Avnet (NASDAQ:AVT) Q2 2020 Earnings Call

0:00 Please stand by. Our presentation will now begin.

0:03 Welcome to the Avnet second quarter fiscal year 2020 earnings call. I would now like to turn the floor over to Joe Burke, VP, Treasury, and Investor Relations

0:15 for Avnet. Joe Burke Thank you, operator. Earlier this afternoon, Avnet released financial results for the second quarter of fiscal 2020. The release is available on the Investor Relations section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of ABNET's website. Lastly, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risk, 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 Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation.

1:25 Today's call will be led by Bill Emilio, Avnet's CEO, and Tom Liguori, Avnet's CFO. Also, Phil Gallagher, Global President, Electronic Components, joins us to participate in the Q&A session. With that, let me turn the call over to Bill Emilio. Bill?

1:44 Thank you, Joe, and thanks to everyone for joining us on our second quarter fiscal year 2020 earnings call. This quarter we delivered sales of $4.5 billion, which was above the midpoint of sales guidance. Adjusted EPS for the quarter was 40 cents, which was in line with the midpoint of our guidance. Looking at our business, we have seen some positive indicators internally and have also seen some good earnings reports coming out in the semiconductor space that lead us to believe that the downturn has mostly bottomed out. PMI activity showed signs of stabilization in the United States, and Asia at the end of 2019. However, there was little to indicate a rebound in Europe.

2:30 Overall, we are reiterating our expectation that there will be a return to growth in the second half of this year. Let me start with some brief highlights from the second quarter of 2020. Our most recent net promoter scores from October 2019 show that we have improved 97% since May 2017. Putting us ahead of the B2B industry benchmarks, customers are voting for Avnet across our major businesses. We captured important component wins in the aerospace and defense segments, where we were working on a number of notable opportunities. We also acquired the Focus Line Car Distributor, Phoenix, and we were pleased to add them to our portfolio. We completed the construction of our Farnell new distribution facility in Europe.

3:18 We ended the quarter with a book-to-bill of .99. We completed our acquisition of Waticchio, which strengthens our software and IoT capabilities at the device level. We delivered on our target of $50 million of annual operating expense reductions that we talked about last quarter, and which is part of our three-year, $245 million cost reduction goal. We launched MaxBoard, a development board for low-cost embedded computing and AI at the edge. We announced the Avnet Guardian 100, a new wireless edge module that adds IoT connectivity to existing equipment quickly and securely. It is powered by Microsoft Azure Sphere, and in addition to retrofitting devices, it can be used to enhance security for enterprises.

4:08 We launched our new IoT partner program at CES two weeks ago. This marks an important milestone in Avnet's IoT offering and was recognized by Forbes magazine as setting a precedent and channel programs that provide resellers what they need to compete, win, and monetize IoT-based client engagements. We received multiple customer and supplier awards in the Americas, EMEA, and Asia. We are proud of the recognition Lou Lukasansky, Avnet's VP of Internet of Things, being named IIoT Leader of the Year by Industrial IoT World. Turning to our business units. Let me start with a review of our electronic components business during the quarter. Electronics components delivered sales of $4.2 billion, which was a decline from the September quarter as well as year over year, as we continue to navigate the demand correction started in December 2018 and persisted longer than industry anticipated.

5:08 Operating margins for electronic components were 2.2%, down both sequentially and year over year. During the quarter, we added a number of new customers to our roster. This included a leader in the 5G revolution, which will rely on Avnet for complete supply chain and new product solutions, and a global innovator of aerospace and defense solutions. Defense and aerospace continues to be a growth engine for our core business and seems to be a bright spot in the economic engine. In the second quarter, the market segment grew 7% year over year. Our progress on the supplier front speaks to the value proposition of our unique ecosystem. It also reflects the confidence our suppliers have in Avnet as a driver of their growth.

5:53 This quarter, I am pleased to note that Avnet continues to add both global and regional supplier franchises to our line cart. We will continue to focus on driving increased sales from existing suppliers while we're also seeking out new suppliers who will find our comprehensive ecosystem compelling. Our acquisition of Phoenix, a well-respected leader and established franchise semiconductor distributor, brings with it a team with a strong track record of providing best-in-class service for both customers and supplier partners. Phoenix offers a focused number of solutions that are complementary to ours, and we are pleased to add them to our portfolio. Now, I know many of you have been watching the Texas Instruments transition closely. As you know, Our strategy is to replace the gross profit dollars that are currently generated on this low margin revenue. We believe this is achievable by the end of our fiscal year 2022.

