Avnet, Inc.
Q1 2018 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations. Please go ahead.

[Vincent Keenan:]

Good morning and welcome to Avnet's First Quarter of Fiscal Year 2018 Business and Financial Update. As we provide the highlights for our first quarter fiscal year 2018. 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 are 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 first quarter fiscal year 2018 highlights. Following Bill, our Interim Chief Financial Officer, Ken Jacobson, will review some additional financial highlights and provide second quarter and full-year fiscal 2018 guidance. Bill will provide some closing remarks, and at the conclusion, 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, Electronic Components. With that, let me introduce Mr. Bill Amelio to discuss Avnet's first quarter fiscal 2018 business highlights.

[William Amelio:]

Thank you, Vince, and hello, everyone. Thank you for taking the time to be here and your interest in Avnet. We've started fiscal 2018 with a strong topline performance as revenue of $4.7 billion exceeded the high end of our expectation, driven by the strength of our EMEA and Asia regions as well as Premier Farnell. Overall, revenue increased 13% year-over-year with organic revenue increasing 3.5% in constant currency. Adjusted operating income declined $19 million or 12% year-over-year and operating income margin declined 87 basis points. This quarter, we saw declines in our gross margin and operating income from a year-ago period, which was due in part to the supplier channel and program changes as well as some additional inefficiency associated with the ERP deployment in the America. At a regional level, both EMEA and Asia regions offset the impact of supplier channel and program changes as they grew both revenue and operating income dollars year-over-year. Premier Farnell also exceeded expectations as year-over-year revenue grew for a third consecutive quarter with a double-digit operating income over that timeframe. The Americas region experienced a material year-over-year decline in revenue and operating income. There are two factors that contributed to the Americas' performance this quarter; first, the ERP disruption; the second, the supplier channel change. When our new ERP system went live in the fourth quarter of fiscal 2016, we experienced failures and basic handoffs in our sales-related process and we lost visibility of many key performance metrics. Inaccuracies in our data flow and communication with customers and suppliers led to some frustration and dissatisfaction. However, the team did an amazing job of tackling these challenges. The first three quarters post go-live were basically a triage exercise by the team to identify issues then develop software fixes and workarounds that restored many of the processes that previously were in place. Even when the system began to stabilize, we had to invest or reassign significant resources to ensure the proper processing of transactions including product returns, supplier and customer pricing and supplier ship and debit processing. All of these issues resulted in lost productivity, and unfortunately, an inward focus as employees spent significant time fixing the system and problematic transaction. We continue to spend $3 million to $4 million per quarter to reliably maintain customer service level. We believe this money is well spent as evidenced by our recent Net Promoter Scores as well as many verbatim comments that cited improved customer service in the America. We're currently on track with regard to our Americas region's ERP deployment, which we believe will allow us to save out of these expenses and grow more profitably in the future. The other challenge that hit America region hard was supplier channel and program changes that impacted both revenue and demand creation margin. The billion dollars of revenue that shifted to competitors disproportionately impacted the Americas regions because of higher loss of demand creation revenue. The combination of supplier program changes and ERP disruption caused the America region to experience a significant decline in gross profit margin. These challenges are now mostly behind us. And this is evidenced by improved metrics, including on-time delivery, quote accuracy, order processing accuracy and order correction turnaround time. I'd like to thank our customers, suppliers and especially our America employees, who are working so hard to recover us from the ERP disruption. I often say distribution is a relationship business. And the relationships our teams have with their counterparts, customers and suppliers is why we not only got through this challenge, but we expect to have a brighter future going forward. So I'm pleased with the strong financial performance this quarter. I'm even more pleased with the progress that we're making in transforming Avnet. Our strategy directly addresses two fundamental shifts that are impacting our industry. The first is that suppliers are modifying how distributors get compensated for their role in the technology supply chain. Suppliers are paying less for additional services and legacy design wins, and they're focusing more on getting their technology in front of a broader set of customers earlier in the product lifecycle. Customers, whether large OEMs, startups, makers, are increasingly demanding digital tools and online access to services that speed their time-to-market and, of course, at lower cost. Our transformation strategy not only addresses these shifts but will position Avnet to deliver higher value services throughout the entire product lifecycle. Avnet's transformation is based on four key pillars, and they are

