AI to human digital platform designed to help a wide range of visitors, including engineers, procurement specialists, professional makers, find the critical insight and information that they need daily across our entire ecosystem. Ask Avnet leverages artificial intelligence to help anticipate a customer's needs and provide them the most relevant solution for our ecosystem rather than just a list of all the possible answers. It also provides a great route into our technical and our customer support teams.

By implementing machine learning, our digital capabilities actually improve the customer experience with each and every transactions, thereby providing a customer a compelling reason to return and do more business with Avnet in the future.

Another initiative that we're investing in is our advanced analytics to inform our decisions and better anticipate upcoming customer needs. One application of advanced analytics is to deliver highly qualified leads from our digital ecosystem to our marketing and sales teams. This allows us to offer customized support when the customer needs it most. Thereby, providing new opportunities for growth and future differentiation.

We believe the digital ecosystem we are investing in will provide great opportunities for growth. We continue to invest in offerings that meet the rapidly evolving needs of our customer base as they design, procure and develop innovative technology products.

We are leveraging our deep technical resources embodied by our field application engineers and technical support personnel to enhance our growth. By engaging with both new and existing suppliers to deploy our [field] application engineers on their products, we will grow our design win business and enhance our margin profile. Suppliers who are anxious to tap that broad reach and technical breadth of Avnet are designing incentive programs that make it a win-win for both partners.

I'm happy to report that we are already seeing progress in both design registrations and design wins. In the Americas region, our Electronics Components team has already offset the impact of supplier program changes and high-performance analog products with products from other suppliers.

In Asia, the team has been outgrowing the market in microcontrollers. These design wins often lead to higher attach rates of our products. In EMEA, we've recently expanded our line card with industry-leading products from Xilinx, who was eager to tap the deep technical resources and customer engagements in the region.

Finally, a quick update on our transformation initiatives. As I mentioned in our last call, roughly half of the operating profit benefits from our transformation program is related to growth, which includes both revenue and gross profit margin improvements. In addition to reorganizing the sales force in the Americas, we have global initiatives bringing innovation to HR programs, compensation, pricing and data analytics to improve the efficiency and effectiveness of our sales efforts and accelerate our growth.

These initiatives are not a one-shot deal but are designed to drive a multi-year improvement. The significant resources of both Electronic Components and Premier Farnell will expand our digital ecosystem and help our supplier partners bring their technology to market across all 3 regions.

Now I'd like to turn the commentary over to Kevin Moriarty to provide more color on our financial performance. Kevin?

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [4]

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Thank you, Bill, and hello, everyone. In our fiscal fourth quarter, revenue grew 17.9% year-over-year in constant currency to $4.6 billion, and organic revenue increased 8.4% in constant currency. Revenue growth was driven by both our Electronics Components group, where organic revenue increased 8.8% year-over-year in constant currency, and Premier Farnell as revenue increased 4% year-over-year in constant currency.

On a sequential basis, revenue grew 2.5% in constant currency, slightly above the midpoint of our seasonal range of 0 to plus 4% in the June quarter. As Bill noted earlier, Electronics Components experienced strong year-over-year growth across all 3 regions, with EMEA up 18.6% in constant currency, Americas growing 8.3% and the Asia region growing 11.6% in constant currency, excluding the impact of exiting the high volume supply chain engagements.

Now turning to gross profit. Gross profit dollars increased $135 million or 27%, primarily due to the addition of Premier Farnell. Gross profit margin increased 120 basis points year-over-year, primarily due to addition of Premier Farnell and improvements in the Electronic Components Asia region, partially offset by declines in the Western regions. Our gross profit margin in the Americas region declined due to supplier program changes, a higher mix of fulfillment revenue and inefficiencies related to our ERP deployment.

Adjusted operating income dollars grew 17.9% year-over-year to $155 million while operating income margin was essentially flat from the year ago quarter as the positive impact of Premier Farnell was offset by a decline in the Western regions in Electronic Components. Adjusted earnings per share of $0.84 increased $0.25 from the year ago quarter, primarily due to the increase in operating income related to the addition of Premier Farnell.