6:47 Since the announcement, we have not seen a material change in TI revenue. As we explained, we anticipate the changes will begin to take place in the second half of our fiscal year, so we will update you as the year progresses. Meanwhile, efforts to replace the gross profit dollars are already underway, with a focus on driving higher revenue from existing as well as new suppliers, understanding that there will be a time lag between winning new business and the revenue reaching our P&L. Turning to Farnell, we continue to experience pricing, sales, and margin pressure. However, as the quarter progressed, we saw some signs of stabilization. We continue to gain traction on our five-pronged plan we will put in place to improve Farnell's competitiveness in the high service market and promote long-term success.

7:36 As a reminder, the five areas of focus for Farnell are, one, increasing SKU count and new product introduction, two, enhancing the pricing and quoting process, three, expanding market programs and initiatives, four, achieving operational excellence, and five, improving the web user speed and stability. We believe the combination of these actions will lead to sales growth with best-in-class profitability and we remain bullish on the opportunities ahead for Farnell as we make investments to grow our online catalog business. Our commitment to achieving operational excellence at Farnell is clear and we are excited that the Farnell New Distribution Center in Europe is complete and shipping from this facility will begin in the next few months.

8:21 We expect these benefits of this investment almost immediately. These benefits include lower cost, improved customer service and the ability to greatly increase our SKU count. In the first half of fiscal 2020, we've already added more than 47,000 SKUs to the inventory. We're about one-third of the way through our SKU expansion, and we are ramping up our distribution center, which will allow us to accelerate the remainder of the expansion. Furthering our commitment to making it easier for customers to do business with us, this quarter we started rolling out new ways to pay. In Europe, we're rolling out PayPal, and in China, we are implementing WeChat Pay, Alipay, and UnionPay. We're also in the process of evaluating similar opportunities in the Americas as we focus on better customer service and satisfaction.

9:11 And Farnell e-commerce global order penetration continues to be a notable success. We also consolidate more than a dozen of our private label products under one unifying brand, Multicom Pro. This will make it much easier for our customers to obtain the best quality and greatest value electronic products available in the marketplace today. Through the Multicom Pro brand, we are also well positioned to leverage this powerful marketplace differentiator and unique IP to drive additional revenue at higher margins. Some of the cost savings that Tom outlined include the further integration of back office functions between electronic components and the Farnell business units. Lastly, the sales of Raspberry Pi were strong at the end of the quarter. Farnell has sold more than 15 million units and grew this revenue source more than 11% from a year ago.

10:00 Based on the sales information provided by our suppliers, Farnell continues to outperform our competition during the downturn. And coupled with our five-pronged plan, we are well-positioned to outperform during the next market upturn. As discussed on our first quarter earnings call in October, we believe operating margins of 8% to 10% are achievable for Farnell by the summer, and that 15% operating margins are achievable by the end of the fiscal 2022. Making it easier for customers to do business with us is a key aspect of our transformation efforts. We are keenly focused on areas of operations that would benefit from digital transformation, which extend far beyond Farnell and is a high priority across all of Avnet's businesses. For example, we have 125 robotic process automation projects either completed or in progress. We anticipate these projects will save us approximately 5,000 hours per week.

10:56 Turning towards

10:57 Abnett Integrated. In the second quarter, we were encouraged by the sequential order activity at Abnett Integrated. On a dollar basis, our wins increased 46% quarter over quarter, and most importantly, they were higher margin solution wins, which are well aligned with our strategy. Now for an IoT update. The work we are doing to transform into a technology solution company will allow us to diversify our business and maximize high margin opportunities and reduce our vulnerability to fulfillment type revenue fluctuations. At the same time, we remain committed to delivering on our core component distribution value proposition in support of our supplier partners. Expansion into IoT solutions will not only help drive incremental growth, but it will expand the customer base for both Avnet and our supplier partners.

11:47 Workers progressing on our IoT initiatives, and during the quarter, we established a comprehensive team of IoT experts around the globe. This team will help us accelerate our progress in this critical and growing market. The acquisition of Wittikio, which we closed during the quarter, brought immediate customer wins in the IoT space, including a major European appliance manufacturer. This would not have been possible without our ability to fully offer a solution with our IoT capabilities. To that end, at CES, we announced our new IoT partner program. This new program accelerates time to market for systems integrators, VARs, ISVs, and OEMs who are looking to develop and scale IoT solutions faster.