[Ken Jacobson:]

Thank you, Bill, and hello, everyone. In our September quarter, reported revenue grew 13% year-over-year while organic revenue increased 3.5% in constant currency. When you exclude the negative impact of the previously announced supplier channel changes, revenue would have increased 8.3% year-over-year in constant currency and our sequential growth rate would have been 1.7%. At Premier Farnell, reported revenue increased 7.6% year-over-year and was up 6.2% in constant currency. Gross profit of $613 million increased $90 million or 17% year-over-year, primarily due to the addition of Premier Farnell. Gross profit margin at [13.1%] declined 55 basis points sequentially, primarily due to supplier channel and program changes. The combination of supplier channel and program changes are having a negative impact on both our gross profit margin and our mix of demand creation revenue in fiscal 2018. These changes were felt more severely in the Western region of our Electronic Components business. Operating expenses of $471 million increased $109 million year-over-year, primarily due to the addition of Premier Farnell and changes in foreign currency exchange rates. If you exclude the impact of foreign currency, operating expenses declined $16 million sequentially, primarily the result of our cost reduction initiatives. Adjusted operating income of $142 million declined $13 million from the June quarter and adjusted operating income margin was down 32 basis points primarily due to the impact of the supplier channel and program changes. Adjusted operating income declined $19 million year-over-year as the addition of Premier Farnell, and growth in the Electronic Components, EMEA and Asia regions, was offset by a significant decline in the Americas region. Adjusted operating income margin declined 87 basis points year-over-year due to the supplier channel and program changes as well as inefficiency in our Electronic Components Americas region related to the previously mentioned ERP deployment. Adjusted earnings per share of $0.76 increased $0.02 in the year-ago quarter, primarily due to the acquisition of Premier Farnell, a lower effective tax rate and a lower share count. Now let's take a further look at revenue growth by region. Our reported growth rate was enhanced by the acquisition of Premier Farnell, beginning in the second quarter of fiscal 2017. Our organic growth for the Electronic Components group was negative in the first two quarters of fiscal 2017, as the Americas region was dealing with the immediate impact of the post go-live ERP disruption. While the Asia region reported negative growth as a result of our decision to exit select high-volume supply chain engagement. When you exclude the impact of that decision, our Asia region grew 5.9% in constant currency in fiscal 2017. We continue to demonstrate strong performance in EMEA region, where the team grew organic revenue double-digits in constant currency over the past four quarters. Avnet organic revenue in constant currency grew 2% and 8% in the third and fourth quarters of fiscal 2017 respectively, compared to organic growth of 3.5% in the first quarter of fiscal 2018. When you exclude the negative impact of these supplier channel changes, our organic growth was 8.3% in the September quarter. At a regional level, both the EMEA and Asia regions have offset the supplier channel changes and delivered double-digit organic growth this quarter of 20.2% and 14.5%, respectively. Excluding the impact of the supplier channel changes, the Americas region declined 10.8%, primarily as a result of the cumulative impact of the ERP disruption fiscal 2017 that impacted both our Americas components and integrated solutions businesses. As demonstrated by our first quarter results, we have two international regions and Premier Farnell that are growing faster than the market, while the Americas region has been challenged by both ERP deployment and a disproportionate impact from the supplier channel and program changes. I would like to take a moment to highlight the actions we have taken, which we expect to drive meaningful improvement in our future financial performance. Specific to the Americas region of our Electronic Components group, we have further stabilized our ERP via numerous software enhancements to improve functionality and transaction processing. Internal sales teams have been reorganized to best leverage Tier 2 and Tier 3 customer accounts, as they represent significant growth and margin potential. Given the reorganization of our sales team, we have also implemented revised compensation plans which are designed to incentivize on growth and margin profile target. Lastly, specific to the Electronic Components Americas region, we recently completed an in-depth comprehensive sales training program designed to integrate and deploy global best practices. From a company-wide perspective, we have made the decision to accelerate our cost reduction plan, which we