In the June quarter, our working capital increased slightly on a sequential basis, primarily due to the impact of the weakening dollar. When you exclude the impact of changes in foreign currency exchange rates, working capital declined $80 million or approximately 2%. The sequential decline was primarily driven by $106 million decline in Electronic Components, driven by a decrease in inventory and an increase in accounts payable.

Working capital of Premier Farnell increased $20 million sequentially in constant currency, primarily due to our decision to expand the breadth of SKUs in order to accelerate growth. Working capital increased $600 million from the year ago quarter with the significant portion of the increase driven by the addition of Premier Farnell.

Cash flow generated from continuing operations was approximately $81 million in the fourth quarter. Avnet's fiscal 2017 cash flow from operations increased sequentially to $221 million.

During the quarter, we paid $22 million in dividends and returned another $136 million to shareholders via our disciplined share repurchase program, which brings our total cash return to shareholders to over $364 million in fiscal 2017.

Entering our fiscal 2018, we still have approximately $400 million remaining under our current share repurchase authorization. Going forward, our intention is to maintain the same capital allocation priorities we have pursued in the past, invest in organic growth; sustain our dividend; invest in strategic M&A opportunities; and return excess cash via our disciplined share repurchase program.

Now looking forward to Avnet's fiscal 2018 first quarter. We expect sales to be in the range of $4.15 billion to $4.45 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.67 to $0.77 per share. This guidance does not include any additional acquisitions, amortization of intangibles, potential restructuring, ERP accelerated depreciation and other expenses and certain income tax adjustments.

The guidance assumes 125 million average diluted shares outstanding and an effective tax rate in the range of 23% to 27%. In addition, the above guidance assumes an average U.S. dollar to euro currency exchange rate of $1.14. This compares with an average exchange rate of $1.12 to the euro in the first quarter of fiscal 2017. The sequential decline in revenue and EPS reflects the negative impact from supplier channel consolidation. Excluding this impact, the sequential revenue decline would be at the low end of the company's seasonal range.

In addition, we are affirming the fiscal 2000 outlook -- 2018 outlook we provided on our April earnings call of revenue in the range of $17.3 billion to $17.7 billion and EPS in the range of $3 to $3.50 per share.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Jim Suva from Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [2]

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Can you just help us understand a little bit more about the inventory management and build given the September sales outlook and the consolidation in the supply chain? I think you mentioned something about additional SKUs, but I wasn't clear on that. And just help us better understand your inventory management and with ADI and some of the other companies going to Arrow, why wouldn't inventory actually decline? It seems like that, that's a very big gap to say additional SKUs, but I'm probably missing some variables.

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [3]

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Jim, it's Kevin. I'll start. What I would point to sequentially, we did bring inventory down in our fiscal quarter, (inaudible) quarter. And while lead times are extending our inventory, velocity is also improving. We are balancing our inventory levels with our customer needs as our performance improves, and we take advantage of near-term opportunities by broadening our SKU base. What I talked to on the call was during the quarter, we increased Premier Farnell by approximately $20 million and probably directionally, the same amount in the September quarter. So overall, we do feel comfortable with our inventory levels.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [4]

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Yes, I'm going to comment on Premier Farnell. If you recall, we bought that company and they were underinvesting in inventory for quite some time, and we have seen great performance out of that unit. And we're now expanding SKU rates to be more in line with what comparable competitors do in the marketplace.

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Jim Suva, Citigroup Inc, Research Division - Director [5]

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Okay. That makes sense. And my quick follow-up on cash flow generation for the June quarter, say, compared to June a year ago. Can you kind of help us bridge about the change for the year-over-year? Because sequentially, I know there's seasonality. But year-over-year, help us understand the cash flow differences.

