Avnet - Q2 2019
January 24, 2019
Transcript
Operator (participant)
Please stand by. Our presentation will now begin. I would now like to turn the floor over to Nina McGinnis. You may now proceed. Thank you.
Nina McGinnis (Head of Investor Relations)
Thank you, operator. Earlier this afternoon, Avnet released financial results for the fiscal second quarter of 2019. The release is available on the investor relations section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release, as well as on the IR section of Avnet's website. Lastly, some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not the guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute such differences are described in detail in Avnet's most recent Form 10-K and 10-Q, 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 release. Today's call will be led by Bill Amelio, Avnet's CEO, and Tom Liguori, Avnet's CFO, and also Phil Gallagher, Global President, Electronic Components, is here today to participate in the Q&A session. With that, let me turn the call over to Bill Amelio. Bill?
Bill Amelio (CEO)
Thank you, Nina, and good afternoon, everyone. I'm pleased to report another strong quarter of financial performance for Avnet. We exited calendar 2018 in a very different place than a year ago. Our execution is solid, and our strategy is really starting to pay off, with growth across the globe and across our unique ecosystem. Revenues for our fiscal second quarter were up double digits, and adjusted diluted earnings per share were up a healthy 33% from a year ago. Avnet continues to show strong operating leverage from the transformation initiatives we began roughly 2 years ago. We remain on track to meet the commitments we made at our Investor Day last June. Importantly, Avnet now has real momentum with our customers and our suppliers, and I will share a few examples of that in my brief remarks today.
The current conditions in the marketplace are decidedly mixed. There is definitely a slowdown in Asia, and it's unclear when that will correct itself. However, the Western markets of Europe and the Americas are steady with several areas of strength. Defense and aerospace is very healthy, and Avnet's position in that vertical is improving. Industrial demand remains strong, and even transportation is doing well. Transportation is an area where unit demand has moderated, but content opportunities continue to increase, which is a growth driver for us. Now, I'd like to give you a brief update on the progress we've made this quarter with our five strategies I've laid out to you previously. The first is accelerating our core electronics components. In our Americas region, execution has improved dramatically in recent quarters.
Revenues in Q2 were up nearly 8% from a year ago, and our forward indicators show a healthy and stable pipeline. This past quarter, the Americas region achieved its second quarter of design win dollar growth, which is an area now showing good growth and momentum. Our customer satisfaction in the Americas has improved significantly, as evidenced by an increase in our Net Promoter Scores. Importantly, supplier confidence has been restored, which is opening up new doors for growth and collaboration. I want to thank the Americas team for the great work that they've done getting the Americas region back on very solid ground and growing again, and there's a lot more to come. Europe remains steady with outstanding performance. Our Europe team delivered year-over-year double-digit revenue growth, constant currency, and continues to be our most profitable region.
In Asia, even though a slowdown has clearly hit the region, the team delivered over $2 billion in revenue, which represents a strong double-digit increase from a year ago. The extent of the current slowdown in Asia is difficult to predict. During the quarter, we saw order weakness accelerate as time progressed, which makes calling the bottom somewhat challenging. We are monitoring our indicators in Asia very carefully, and we believe our forecast for the coming quarter captures the current situation appropriately. Our interconnect, passive and electromechanical business also had a very strong quarter. Revenues grew over 16% from a year ago, with margins higher than our corporate average. On the supplier front, I'm pleased to note that Avnet added 2 new global supply franchises to our line card this quarter and also extended 4 regional supply franchises as well.
These additions and extensions are indications of the unique value suppliers see in our ecosystem and their confidence in Avnet as a driver of growth. Our second key strategy is scaling our high profit margin businesses. Let me start first with Premier Farnell. Revenue in the business grew 5% in constant currency from a year ago, but operating income grew almost 19% due to our cost reduction efforts. There was some softness in single-board computing sales this quarter, which contributed to the slowing of growth, but new releases are coming soon that we are confident will return us to the past growth levels. During the quarter, Premier Farnell added seven new global supply franchises. Suppliers are recognizing how aligning with Premier Farnell gets their products into our unique ecosystem and also gives them access to a large number of customers and development projects underway at Premier Farnell.
Avnet's design service revenue growth is another notable highlight. If we look at AVID, our dedicated design house that provides design services, simulation, testing, and prototype assembly across a number of key verticals, revenue in the second quarter more than doubled from a year ago, with significantly higher margins than our company average. Avnet's design service capability is a critical part of our overall ecosystem value proposition, which helps our customers get their products designed, tested, and manufactured more quickly and cost effectively. Our third key strategy, extending our digital capabilities. Our digital investments are starting to show tangible benefits. For example, we have invested in specific tools to help our quote turnaround time. In the areas where we have piloted this capability, we have seen a significant reduction in turnaround times as well as margin uplift.