12:32 They're able to do this by leveraging Avnet's IoT Connect platform and our ecosystem of experts. Our new IoT program allows partners to accelerate time to market with rapid deployment of IoT solutions. Scale quickly to a multi-level partner model. Realize complete solutions and services beyond SaaS, encompassing security, hardware, logistics, and beyond. Manage their costs effectively through a lean OpEx model and create awareness within Avnet's global customer base. In addition, Avnet will launch an IoT marketplace this spring, which is designed to help our partners expand their reach and generate additional revenue streams through Avnet's reoccurring billing platform and global IoT marketplace.

13:20 For customers, it gives them access to trusted and certified IoT devices developed by our partners, as well as Avnet's smart applications to speed their time to market. It will also enable developers to write to the platform and sell their solutions into the marketplace. Our first partner in this program also happens to be one of our customers, Capstone, a United States-based water management company. In addition to using Avnet's IoT Connect platform, the power of their award-winning IntelliH2O smart water metering solution, they are using our IoT partner program to deploy the same solution to thousands of municipalities. This allows them to change their business model to deliver water as a service and create an ongoing revenue source for their company.

14:07 As a result, they expect to have 35,000 devices installed by the end of 2020. As you may have heard us say previously, we are confident our IoT Connect platform can become the iTunes of IoT. That's how powerful it is. As we've discussed over the course of this call, our five key strategic initiatives are on track to deliver enhanced customer experience and long-term growth for the company. Halfway through the fiscal year, we remain committed to those five priorities. amplifying our electronic component distribution business worldwide, scaling high-margin business segments including Farnell, Avnet Integrated, and IoT, aggressively extending our digital capabilities with the implementation of robotic process automation and AI pricing, continuously finding new ways to leverage our ecosystem for the growth with existing customers and attracting new customers, and driving continuous improvement through the business, which is fundamental to our success.

15:08 Overall, as the first half of our fiscal year is completed, we are pleased to have delivered second quarter sales above the midpoint of our guidance and adjusted EPS at the midpoint of our guidance. We are confident that we have the right mechanisms in place to drive growth in the second half of the year. With that, I'll let Tom report the financials for the quarter in more detail. Tom? Thank you, Bill, and good afternoon, everyone.

15:32 While macroeconomic factors impacted our performance this quarter, we continue to execute our strategy and manage those factors under our control. We made further progress this quarter, optimizing our costs by implementing our 50 million annual cost reduction initiative, generating 149 million of cash and buying back stock, adding two smaller strategic acquisitions to our portfolio and managing debt. We executed our near-term plan and generated sales and adjusted EPS at the midpoint of our guidance. During the quarter, we delivered revenue of $4.5 billion. Gross margin held relatively steady sequentially at 11.6%.

16:18 While we have not yet seen margin recovery, the steady gross margin reflects a level of stability in demand and pricing, which is encouraging. Adjusted operating expenses increased $7 million sequentially to $443 million in the second quarter. This is primarily due to a reserve for a potential bad debt, which is unique to one customer, and we do not believe is representative of a broader credit risk exposure. We continued to manage costs and achieved our goal of removing an extra $50 million in annual costs from our operations. Working capital days continued to decline, ending at 83 days, down one day sequentially, and contributed to cash flow from operations of 149 million.

17:08 We repurchased $88 million, or 2.1 million shares of common stock. While the average diluted share count for the second quarter in our financials was 101 million, we ended the quarter with 99.3 million of common shares outstanding, achieving our goal to be below 100 million. Book-to-bill ratios improved, ending the quarter at 0.99, with all regions showing improvement. By region, America's ended the quarter at 1.04, Asia was just below parity at 0.99, and EMEA was 0.94. Turning to business performance on slide 17. Electronic components performance reflected the slow demand environment with revenues of 4.2 billion, down 2.1% sequentially and 10.2% year-over-year.

18:06 EC operating margins declined 39 basis points sequentially to 2.2%. The declining operating margins is attributable to the slightly higher operating expenses with lower revenues. Gross margin was flat sequentially. Sales for AvNet by region were as follows. Americas delivered revenue of $1.2 billion, down 2.4% sequentially and 8.8% year-over-year. Despite this slowing, revenues in the second quarter were better than expected and appear to be stabilizing, a good sign that we may be near the bottom of the downturn. The median revenue of $1.4 billion was down 3.1% sequentially and 14.6% year-over-year.

18:55 In constant currency, performance was a bit better. down 2.9% and 12.1% respectively. Overall, EMEA performance was in line with our expectations. Asia revenue of 1.9 billion was down 1.1% sequentially and 7.6% year over year. Constant currency results were similar, down 0.9% sequentially and 7.7% year over year. Overall, Asia appears to be stabilizing. Turning to Farnell, revenue for the quarter totaled $331 million. This compares to $336 million in revenue in the first quarter and $368 million a year ago.