previously communicated. We are targeting a global operating expense reduction of $125 million on an annualized basis by the end of fiscal 2018. In the September quarter, we reduced expenses by $16 million sequentially excluding impact of currency. In the December quarter, we expect to take out an additional $18 million to $22 million of annual operating expenses with the remainder of the reductions happening in the second half of fiscal 2018. Similar to our salesforce reorganization in the Americas region, we have taken steps in other regions to ensure a focus on higher growth opportunities, on improved margin profile and a lean expense structure. We supplemented our business management system with new diagnostic metrics and added transformation initiatives focused on operational areas where we need to accelerate progress. We expect the impact of these initiatives to increase as we exit fiscal 2018 with additional benefits going forward. As these cost reductions and initiatives are implemented, we expect to see an improvement in our margins that will also be reflected in our returns. We still embrace our value-based management philosophy, which focuses on return and we are embarking on this transformation to get the right combination of earns and churn that will drive long-term shareholder value creation. As we look longer term, we expect enterprise operating income margins to be in the 4.5% to 5% range with a targeted return on capital of 250 basis points greater than our cost of capital, which represents a returns range of 10.5% to 11.5%. In the September quarter, working capital increased by approximately $328 million sequentially, primarily due to an intentional investment in inventory. Inventory increased approximately $300 million, with approximately $200 million of the increase being for investments related primarily to the strong book-to-bill, extending lead time and to expand skews at Premier Farnell. The remaining $100 million was due to foreign currency and inventory held for specific supply chain engagement that is working capital neutral. When you exclude the impact of changes in foreign currency exchange rates, working capital increased $265 million or approximately 6% on a sequential basis. Working capital increased $826 million from a year-ago quarter with a significant portion of the increase driven by the addition of Premier Farnell. In the first quarter of fiscal 2018, cash used for operating activities was $128 million resulting in a trailing 12-month of cash used for operations of $17 million. During the quarter, we received approximately $50 million from the sale of Tech Data stock, which we acquired from the sale of the Technology Solutions business. We used the proceeds to repurchase our own shares via our disciplined share repurchase program. We expect an additional $75 million in proceeds from the sale of Tech Data shares by the middle of the December quarter. The remaining $125 million of Tech Data shares will be sold in the June quarter due to contractual restrictions. We expect to use these proceeds to continue to repurchase our own shares. Entering the second quarter of fiscal 2018, we have approximately $327 million remaining under our current share repurchase authorization. We ended the quarter with $540 million of cash, of which $513 million was outside of the U.S. For working capital purposes, we believe we need between $200 million to $250 million of cash on hand to run our business globally. Going forward, our intention is to maintain the same capital allocation priorities we have pursued in the past. Invest in organic growth, return excess cash via our disciplined share repurchase program, sustain our dividend and invest in strategic M&A opportunities. Looking forward to Avnet's December quarter, we expect sales to be in the range of $4.25 billion to $4.55 billion. Based on this revenue forecast, we expect adjusted diluted earnings per share to be in the range of $0.67 to $0.77 per share. We have also increased our fiscal 2018 outlook to annual revenue in the range of $18.1 billion to $18.5 billion and adjusted diluted EPS in the range of $3.10 to $3.60 per share. This increase in fiscal 2018 guidance represents an approximately 5% increase in revenue and 3% increase in adjusted diluted EPS as compared to the midpoint of prior guidance. This guidance does not include any additional acquisitions, amortization of intangibles, potential restructuring integration, ERP accelerated depreciation and other expenses and certain income tax adjustments. This guidance assumes 123 million average diluted shares outstanding and an effective tax rate in the range of 21% to 25%. In addition, the above guidance assumes an average U.S. dollar to the euro currency exchange rate of $1.18 to the euro. This compares with an average U.S. dollar to euro currency exchange rate of $1.08 to the euro in the second quarter of fiscal 2017. Now I'd like to turn the call back over to Bill for some closing remarks.