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [6]

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Sure. Kevin. You may recall, last June we were coming off the Americas ERP and we had lower sales, which generated, like, a higher cash flow during that quarter. So primarily, year-on-year, that's the most significant aspect of the decline.

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Operator [7]

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The next question is from the line of Param Singh from Merrill Lynch.

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

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So guys, when I look at your full year 2018 guide and I break out Premier from the rest of the business, the implied margin for the other EM portion is close to 3%, 3.1% operating margin, which is far below what you used to do before Premier, which is about 4.5%. So can you bridge the gap between the 2? How much of that is [the when] the program changes? How much of that is more a mix of Asia business or any other pieces that might be changing in the meantime?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [9]

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We gave a walk in the last, the April -- in the earnings announcement, we kind of walked a little bit through that. So I'd tell you, the big chunk of it is of course is the supplier program changes, which included both losses of supply lines as well as margin pressures. So we're working that through the system. We'd still tell you that our long-range plan is to get back to 4.5%. So that's kind of what we're still targeting for, but we've got to work our way to that. And as we talked about last earnings call, we made some meaningful changes in our go forward guidance and we've put together a full year guidance, which we typically don't do. And we've come out of the chute in the first quarter. And of course, we met or exceeded those guidance and we're going to do the same thing in the upcoming quarters.

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [10]

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So to be clear, if the volume was to come back and you did mention that America's volume has been [fulfilled] back. So if that were to come back, then you should be expecting a 4.5% margin. Am I correct in assuming that?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [11]

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No, I'm just saying our longer-range goal is 4.5%. Not as if...

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [12]

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4.5% to 5%.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [13]

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I'm sorry, 4.5% to 5%. But we're not seeing that in the next couple of quarters. But that's what we want to aim for in the upcoming years.

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [14]

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Okay. Then for my follow-up, could you remind me what the typical seasonality for the September quarter is, with the addition of Premier? Or to be clear, how much revenue is actually taking a hit sequentially from the program -- vendor program changes?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [15]

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Okay, vendor program changes, we're talking about upwards of $200 million, which is consistent with the billion that we told you about when you did the [walk] year-to-year in the last earnings call. So there's no real changes associated with that. And the seasonality ranges from, Kevin?

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [16]

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Down 2 to plus 2.

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Operator [17]

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The next question is from Adrienne Colby from Deutsche Bank.

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Adrienne Eleanor Colby, Deutsche Bank AG, Research Division - Associate Analyst [18]

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Just a follow-up on that last comment about the midpoint of guidance suggesting a little bit more moderate loss in sales from supplier actions, I think, around $200 million. That seems to be a little bit lower than the billion in lost revenues that you'd been talking about for fiscal '18. So I'm just trying to understand if you're expecting sort of a pick-up in the supplier losses or if it's actually coming in below what your initial expectations were.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [19]

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No, it's coming where we expected it. It's north of $200 million.

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Adrienne Eleanor Colby, Deutsche Bank AG, Research Division - Associate Analyst [20]

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Okay. And as a follow-up, the operating margins from Premier Farnell declined sequentially. Just wondering what was driving that and if we should be expecting margins to stay around current levels into '18.

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [21]

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Yes, I think what I would point to is we definitely made some marketing investments sequentially and as well as though, you can look to a double-digit rate as we work into the next fiscal year.

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Operator [22]

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Next question is from Matt Sheerin from Stifel.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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Just another question regarding the guidance. You talked about the $200 million shortfall due to the semi consolidation. Your competitor that is winning that business guided actually for a less of incremental growth due to the semi consolidation. They said it's going to take place more so in the December quarter. So I'm trying to figure out whether we're going through a transition period where you may have shipped product into your customer base in the June quarter. And that, that may be a reason why you're saying one thing and Arrow is saying another thing. And then just relative to your guide for the low end of seasonality, if you look at as a component, the space in general now, most companies seem to be guiding in line to better than seasonal because of lead time extensions and fairly good outlook in terms of demand. So I'm trying to figure out why you're guiding to the low end of seasonality.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [24]