19:42 The quarter was a bit weaker than expected in both revenue and margins, reflecting pricing and demand pressures that persisted during the quarter. Operating margins were 6% compared to 6.5% in the first quarter. On the positive side, Fornell operating expense continued to decline this quarter, and we completed the new European distribution center, which should lead to further productivity improvements this calendar year. Turning to the balance sheet and cash flow statement on slide 18. This quarter, we generated 149 million in cash flow from operations and totaled 948 million over the trailing four-quarter period or $9.39 cash flow per share. We used our cash to buy back 88 million in stock, pay 21 million in dividends and invest 51 million in two strategic acquisitions, Watechio and Phoenix that Bill described earlier.

20:46 We anticipate annual revenues from these two acquisitions to be in the 160 million range annually. We reduced our revolving debt by $144 million. Maintaining our investment grade rating is a priority, requiring a gross debt leverage in the mid twos. After the debt pay down, we ended the quarter with a gross debt leverage of 2.6. With macroeconomic factors depressing EBITDA, to maintain our leverage, we will make periodic debt repayments as necessary. Going forward, We expect to have a balanced capital allocation that includes share repurchases, dividends, smaller strategic acquisitions, and periodic debt repayments.

21:32 At the end of the second quarter, we had $506 million remaining in the share repurchase authorization. Regarding the Texas Instruments transition, our revenues from TID were $4 million sequentially in the quarter and $106 million from a year ago. We expect to see some further decline in March and then continuing through the calendar year. Meanwhile, the reduction in costs, which totals approximately $35 million annually, will follow in step with the TI sales pattern, although we may need to incur costs as we execute our recovery plan. Our goal remains to achieve EC operating margins in the 2.2% to 2.5% range starting this summer and onward.

22:22 We will continue to update you on our progress. Looking ahead, we remain focused on returning Fresnel to double-digit margins, expanding EC revenues, and growing higher margin businesses as we continue to manage costs and focus on generating cash. Turning to guidance on slide 20, we are guiding revenue in the range of $4.1 billion to $4.5 billion and adjusted EPS in the range of 38 to 48 cents. These estimates reflect similar market conditions to the December quarter and the impact of the TI transition. With that, let's open the line for Q&A. Operator? Thank you.

23:09 Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Adam Tindall with Raymond James. Please state your question.

23:45 Okay, thanks. Good afternoon. I just want to start on Tom's last point on guidance. You talked about it being inclusive of the estimated TI impact, and I'm trying to help quantify that. You sound at least, you know, more positive or similar on market trends. So if I run kind of normal seasonal revenue in the March quarter up, you know, call it mid-single digit sequentially, I think it suggests you're kind of assuming essentially the full revenue impact from TI in guidance. So I want to confirm that. and if so, why is that the case given you really haven't seen much impact thus far? Is it just, you know, we want to assume kind of a worst case at this point and let the rest be upside?

24:22 Hi, Adam. First of all, the seasonality is plus or minus 2% typically going into the March quarter. And as far as TI, we anticipate sequentially going down another 50 to 70 million of revenue. So we had to go down $43 million in Q2 and a further $50 to $70 in Q3.

24:49 Okay. And maybe just staying on that point, Tom, on cash flow, you know, trailing 12 months operating cash flow is almost a billion dollars, like a quarter of your market cap. I think the TI change was supposed to be a couple hundred million dollar benefit. Has that been recognized in cash flow or is that still on the come?

25:06 No, very little of that's been in cash flows, so that would be over the next few quarters.

25:12 Okay. And then a question quickly on Farnell. I think on the last call you had talked about pricing and demand slowing in July but appeared to be stabilizing in August and September. On this call you talked about those pressures showing signs of receding, but if we looked at the Farnell operating margin, it was still down sequentially in that December quarter, which is typically a little bit seasonally stronger quarter. So I'm just, you know, maybe Phil can weigh in here, but footing some of the positive qualitative commentary that we're hearing on the backdrop with the quantitative data and any color on the deceleration and operating margin.

25:45 Yeah, for now it was a little slower than expected this quarter, both revenue and I would say with pricing and margins as well. You know, that said, you know, we do anticipate that March will pick up and we, you know, as Bill said, we have the new distribution center that is beginning operations, which has higher capacity and lower cost, continue to work on the cost structure with integrating back offices, streamlining our real estate portfolio, things of that nature.