[William Amelio:]

Thank you, Ken. As we entered fiscal 2018, we knew the supplier channel and program changes would be a headwind to our financial performance. Even with those headwinds, there are many accomplishments that demonstrated that we are competing well and making progress on our strategic initiatives. Our EMEA and Asia region are offsetting the negative supplier impact by outgrowing the market and executing on a transformation project. In our Americas regions, the business is stabilizing with many key metrics indicating that customer confidence and growth are improving. Our digital ecosystem continues to outperform expectations, and we are investing in new services and products to accelerate our growth. Many suppliers are embracing our unique capabilities that are embodied by the combination of Premier Farnell and Electronics Components to cover the entire product lifecycle. The addition of innovative solutions from Hackster.io and Dragon Innovation are incenting suppliers to create new partnerships with us that extend their reach to a broader base of customers. And we are acting quickly to the industry shifts by accelerating our cost reduction initiatives to right size the company, our investments in growth initiatives that includes FAE, digital and IoT are gaining traction, and will ramp as they progress through fiscal 2018. Lastly, we continue to manage our capital prudently with consistent returning cash to shareholders via dividend and share repurchase programs. And we remain committed to achieve our higher fiscal 2018 revenue and EPS goals. With that, let's open up the lines for Q&A. Operator?

[Operator:]

Thank you. Ladies and gentlemen, we will now be conduction a question-and-answer session. [Operator Instructions] Our first question comes from the line of Param Singh with Merrill Lynch. Please proceed with your question.

[Paramveer Singh:]

Hi. Thank you for taking my question. So firstly, I wanted to get a sense of the organic growth in Europe and Asia, what was driving that? Were there some share gain? I know you mentioned Marvel, was that predominately it? Or is there underlying demand trend that's benefiting you? And then I have a follow up.

[William Amelio:]

Sure, Param. Clearly, we are hitting on all cylinders over in EMEA and automotive continues to be strong for us as well as industrial. So it's a great format. We're just outperforming and our demand creation engine is the best it's been, and we're pretty excited about what's going on in both EMEA as well as Asia. Marvel had a little impact, no impact this quarter. That's something that's going to happen in the future.

[Paramveer Singh:]

And as my follow-up, I noted that your Premier Farnell margin stand out around about 50 bps sequentially and revenue seems to be stronger. So what led to that margin shift down in Premier? And then what will take you to get to your operating margin target that you outlined? Is that a two to three-year time-year phenomena or what are you thinking about there?

[William Amelio:]

Yes, I wouldn't look at it quarterly perturbations. If you look at when we picked up Premier Farnell, their operating margins were around 6% and we've essentially almost doubled those. So we're driving for more improvement. We made some investments during the quarter in order for us to have better improvement in the future. So we talked about some of the skew investments that we've made as well as investments in people, in the organization to strengthen their team. But we're ecstatic about the performance that's been happening with Premier Farnell, and we're also very happy about the synergies that we see between Avnet and Premier Farnell with the lead transfer back and forth as well as the ability to be able to add new supply lines that we would never be adding to Premier Farnell, if it wasn't for Avnet.

[Paramveer Singh:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Adrienne Colby with Deutsche Bank. Please proceed with your question.

[Adrienne Colby:]

Hi. Thanks for taking my question. I wanted to follow-up on Param's question. You've mentioned in the script that you do expect to get into that 4.5% to 5% targeted operating margin range. Can you comment on if you're still expecting to get to that 4% ZIP code in fiscal 2019? What kind of a timeframe are we looking at to reach that target?

[William Amelio:]

Well, as we said in the script, it was 2020. It's kind of the direction and, of course, we like to work in getting that sooner than later and with the four pillars that I've talked about of what we're trying to do as a company, we have a good shot of being able to bring that in, but right now our target is 2020.

[Adrienne Colby:]

Thanks. And as a follow-up, can you update us on the progress of your CFO search?