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I'll take that question. This is Bill Amelio. If you recall in the last quarter, we had some meaningful changes with respect to our forward-looking guidance, and that was primarily due to the changes in the suppliers as well as a [need to write] off of our ERP system in the Americas. And we saw accelerated depreciation there. We gave full year guidance, which is something that we typically don't do. And I think it's proved, from our standpoint, to say that we need to demonstrate that we can hit the targets that we've put out there. In the first quarter, we have been able to do that, and we're sticking to where we are in the second quarter. And I'd also point to the fact that while our book-to-bills are definitely healthy, there's no question about that. There is still some concern out in the market. Is there some double booking that's occurring? We haven't seen that yet. But there is some concern about that. And I think taking a prudent view of the future given what we've been through is probably the most wise thing that we could do. Regarding your first question, I'd kind of point you back to our competitor to go ask them that particular question. Because I'm giving you the results as we see it as we're [blowing] off the suppliers out of our particular numbers. I have no way to be able to comment on their particular financials.

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Matthew Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [25]

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Okay. And then as my follow-up, if I can ask Phil Gallagher a question. Just Phil, you've been on board now for just 2 or 3 months. And obviously, you've got a strong background with Avnet and then you've got strong relations with the supplier community. How do you see Avnet's position here, particularly in terms of maintaining or strengthening relationships with the supplier community?

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Philip R. Gallagher, Avnet, Inc. - Global President of Avnet’s Core Distribution Business [26]

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Yes, Matt, thanks for the question. We're very optimistic. Yes, you're right. It's been about 12, I guess, 13 weeks or so. It's certainly been a whirlwind. That's for sure. We've been out, and I've been out across the world. We just got back from Hong Kong, was in Europe a few weeks before that, across the Americas and I've met with north of 100 different suppliers and supplier executives. And as we see it right now, we're feeling better and better. Hey, there's always dynamics out there, right? We can't see what's around the corner. But as I'm sitting right now, I feel very optimistic about our position with the suppliers and continuing to improve that position.

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Operator [27]

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The next question is from the line of Adam Tindle from Raymond James.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [28]

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I wanted to start, Bill, on Premier Farnell. I think you mentioned it's adding 30,000 customers a month. Can you speak to maybe the incremental revenue per customer or timeline of conversion for a new customer to revenue? What I'm trying to get at is anything that might suggest that the 4% constant currency growth we saw in Premier Farnell is poised to accelerate.

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

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Well, that statistic I gave, I'm sorry I wasn't clear, Adam. What it was, was 30,000 in the community. It's not customers. So the customer base in Premier Farnell is roughly 2.1 million customers. And if you recall, Avnet core is about 110,000 customers. So we're seeing modest adds everywhere across the board. I would say that I am bullish on what's happening with Premier Farnell, and we go with that because we're outperforming our expectations. We did a lot of pre-work, as you recall, when we bought the property, and we've since been in the middle of a transformation effort. We've adjusted some of the leadership there. That's gone extremely well. We've worked some key processes. We've streamlined the operations in their facilities. We're changing the footprint of their logistics program as well. And I think all those changes are really boding well with our customers.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [30]

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Okay. And maybe just one, I think kind of building on previous questions and specifically helping us think about the shape of the year. You typically see a sequential revenue decline in December, and it doesn't look like you've reflected all the supplier changes in the September guidance. So I just wanted to confirm, if all the changes are reflected in September or if there's more to come in December? And if so, it would seem that December EPS should be down sequentially versus current expectations that are more flattish.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [31]

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We've got the majority of the supplier actions out, and there'll be just dribbles into the next quarter. So we'll see a major step function down the supplier actions.

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Operator [32]

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And does that answer your question, Adam?