26:10 Yeah, hey, Adam. Just to add to that, we actually had a lot of optimism through the quarter on Farnell. It really just dropped off in the end of December where we saw the impact, which is kind of typical. We don't have a lot of visibility to backlog. We're in a core business. We'll ship the backlog to book, but the incoming bookings tend to drop off with shutdowns and whatnot from the customers. So we saw a little bit more softness in that last week and a half or so in December, which drove some of that down. A lot of the other metrics are looking positive. The skew counts are going up. The activities so far through January looks pretty good. So we are optimistic that the March quarter is starting to show some progress on the top and bottom line in Farno.

26:55 and a couple comments on that too, Adam. We still are bullish that in the summer we should be somewhere between 8% to 10% operating income and we still are committed that as we move into the up cycle we'll get back to 15%. So we're well on our way to implement the five prong approach that I talked about in my remarks and I think that that's going to bode well for us to be positioned extremely positively as we see the upswing in the market.

27:20 Okay, sounds like a lot of positive ahead. Thanks and best of luck. Thanks, Adam. Our next question comes from Sean Harrison with Longbow Research. Please state your question.

27:31 Hi. Afternoon. Based upon, I guess, you know, there's limited visibility right now, but the trends in the bookability you saw in the December quarter, would you expect your book to be, Bill, be above parity or at parity exiting the March quarter?

27:48 Yeah, I'll take that. This is Phil. How you doing? Short answer is yes. And so far, early days, we're in that .98 to one right now as we sit. And again, that first week of January was a little slow with the coming off the holiday. So as we see it right now, the answer would be a yes, pretty much across the board. York might still be a little bit less as they catch up a little bit, but short answer, yes.

28:20 Okay, great. And then, Tom, just on the cost takeout exclusive of what will happen with TI, where are you at now on a run rate basis? And just remind me where you'll exit the fiscal year in terms of run rate cost takeout.

28:34 No, thanks, Sean. We'll end at $190 million of the $245 million by the end of Q4.

28:42 Okay, and as of the December quarter, what was the run rate?

28:46 $175 million, approximately.

28:49 Perfect. Thank you.

28:52 Thank you. Our next question comes from Ruplu Bhattacharya with Bank of America. Please state your question.

28:59 Hi, Bill. Hi, Tom. Thanks for taking my question. Hi, Ruplu. Hi. The first question just on TI. So from the commentary, you said, should we assume that nothing has changed with respect to the timeframe for the revenue to go out? I think last time you said by the end of December is when we were targeting that $2 billion to go out. Is that still the case, or is it running slower or faster?

29:25 So it's more like $1.6 billion in revenue, and yes, we saw some decline quarter over quarter, but it's definitely slower than we would have expected it to be, and it will pick up towards the back half of the year, and it most likely will be gone by the end of the year.

29:42 Okay, got it.

29:43 Calendar year.

29:45 Okay, got it. And then in terms of verticals, I think you talked about aerospace and defense being strong. Can you talk about retail and healthcare and the other verticals? What did you see there?

29:59 Yeah, this is Phil. Again, defense arrow continues to be strong, and we believe that will continue through the year at this point in time. The automotive, still a little bit slower than the historical. Goodness, the content's going up. and between automotive and industrial, but we have the medical, you know, it's roughly 27% of our business across the region. So we have seen good opportunities, as Bill touched on IoT, we've seen a lot of good opportunities in the core and IoT world in medical applications. So that, again, continues to be a pretty good strong suit for us. And industrial will have particular strength in Europe, starting to see a slow, A rebound in the industrial segment as well.

30:45 Consumers probably not our largest play, although we do play with some guys there, and that's actually been pretty steady, particularly in the December quarter where you see that pick up in Asia. You start to see that September, October due to the holiday season, and that was strong for us in the consumer space.

31:04 Okay, thanks for the color on that, Phil. And maybe my last one for Tom. You know, you've done two small acquisitions so far, and I think you said $150 million in revenues per year. You know, given you're trying to replace so much of TI inventory, should we expect acquisitions to continue and that be a larger part of your cash priorities going forward?

31:28 I wouldn't say a larger. I mean, it's always been a priority. The nice thing about the two acquisitions is it's $160 million of revenue. So that's about 10% of the TI business. And to the extent that we find, you know, targets that strengthen our core business by either more customers or different verticals, suppliers, you know, we'll continue to do that. And this is what we're looking at. You bet.

31:53 Okay, thank you. Our next question comes from Matt Sheeran with Stifo. Please, to your question.