[William Amelio:]

Sure. We've looked at many candidates internally. We're lucky to have a rich slate internally here and as you have heard from our interim CFO right now, he is doing a fabulous job. And we had a list of probably about 25-plus candidates outside and we've gone through a pretty rigorous process and I'm happy to say that hopefully we'll conclude that by the end of the calendar year, and I will make an announcement.

[Adrienne Colby:]

Thank you.

[Operator:]

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

[Matthew Sheerin:]

Yes, thank you. Question on the gross margin, you talked about why that was down, obviously, the North America, the supplier reductions and then also the ERP issues there. As you look forward, and I know you talked about some really nice growth in the Demand Creation business and design wins. And then as you sort of fix the ERP issues and get that behind you in North America, how should we be thinking about gross margin as we get through your fiscal year?

[William Amelio:]

I'll let Ken give you some more specifics on it, but I will tell you this, I think what you've seen us do as we've turned the corner now in the Americas, it's been a rough slot for us over the course since we've implemented the ERP, and I am happy to say that we've added in back in place many of the headlights that would be lost when we went to go-live. And when you look at the ways the major – the health of that business, you will see that we've bottomed that and turned on all of those and we're seeing real progress from the Americas team now. So we'll see margin accretion as we go forward, but we have not laid out the specifics exactly what that is yet.

[Ken Jacobson:]

Yes, the only thing I will add is in the second half, we shift to a higher margin because of the Western region. So expect some recovery in the Americas as well as the Western region mix. So we expect to exit the year at a much – a little bit higher gross profit margin percentage than Q1.

[Matthew Sheerin:]

Okay. And your guidance for Q1, just doing the math on what you said in terms of the cost-cutting opportunities, it looks like gross margin will be flat-to-down again, is that right?

[Ken Jacobson:]

I think gross margin is going to be up between 10 bps to 20 bps.

[Matthew Sheerin:]

Oh, it's going to be up a little bit, okay. Okay, great. And just lastly, just question for Phil, just in terms of your take on the current cycle here because you've got extended lead times on certain components, concern about some double ordering in the channel where suppliers are seeing allocation, but then we've got what looks like fairly good underlying demand in broader industrial markets, auto markets or areas where you play. So what's your take, Phil, in terms of their current cycle and how much do we have left here?

[Philip Gallagher:]

Hey, Matt, thanks. Good to hear from you. Well, how much we have left, that's a very difficult one to call. I could give you what we're seeing today. And right now Matt, in all regions, our book-to-bills are still positive. You average it out, it's probably about 1.04

[Matthew Sheerin:]

Okay, fair enough. Thanks so much.

[Philip Gallagher:]

Thank you.

[Operator:]

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

[Adam Tindle:]

Okay, thank you. First question for Bill, you alluded to regaining momentum in the job that your Americas team has done, sounds encouraging. Can you talk about the decision to raise full-year revenue guidance more meaningfully? I understand the upside in the quarter was just over $300 million or so. But seems like this was carried through almost 3x over based on the full year guidance. It sounds like there's a lot of positive momentum here and I'm just trying to understand what gives you the confidence to do that at this time and then I have a follow-up. Thanks.

[William Amelio:]

Okay, a couple of things. First of all, as I do not talk on plenty of occasions that I wasn't quite ready to say that we had turned the corner last quarter with Americas, and we had to write it out, and right now, we now believe that we've now turned the corner. So that gives us great promise that we have hit a low-water mark and we're going to fight our way back. We've demonstrated in other regions that we can win and we can win big and I like to say it this way is that the team has moved from defense to offense now. So that part's really good. The other thing I'd say that helps us is we're in an environment where FX is our friend, so that's helped a bit as well.

[Adam Tindle:]

Okay and then maybe just one for Phil. I understand inventory is up, as order trends are better and it sounds like many metrics support this build as you alluded to in the previous answer. Just wondering, to what extent suppliers are incentivizing distributors to take more inventory? In other words, is there a gross margin benefit coming at some point? Thanks.