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [33]

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Okay. Yes maybe if I can just get one last one. Buybacks have been well over 100% of cash flow for the past couple of quarters and at an average price that's above current levels. So can you just talk about the sustainability of share repurchases at this level and how you evaluated the cadence to seemingly use a larger portion of this now? It would seem to imply your view of intrinsic value is well above the markets.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [34]

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Your last point is exactly right. We believe that. Recall, though, we have a meaningful amount of our cash offshore. And therefore, we've got to be very prudent with what we're doing because one of the key constraints we have is we want to make sure that we maintain our investment grade with respect to our debt. And that's one of the key guiding principles that we have. As we're able to demonstrate more operational cash flow in the Americas, we will have an opportunity to be able to continue with our disciplined share buyback program.

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Operator [35]

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Next question is from William Stein from SunTrust Robinson Humphrey.

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William Shalom Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [36]

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Bill, you offered some good details around the digital transformation. But I think the real story about integrating Premier Farnell isn't so much about growing that business itself, but, as I recall, it's more about trying to transition these low volume and engineer [example] type customers that would traditionally have gone to Premier to the Avnet platform at a margin that's not, well, let's say, that's more in line with Premier's. Can you update us on that effort, please?

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

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Sure. What we're [previously] working on strategies for us to be able to share leads across the world, and that's going well. We'll have some metrics in the future on that, we're not yet prepared to do that. It's still early days. I will tell you that we have had several pilots that have worked extremely well. We're also experimenting with some interesting new marketing automation tools that will help us be able to qualify leads in such a way that it gives a hit rate on those leads to be very hot with respect to when they move over from Premier Farnell over [to] Avnet. And therefore, there'll be something exciting for the salespeople to follow up on. You can imagine, if you hand a lot of leads to a salesperson and they don't get a good hit rate on, that they're not going to be too excited about that lead sheet. So therefore, we've been working diligently to make sure we get the right tools in place that when we turn those leads over, they're ones that really convert into high volume production into Avnet. So we're pretty bullish on where we are. We're encouraged, and we'll start -- we'll share metrics with all of you in the future.

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Philip R. Gallagher, Avnet, Inc. - Global President of Avnet’s Core Distribution Business [38]

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Yes, Bill, let me just add to that. This is Phil. So bottom line is the collaboration between the, we'll call -- yes, we'll call it, the core business EM and PF is extremely good. The key is qualifying these opportunities, and we have 2.1 million customers. The amount of transactions and then you tie that to the communities, what we're doing is yes, we're sifting, right? And we're filtering and we're using analytics to start a better understanding where are those real opportunity versus not. It's very complex, but the collaboration is high. The analytics are coming in. And then the key is also how you contact those customers. Is it online? Do they want a salesperson to call them? So we go through all those different qualifications but some very exciting opportunities have already come out of it. As Bill pointed out, and we're beta testing some new opportunities around the NPI that we could do at Premier Farnell. So we have much more to come in the future in that arena.

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William Shalom Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [39]

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Appreciate that update, guys. Maybe one more, if I can. Any update on the ERP project? We're aware that there was a big investment. There were some big problems. You're now writing down that investment, and I think there was sort of a restart here. Any update on the process, the investment, the results?

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [40]

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Yes. We're still on track with what we've said with respect to the level of the investment that we're going to put in place with respect to going to a global system. As you recall, we discussed that our European team will be going to a one instant SAP at the end of the year, and that's on track and going extremely well. We've had several workshops over in Europe with America's team and the European team. And we feel like we're in really good shape there. So and that's really an iteration on what's already over in Europe. And that will become the basis for the system that we implement into the Americas and eventually, the global system. So we feel like we're still on exactly the same path that we talked about before, which was a 24-month implementation for the global system. And we'll keep reporting out on that in each of the quarters.

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Operator [41]

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Next question is from Shawn Harrison from Longbow Research.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [42]

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First, I just want to wish Kevin all the best. I wanted to delve in a little bit more on both the supplier losses and then just kind of what it means for the end of the year in the first question. Are the losses geographically split up, maybe 1/3, 1/3, 1/3? If you could help us with the weighting of where the revenues is coming out. And then second, it seems to imply based upon maintaining the full year guidance with the midpoint that you will be growing organically year-over-year as you exit fiscal '18, and I want to make sure that's correct.