32:01 Yes, thank you. Your commentary regarding gross margin stabilizing was certainly encouraging. And when you look into the March quarter, typically you're stronger sequentially in Europe and North America and weaker in Asia, which would benefit your margins. I know now it sounds like Europe's a little bit less than seasonal, but are you expecting gross margin to be up here? And as you go forward the next few quarters, what's going to drive that gross margin in terms of What you're seeing with demand creation and the mix of the business? Sure.

32:38 So, Matt, yes, on March. Seasonally, Americas and EMEA would be stronger, and Asia is Chinese New Year, so we should see a margin uptick. And then going forward, it's what you just said. Demand creation, we anticipate AI and IoT continuing to ramp. And really, Farnell, I mean, and many more.

33:28 Good point.

33:29 Okay. And actually, Premier Ford Elroy was my follow-up question. Just regarding your targets to get back to double-digit margins next year, seem somewhat optimistic given that, you know, at this lower base, a little bit of optimism in terms of business, and I know there's OPEX, but still relatively tough environment without a lot of visibility. It just seems a little bit optimistic here.

34:00 Well, we definitely need some macro improvement to get back. I think our peak was 12% from Fresnel, so we would need some macro recovery to get to 12%. But keep in mind, the new distribution center just opened up that has more capacity at lower cost. Bill talked about the SKUs. And we continue to leverage the OPEX, Matt, with the back office integration with the support costs. You know, we continue to work on our facilities rationalization because several of the cities we have, you know, both Avnet and Farnell. So we're actually pretty optimistic that we'll get to the 8% to 10% by the summer and that we'll get to 12%, not too many quarters thereafter.

34:45 Additionally, Matt, we mentioned the five-prong plan that we have. All those things are making great progress. and all of those position us to either get more business or get business at higher margins. For example, our pricing AI tool, it gives the people that quote the opportunity to make sure that we are quoting at the highest possible price to get the best margin possible and still win the deal. And we've been seeing some real favorable results with that as we implement that across Avnet's core business. And that's going to be totally implemented across Farnell in the coming months.

35:19 Got it. OK, that's helpful. Thanks a lot.

35:22 Thanks, Matt. Our next question comes from Tim Yang with Citi. Please, your question.

35:29 Hey, guys. Thanks for taking the question. You mentioned Asia is stabilizing, but the growth remains negative in the region in the last quarter. I think one of your key competitors have seen year-over-year growth for December quarter. So can you talk about what are you seeing in the region and why you're not You don't have big worlds like your competitors.

35:52 Yeah, I'll take a shot at that, Tim. It's Phil Gallagher. How are you doing? You know, we're very careful in the words we choose for Asia-Pac and saying stabilizing because there are so many different factors that can affect Asia. I can't, you know, speak to our competitors. I can only speak to what we're seeing and where we play. There's some parts of the market in Asia we don't play in. As I said a little bit earlier, we play in some consumer, but we don't Memory and Processing, for example, is out of our margin model in Asia-Pac. So we'll be a little bit more selective there as well. But again, stabilize the right term. We saw the book-to-bill come back into a net positive one-to-one, a little bit over. And we'll just track it as we go. That's just what we're seeing.

36:37 So building on Phil's point, The market and markets that we're playing in, we're either holding share or gaining share in Asia. So we're doing well. We just don't participate across the board in every particular market.

36:51 Great. My next question is on the timing for the recovery. If I use the midpoint of your guidance and then adding back the TI impact, I think you're still guiding March quarter below normal seasonality. You mentioned some strong results from semi-vendors and your book to bill is improving as well. Can you talk about, based on your experience, how soon we will see the demand come back and for ABNA to see those upbeat trend from vendors?

37:19 Well, the midpoint is $4.3 billion of revenue and $0.43 CPS. What we're seeing, and this is as of today, more of March, April type time frame for recovery, continuing through June. I think that's consistent with what others are seeing as well.

37:39 Great, thank you.

37:41 You bet. Thank you. Our next question comes from Joe Quadrasti with Wells Fargo. Please state your question.

37:49 Yeah, thanks for taking the question. I was curious on the TI replacement, if you could give us any kind of update on your visibility into some of the potential share shifting that occurs that could benefit ABNET.

38:04 Yeah, this is Phil Joe. Well, it's early days yet, and we have a very clear three-pronged approach and strategy we're driving across all regions, all cities. We have it narrowed down by account, by account manager, and the three things are, one, we're pin-for-pin replacement. We've got suppliers lined up to help us there, and we're working with each of the suppliers on packages. We have some suppliers adjusting their technology because there's some slight tweaks that you have to make to try and get the design and the socket out. Two is the complete new design. That's a longer pole in the tent. There aren't a lot of customers that are going to design out something in the current product. They don't have the engineering resources or the cost of the board layout, so they'll wait for next generation design. But again, we've got our key suppliers working with us there with dedicated resources.