[Philip Gallagher:]

Yes. Hi, Adam. No, generally – no, that's not incentive at all. For the most part, those days are behind us on the suppliers up, which is to take more inventories. So I'm giving you what's real demand, okay, based on our backlog, real demand based on the MRP for taking in, and then of course, we manage our pipelines based on lead time plus a certain amount of outlook, okay. But no, there's no incentive for us to take inventory in sooner.

[Adam Tindle:]

Okay, thanks.

[Operator:]

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

[William Stein:]

Thanks for taking my question. Really just a couple of clarifications, first, I think you noted that you expect ROIC to be 2.5% above your cost of capital. Can you remind us of, maybe you said it before, but I didn't get it, but what you believe your cost of capital is?

[Ken Jacobson:]

Yes, so the cost of capital is between 8% and 9%, depending on our debt-to-equity mix.

[William Stein:]

Thank you. And then you also, in the past, have discussed the future sort of benefits of integrating Premier Farnell with your traditional business, in that your hope was that you could make the transition from Premier business to traditional Avnet business without taking a step function down in margins. That certainly would be a great achievement for the company. Any progress in that effort that's worth noting yet any timing on that? And then I have one more sort of housekeeping item, if I can.

[William Amelio:]

I'd say this, Will, is that we mentioned that we've seen great progress with lead transfer between the two businesses, there is such significantly quarter-over-quarter, 3,000 leads have been passed and this corresponds to $40 million, and while that's not a huge number yet, it's 3x where it was last quarter. So it's a big move in the right direction. And the collaboration that's happening across the world is really fabulous. So I've been very encouraged with how the teams are interacting together and how customers and suppliers really are embracing this entire concept.

[William Stein:]

But the margin – that slow transition, are you seeing that actually take form?

[William Amelio:]

Yes, yes. I'll give you a perfect example. In the Americas, we instituted web-based pricing below a certain price threshold today and that essentially does two things for us

[William Stein:]

If I can have just one housekeeping issue, can you remind us of all the cost savings? I know that you had this one related to Premier Farnell, one of course related to ERP, but there were something separate related to, I think it was G&A that was sort of a drag from the Tech Solutions sale, sort of stranded cost in a sense. Is that all encompassed in the $125 million number that you've highlighted?

[Ken Jacobson:]

Correct. The $120 million is all in with all the different transformation initiatives plus just cost cutting as well as Premier Farnell's kind of one bucket now.

[William Amelio:]

And I'll make a comment about the Tech Data carve-out. That's going extremely well. We've been really partnered extremely well with the Tech Data team. And we've phased out many of the transitional service agreements and we're down to just a few right now. The most notable one is the IT, which will last probably to the March or June quarter and then we'll essentially be done. And we have essentially no stranded costs associated with that because we managed it so effectively over the last several months.

[Ken Jacobson:]

And just to make one slight correction, it's $120 million, not $125 million.

[William Stein:]

Yes, I heard that. Thank you very much for the clarifications. Appreciate it.

[Operator:]

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

[Shawn Harrison:]

Hi, good morning. I apologize for such a remedial question, but the biggest net savings left to come would be $15 million per quarter from the run rate of OpEx you exited this September quarter with. Is that the correct way to think about it?

[William Amelio:]

Shawn, could you repeat that one more time?

[Shawn Harrison:]

The correct way to think about the remaining, I guess, you had $60 million of annualized OpEx savings you generated, I believe, this quarter, and so you have about $60 million on a net basis to come, and so that would, say, SG&A on an absolute basis should be down about $15 million from where you exited this September quarter?

[William Amelio:]

That's correct. Yes.

[Shawn Harrison:]

Okay, perfect. More – two other questions if I may, how much of the supplier losses came out then in the September quarter? My math says maybe about $750 million so you have $250 million to go in the December quarter, on an annualized basis?

[William Amelio:]

No. The majority of it is out. We have a little bit trickled over into the December quarter, as far as revenue is concerned.

[Ken Jacobson:]

Very minimal in the second quarter as far as – so it's behind us on a net go forward run rate.

[Shawn Harrison:]

Okay.

[William Amelio:]

So you can look to see that and whoever picked it up in their numbers.