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

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I'll take the second question first. That's exactly correct. We will be growing organically. And to the guidance that we gave last quarter, we're sticking with that. So that's exactly right. And with respect to the supplier losses, it depends on the particular supplier. But you'll see some that will hit more in the Americas than in other regions in some cases. But generally, it's roughly as you laid it out.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [44]

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Okay, that's helpful. Just a follow-up. Kevin, operating expenses on a dollar basis and interest expense were a little higher than I would have thought them to be for the June quarter, when I put that I mean, in terms of bad math. But can you give me maybe a dollar guidance to think of both operating expenses as well as interest expense for both the September quarter as well as fiscal '18? How should I think that would track?

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [45]

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Sure, Shawn. I'll -- for the September quarter, you should be thinking in the neighborhood of down $10 million to $15 million sequentially. And that's kind of how we're looking at it. And the way to qualify interest and other, I'd go with a aggregate amount of roughly $25 million for both interest and other for the quarter, for the September quarter. And then...

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [46]

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But I was going to -- I guess on the interest and other, I'm a bit confused because you paid down what, $1.8 billion of debt back in February. And so I thought even if a low rate on that debt, you'd have a little bit more interest expense savings. So maybe bridging the $25 million of what you did in the March quarter would help me out.

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [47]

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Sure. And part of it, Shawn, is during the quarter in terms of where are the facilities and the timing around that, and that's part of the dynamics here that goes in terms of where is the cash positioned, [even as] we work through the quarter. So we may have had lower cash levels during the quarter, which created a higher interest expense as we worked through the June quarter. And that's really the primary difference.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [48]

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And then on the OpEx, as you exit the year, is there a range in terms of percentage dollar amount that it should decline fiscal '18 versus fiscal '17 that you're targeting?

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [49]

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Sure, yes. And I think what I would say just turning to next year and bridging kind of what we said on the April call, we are looking for operating expense to go down approximately $90 million to $100 million this year. And if I was to range that between the quarterly impacts, think of, like the 10% to 15% as we go into our fiscal Q1, the December quarter, somewhere in the neighborhood of 18% to 22%. And then in the March and June quarter, somewhere in the neighborhood of 28% to 32%. Again, a lot of things we've talked about are back-end loaded. So that is kind of our expectation as we sit here today.

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Operator [50]

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The next question is from the line of Steven Fox from Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [51]

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My first question was regarding some of the lead generations you've been talking about on the call. I was curious if there's any common thread in where you're having success either by vertical or customer type or type of application component, et cetera. Is there any more color on that, that will be helpful. And then I have a follow-up.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [52]

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It's a pretty much across the board. All verticals, we're having good luck with. So I wouldn't point to any particular one to say it stands out with respect to that. And it's more important is to say where they are in their life cycle, and how quick that particular product line is going to pop into high-volume production. And that's what the analytics are that we've worked to be able to move those leads over, so they become ones that are successfully converted into high volume opportunities.

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Philip R. Gallagher, Avnet, Inc. - Global President of Avnet’s Core Distribution Business [53]

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Yes, Steve, I'll add. This is Phil. I think -- and we don't classify it as a vertical, but we have had some specific wins in the area of IoT, okay, in the Internet of Things, that have come out of that where it's a new customer, a new application, and we've been able to provide the complete solution to them around IoT, which is going to continue to be a focus for us and a big growth area.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [54]

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That's helpful. And then just I might be missing something on the Premier Farnell numbers that we're seeing. So quarter-over-quarter, it looks like the operating profits and the sales were down about the same amount. So that's a pretty big negative leverage. Can you just talk to what happened in the quarter sequentially with the margin, a little bit more just for Premier Farnell?