38:54 We're actually adding some dedicated resources based on suppliers' specific programs. And then the third is share shifts. With any account base, there's opportunities. We're very few customers anywhere that are exclusive with any one distributor or two distributors. So the customers, as we've seen in the past, will modify their share shift. And there's a lot of reasons for that, one for strength, parity, and also sometimes it could be sheer credit line. So they're the three areas we're tracking it. We've got it by account. Kay, revenue by account manager all the way up to the global level.

39:32 Yeah, I would add that Phil's management system on this is really tight, and the enthusiasm with our team and the suppliers couldn't be better.

39:41 Okay, thanks for that. And then, Tom, just on more of a housekeeping, I think, you know, in the scorecard that you've previously given in the slide deck, you've given the percent of revenue that's come from higher margin businesses that's for Avnet. and the quarter. So I was curious. I don't think I saw that this quarter. Could you provide that or any kind of commentary in terms of the growth that we saw there?

40:04 I think the percentage is very similar to last time, which is probably roughly 43. It could be misquoted here. We're focused on getting back to the low 2%, 2.1% to 2.5% operating margin by the summer, and therefore That's our focus, and that's why we elected to take it out this time. Okay, fair enough. Thanks. Our next question comes from Stephen Fox with Cross Research. Please state your question.

40:37 Thanks. Good afternoon. Just two questions from me. First of all, off of the stabilization that you're seeing in your end markets, I guess when you think about the next few quarters and the recovery that you sort of pointed to starting to show in earnest by March or April, How do you envision that happening? Where are you most confident that business trends come back? Where do you need to see more evidence? And then just as Tom, as a follow-up to the question about getting back to the 2.1 to 2.5 margins, how much can you do if the markets stay at these levels? How much do you control your own destiny on and how much do you need a little bit of lift in terms of demand? Thank you.

41:16 So I'll go first, Steve. Thanks. I'm going to assume you were asking about which regions from a stabilization standpoint, but I'll comment on that plus give you a little bit of vertical as well. As Tom said in the script, we started to see book-to-bills come back in all regions. Not crazy over one-to-one, but come back close to one-to-one, so that's good news. I'll start here in the Americas. America started to see the downturn. We started to see it in the and many more. And that we're already starting to see firm up. So relatively quick. And again, a lot of that driven by, you know, industrial course with defense arrows we pointed out a few different times.

42:04 And we're playing more and more in the transportation space here. And although that's still soft, that's still a pretty strong segment for us. Asia Pacific, stabilizing, again, very careful word we're using, but we're seeing it kind of Steady as she goes. It's steadied out at a lower base number. No mistake about that. But again, the book to build is starting to move in the right direction there. And we feel great about our team in Asia-Pac. Again, there's a lot of political environment there. We've got to watch very closely, particularly in China. And Europe, our European leadership team, again, is starting to feel, I wouldn't say bullish, but definitely more optimistic as they came out of the December quarter and as Tom said, we're thinking March, April in Europe. And again, that's heavy based on industrial.

42:53 We're very strong in the central as well in automotive. And there are some signs that's starting to turn there as well. That we're going to watch closely. So that's kind of the regional color for us. And Asia, I'll separate Japan. Japan's still a little bit of a challenge market overall, I think, as everybody knows.

43:14 And Steve, on your margin, We gave a fairly wide range, 2.1 to 2.6%. So the 2.1 was assuming no market recovery. And even in this quarter, if you go through our guidance, we'll be at about a 2%. And if you think about where are we with the TI transition, well, you take the two sequential declines we talked about, that's about a quarter of the way through. So we feel we're tracking very well to it. If there is no market recovery, we'll be at the 2.1%. And, you know, the high end is assuming, you know, market recovery with both some level of revenue and some level of pricing recovery to get to the full 2.6%.

43:56 That's really helpful. I appreciate that, caller.

44:00 Thank you. Thank you, Steve. Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Please state your questions.

44:11 Yes, good afternoon. Thanks for all the details that the company provided and I appreciated the opportunity to ask some questions. I guess first I did want to make sure I understood where the TI business was running at for revenue in the December quarter. And I think, not this call but the last call, I think the company said a little under $500 million and then less the $43, $44 million. So it's kind of roughly in the $450 million range or a little under in the most completed quarter. Is that correct?

44:39 Well, it was running in the $450 million range, so now down $43 would be about $400 million at the end of December, and they were guiding to March down another $50 to $70, which would be in the mid-$300 million range mark.