[Shawn Harrison:]

Gotcha. As I look at the guidance, and it looks, who knows what seasonality is anymore, but it looks a little bit worse. It looks a little bit worse than seasonal, so I don't know if there was some pull forward demand in the September quarter, maybe I have no idea what, like I said, seasonality is or that's why I ask the question on the suppliers leaving.

[Ken Jacobson:]

I would say it's – from the historical seasonality when you take out the select high-volume supply chain engagements in Asia, it would be just below the low end and that, I believe that range was zero to three down.

[Shawn Harrison:]

Okay. And then lastly, if I may, just inventory positioning versus where you see demand. I know you've been trying to build inventory for a variety of reasons. But do you see the need to continue to build inventory on an absolutely dollar basis or when may that normalize?

[William Amelio:]

No, I think actually – Shawn, this is Bill. No, I think it's going to start to normalize. As we said, we've build up some inventory in this quarter, deliberately. We also have another strategic opportunity, which is working capital neutral. So when you take that out, I think, we're actually, from an inventory standpoint pretty good shape, particularly based on – we've just talked about the guidance from the quarters. I feel we're about right on the inventory.

[Shawn Harrison:]

Perfect. Thank you, Philip.

[Operator:]

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

[Steven Fox:]

Thanks. Good morning. A couple of questions for me please. First off, you mentioned the sharp increase in design registrations, the 41%. Can you just dissect that a little bit more? How much was maybe related to just ongoing business as opposed to the actions you took to redeploy FAEs? And then I had a follow-up.

[William Amelio:]

Well, it's hard to break that out, but I'll tell you this way that we're definitely seeing a acceleration. This has been a major focus of the company. It's something that Joe and I spent a lot of energy on talking to our teams about making sure that we got the right programs in place with every one of the suppliers and with that – with all of them there in order for us to replace [stock] as fast as possible. And as I mentioned, some of the regions we actually placed all the [stock] that we lost when we had the supplier loss and which is truly remarkable to do that over a few quarters.

[Philip Gallagher:]

Yes, Steve, let me – this is Phil, let me just add on that. I'll be a little bit more deliberate. Maniacal focus on design registrations and converting those to design wins. We've taken, as you know, a couple of suppliers changed their programs or aren't with us anymore. We do not rebudget our teams. We said, "Hey, we have a certain run rate and design registration, design wins, we've got to make up that run rate with the core lines we have." And as noted in the script, we got a bunch of lines that are benefiting from that and we're getting rewarded for. So we're – those who are going to get rewarded for that, from a return on investment, we're going to be driving it like no tomorrow.

[Steven Fox:]

And those registrations will start translating into revenues, how far down the road from when you sort of realize...?

[Philip Gallagher:]

Yes, that depends on if it's a low-end controller that could be six to nine months or if the higher-end FPGA, it could be 12 months, 18 months. So I think, Steve, if you use a year as an average by year to 15, 18 months, probably.

[Steven Fox:]

That's helpful. And then just a little more clarity on the book-to-bill numbers you talked about, I mean, is that a reflection also again of sort of improving operations, getting better go-to-market, et cetera? Or how much of that is just a natural reflection of market versus, say, what you guys are doing on your own to turn things around?

[William Amelio:]

I'll say a comment and Phil will join. I would say, if you look at what's happening over in Europe and Asia, that's a reflection of the market. When you look at what's happening in Americas, it's probably a combination of both because we are now regaining all the confidence that we lost with customers and suppliers in the Americas and we see a huge rebound there and some of that of course associated with their confidence returning.

[Philip Gallagher:]

Yes, I'll add on that, I think the markets in Europe and Asia are solid, particularly around automotive and industrial, which we play extremely strong. And I would say it's our team executing those two regions above the market. So we feel very good about that. In the Americas, as we [canted] in the script, we weren't participating in the up market as much, so it's just basic, so we – our teams have been working hard just too kind of tread water. Now as we start to come back out of this thing it will not only enjoy a little bit of a market uptick, but our execution side and customer confidence coming back should help us.