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [55]

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Sure. This is Kevin. I think what I pointed to earlier is sequentially, we've roughly -- as we bought the property, we've definitely been making some investments in marketing and some of the areas and that primarily was a sequential change in the June quarter versus the March quarter.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [56]

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So then going forward, do you envision more investments that keep the margins around these levels? Or does that start to wane off and you see margins more like what you had in the March quarter?

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Kevin Moriarty, Avnet, Inc. - CFO, SVP and Member of Executive Board [57]

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I would say to think of it in terms of double digit and as we kind of work through, we're obviously investing in the business but definitely looking to be at double-digit as we work through the balance of this fiscal year.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [58]

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And recall, we were real clear that we have to do some investment in the IT space as well, so there'll be some expense that we'll be putting there as well as capital in there in our IT systems.

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Operator [59]

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Next question is from Mark Delaney from Goldman Sachs.

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Garrett Barkley Clark, Goldman Sachs Group Inc., Research Division - Research Analyst [60]

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This is Garrett Clark on for Mark Delaney. I know you've kind of already talked about semi lead times or at least hinted at them. And I was just wondering if you can provide any more color on this issue, where they are today and what you would consider normal. And then I have a follow-up.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [61]

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Well, there's no question, lead times are expanding. So we'll be seeing that. And I think you've heard that across the industry. That continued pressure will [fall beyond] sort of the better part of the year. But as I've pointed out with respect to our guidance, there's also a concern out there with respect to double booking if that, in fact, is driving some of this. We haven't seen it yet in the numbers, but that's always something that we're concerned about.

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Philip R. Gallagher, Avnet, Inc. - Global President of Avnet’s Core Distribution Business [62]

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Yes, Garrett, I'll jump on that. We definitely track the bookings very closely in both our hard order backlog as well as our supply chain. You've got to be sure that we're not seeing any funny business. And we want to reemphasize, we've not seen that. So the book-to-bill is solid. It's in line with the market and feel good about that. As far as the lead times, most of ours are avoiding the A word. But [the] for sure lead times are out 16, 20 weeks. We're seeing it, particularly, passes for sure are price stretched as far as anything. A lot of that is driven by the automotive market, frankly. And then we're seeing really memory, controllers. It's pretty much standard. But again, going back to the inventory question, we also have increased our pipelines to be sure that we can cover our customers' demands through the quarter and into the future. And that's frankly, our job to do the best we can to buffer that.

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Garrett Barkley Clark, Goldman Sachs Group Inc., Research Division - Research Analyst [63]

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I appreciate that color. Similar question sort of piggybacking on that, on inventory levels at customers, can you give any more color on inventory levels in specific end markets or just generally more color on inventory?

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Philip R. Gallagher, Avnet, Inc. - Global President of Avnet’s Core Distribution Business [64]

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Yes, this is Phil again. I'll take that. I don't think there's any -- any surprises there. I think it's pretty normal. Again, we just contract our bookings and our billings [then] in our supply chain. The supply chain business is roughly 50% of our business today. The customers are still pulling it -- they're not giving -- they're pulling it in, yining and yanging like they always do. But it's not like they're pulling in excesses. And do I feel any concern that our customers have excess inventory and finished goods or raw goods, the answer across the board would be no.

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William Joseph Amelio, Avnet, Inc. - CEO, Member of Executive Board and Director [65]

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Another way to look at that same question you just asked is what's going on with our cancellation rates and our expedite rates and there's nothing that's abnormal with either one of them at this juncture. So I wouldn't conclude that the inventory levels at the customers are expanding in any meaningful way.

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Operator [66]

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Gentlemen, there are no further questions at this time.

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Vincent Keenan, Avnet, Inc. - VP of IR [67]

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This is Vince. Okay, thank you for participating in our earnings call today. Our fourth quarter fiscal 2017 earnings press release can be accessed in downloadable PDF format at our website under the quarterly results section. Thank you.

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Operator [68]

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