44:56 Okay, perfect. Thanks for level-setting that. And then also I was trying to understand just the... The timing and impact is some of these cost reductions a little bit better. So if I back out the $7 million one-time SG&A expense in the December quarter and think about the savings of the $50 million cost reduction program, I know there's probably some other puts and takes in March around maybe merit increases, but TI revenue going away. I'm coming out with something like $425 million for SG&A. It's kind of baked into... Am I thinking about SG&A properly for March, or are there other factors I should be

45:33 considering? Mark, we think of it being in the 430s million range. And part of that is we do expect some sort of uptick in March, April, but that's the way I would model it. That's the way we think of it, in the mid-430s.

45:51 Is that kind of getting the full benefit of the 50 million cost reductions and so forth? 430 is sort of a good baseline. I know there's some other cost reduction plans.

46:02 Yes.

46:03 Okay. And there's other cost reductions out of that plan, but there's also investments the company would be making, so we shouldn't think about below 430 in future quarters.

46:14 Correct.

46:15 Okay. And then just lastly, those two acquisitions that you mentioned, I wasn't sure what margin profile they may have, and trying to think about the EPS contribution from those two acquisitions over the, not only just the near term, but how to think about EPS contribution from those acquisitions

46:33 longer term. Thanks. You know, when I said the revenue from the two is about $160 million, most of that is on the component distribution as opposed to the software company. Operating margins of that company are are all accretive to what we currently are, but it's an electronic component distribution company.

46:56 Yeah, I'll jump with some color on the company, Phoenix, based out of Boston. They're more of a niche player, really focused heavy in demand creation and very strong in the comms space, comms wireless communication space, and we think we will be operating that separately. Okay, and as Tom said, they're definitely created from an op margin standpoint.

47:21 So the operative word there is demand creation margin. So we have a high percentage of demand creation, which makes them .

47:26 That's very helpful. Thank you.

47:32 Thanks, Mark. Our next question comes from William Stein with SunTrust Robinson Humphrey. Please state your question.

47:39 Great. Thanks for taking my questions. First, something that I haven't heard come up on your call or any others yet is the potential effects of the city shutdowns that we've seen in China owing to the coronavirus. Has that begun to influence your business in any way? Do you anticipate any impact or is this something you think somehow shouldn't affect the electronic supply chain meaningfully?

48:09 Well, it depends how large the problem becomes. Right now, we actually have our people that are in that city working from home, and we were monitoring it very carefully. We'll see what happens with some of the supply lines coming out of China. But at this juncture, we have not seen an impact. But if it gets worse and they start shutting down airplanes, et cetera, then that will have a different effect on shipments out of China.

48:33 Is it a meaningful region from a manufacturing perspective? and many more. A significant customer that's going away. You're turning a lot of AR into cash. You're generating a lot of cash. And with the rest of the business still not in a great part of the cycle, you're generating a lot of cash from that as well.

49:24 You're also at the same time doing acquisitions, which seem very important to you. Your debt rating is important. Restructuring expenses are important. and so the question is when you come out of these conditions, let's say three plus quarters or so from now, what sort of cash flow do you anticipate being able to generate on a sort of stable basis? Does that give you an opportunity to continue to support and potentially raise the dividend or would it challenge it? Thank you.

50:04 Sure. First of all, your commentary is, you know, spot on. And, you know, the 900 plus million, yeah, that is in a downturn, countercyclical. You know, good job to everybody at ABNAP. Normalized, you know, we've always talked about a 400 to 500 million type annual cash flow number, Will. I think that's, you know, a fair number going forward to think of at an annual basis. You know, We're really hoping that we see some further evidence and uptick in March and April, and that'll affect our cash flow. And I'd love to report on the next call that we use some cash for working capital because our order rate is up. The dividend is very important to us, and I think we've always talked about growing that annually in the 5-plus percent range on an orderly basis. and you're correct on the remaining uses of cash. Continue to look at smaller size acquisitions that complement core or IOT as well as we continue with our buyback program.

51:14 Thank you.

51:16 Thanks, Will. Thank you. Ladies and gentlemen, there are no further questions at this time. I'll now turn it back to Bill Emilio for closing remarks. Thank you.

51:25 Thank you, Operator. While the quarter reflected the expected ongoing correction the industry has experienced, we are pleased to see good signs of stabilization across key geographies and business units. In addition, our transformation initiatives are helping drive significant cost savings, and our new way of doing business will keep us nimble and better equipped to serve our customers over the long term. We look forward to updating you on our fiscal third quarter results in a few months. Thank you, operator. Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.