[Steven Fox:]

Gotcha. All right, thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Mark Delaney with Goldman Sachs.

[Mark Delaney:]

Yes, good morning and thanks very much for taking questions. First question, I'm hoping to better understand the new fiscal 2018 guidance. I think company took up the midpoint of EPS guidance by $0.10. If you could help us understand how much of that is coming from the now lower tax rate assumption? And how much is from the FX tailwinds? And then it seems like that's kind of all or more than all of that $0.10 increase in guidance even though revenue is coming up, so it seems like there's incremental margin pressure even versus what was assumed before, which is a little surprising to me with lead time starting to expand. So can you guys help us understand what the incremental margin pressure may be that's now baked into the new fiscal 2018 guidance? That would be helpful.

[Ken Jacobson:]

Yes, I guess, how I would characterize it is most of the improvement is coming from FX and below the line share count and tax rate. And what we mentioned earlier was that the margin recovery we expect in the second half of the year, but because of the margin pressure on the first quarter, there is some pressure on the overall guidance.

[Mark Delaney:]

Okay. So margins do seem, though, that they're incrementally weaker than before and maybe I'll just kind of dovetail into my second question. I'm just trying to better understand the source of the revenue upsides. Is any of – some of those high volume engagements that Avnet participated in historically, is that maybe why margins are now lower than what was previously assumed or just kind of G&A; any sort of better understanding of what the source of the margin pressure incrementally may be?

[William Amelio:]

Yes, I guess, I would characterize as the Americas region underperforming so some of their margin pressures which we already talked about. And in some of the business where we're winning isn't necessarily the high-volume supply chain, but there is some mix of fulfillment versus demand creation, but – and then as well, some of the demand creation is in a higher margin than it used to be, what Phil talked about in terms of some of the shift.

[Mark Delaney:]

Okay, that's helpful. Maybe just ask one last one. The company talked about a couple of new wins, and you're not looking for any specific supplier numbers but you, in totality, talked about Marvel, I think IDT, extended Xilinx, maybe you can just help us understand the full year revenue opportunity from some of those newer supplier that you talked about?

[William Amelio:]

Well, it's hard to really estimate what it is. And we do that kind of ballpark range but we're not yet in a position where I would comment on that.

[Mark Delaney:]

Got it, thank you.

[Operator:]

Thank you. Our final question comes from the line of Jim Suva with Citi. Please proceed with your question.

[Jim Suva:]

Thanks very much. I have two questions. I'll ask them both at the same time. First, based upon your comment, is it correct if my math is correct that basically the margin, both on a percent-dollar basis are kind of bottoming here, that you're calling for a bottom here this report of September quarter, as far as looking ahead? And then my follow-up question is the ROIC, return on invested capital, that you mentioned, 200 to 300 basis point above weight-average cost of capital, that's very impressive, I just want to make sure, is that a all-in number? Or does that like exclude things like amortization and various other costs?

[William Amelio:]

All right, I'll take the first question. Yes is the answer to that question, we bottomed out. We planned to work our way back in. And the 4 pillars that I talked about is going to help us, in fact, get some margin back. We're just not yet bullish enough to start predicting a big margin expansion, but clearly as the four things that I mentioned, our unique end-to-end ecosystem, the digitalization of the business, the huge transformation effort that we've been undergoing since last September of this year, we started implementation in January this year, and then we're, as I mentioned, we're doing extremely well against that, and then rightsizing the business with the cost that we're taking out. All of those will give us an opportunity to expand operating income margins. With that, Ken will take the second question.

[Ken Jacobson:]

To answer the second question, I would say that the guidance we gave on returns is specific to how we look at our adjusted result. So amortization, accelerated depreciation and some of those things are excluded.

[Jim Suva:]

Thank you so much for the detail. End of Q&A

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Keenan for any closing remarks.

[Vincent Keenan:]

Thank you for participating in our earnings call today. Our first quarter fiscal 2018 earnings press release can be accessed in downloadable PDF format at our website, www.ir.avnet.com. Thank you.

[Operator:]

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