We plan on rolling out this capability more broadly over the next several months. We have also invested in tools that tie our entire ecosystem together to improve the customer experience and lead process. We're seeing strong gains in productivity and demand generation as a result. I will share more specific examples of this in the near future. Our IT roadmap has been greatly simplified. We have prioritized some critical SaaS-based tools in areas such as pricing and data management that have yielded savings, process simplification, and functional enhancements. On the e-commerce front, growth continues through our digital channels, and we remain on track to hit our stated goal of $1 billion of revenue through our e-commerce channel this fiscal year. The fourth strategy is leveraging our ecosystem to expand customer opportunities. Avnet continues to rapidly expand its IoT revenue pipeline to new customers and new opportunities.
In fact, we're adding new opportunities at an accelerated rate. In the first half of fiscal 2019, the 3-year total IoT pipeline more than tripled to exceed $500 million. This number does not include device revenues we are already supplying to the market that represent end-to-end solutions of devices, software, gateways, security, and cloud applications that are in development with our customers. Our ecosystem is starting to create a bit of a viral effect. Let me briefly explain what I mean. First, we have partners that work with us who can see that our end-to-end capabilities can speed their time to market, reduce cost, and reduce complexity in the development cycle, so they are sending leads and opportunities to Avnet as a result. A prime example of this is Microsoft, which I'll describe in just a moment.
In addition, other leads are being generated within the Avnet ecosystem as customers needing particular services are now being exposed to the other parts of Avnet's ecosystem. This is creating the opportunity of multiple sources of revenue from a given customer. Avnet's ecosystem is also expanding our customer reach to include a growing list of nontraditional customers. For example, just this quarter, Avnet closed the following: a $multimillion-dollar deal with a breakthrough smart health company. Avnet provided the hardware designed through Avid, and the customer then decided to take advantage of Avnet for supply chain and component supply to get their solution to market. We've closed several $multimillion-dollar cryptocurrency solution opportunities that leverage our ecosystem from design to manufacturing. I'm happy to report we recently began accepting cryptocurrency payments, which is a valuable service for certain customer types.
We also made a critically important acquisition that will greatly enhance our ecosystem and IoT capability by purchasing Softweb Solutions. Softweb has a proven track record bringing IoT solutions to market and possesses world-class AI, data advisory, and digital development services. This is a major addition to our ecosystem. Softweb now brings the software, AI, cloud, and analytics expertise necessary to offer complete end-to-end solutions for our customers. I also want to make a point about Avnet's strategic relationship with Microsoft. Avnet is an important partner for Microsoft's premier business, Microsoft Azure, and was selected the first Azure Sphere distribution partner. As a result of this partnership, Microsoft is now leveraging Avnet's ecosystem and IoT capability to help its Azure customers get their IoT solutions to market faster. We have received significant tier one customer orders and engagements directly from Microsoft, and a great example of this is Starbucks.
Using the Avnet Azure Starter Kit platform, we've partnered with Microsoft to design an Azure-based solution that brings predictive capability and cloud connectivity to Starbucks coffee machines. We have begun shipments of this solution and will ramp up volumes over the next several months. This is just one of many opportunities we're working with Microsoft to bring secure IoT solutions to market, leveraging our unique ecosystem. The last of our five strategies is focusing on driving performance and operational excellence with continuous improvement. Our results this quarter clearly demonstrate the earnings leverage we are realizing through our transformation and cost optimization efforts. An example from this quarter is how we successfully migrated certain sales operations and customer service functions to low-cost regions here in the Americas and in other areas of the world.
We have managed to reduce administrative and support costs while simultaneously improving our customer satisfaction scores and relationships. We remain on track to deliver to our committed target of $245 million in our overall savings over the next three years, and Tom will talk more about that in a moment. In summary, Avnet is executing well and has come a long way from a year ago. We're optimistic and confident about the things we can control and have contingency plans in place for things that are outside our control. Our ecosystem is truly unique, and the value we offer is creating real benefits for our suppliers and our customers. Our IoT strategy is accelerating with strong growth in our customer pipeline.
Many of the solutions we are working with our customers to bring to market will make a real difference in the world and drive continued growth and profitability as well. With that, let me turn the call over to Tom for some additional commentary on our financials. Tom?
Thomas Liguori (CFO)
Thank you, Bill. Good afternoon, everyone. We are pleased to report strong results this quarter, with year-over-year sales growth and a streamlined cost structure. Both of these contributed to adjusted EPS for the quarter of $1.04, a 33% improvement year-over-year and above the midpoint of our guidance range. Our financials for the second quarter reflect a number of year-over-year improvements. Sales increased 12% to $5.05 billion. Adjusted diluted earnings per share increased 33% to $1.04. Americas acceleration continued with sales growth and year-over-year margin expansion. Selling, general and administrative expenses declined by $12 million. Our diluted share count is 10 million shares lower, an 8.5% reduction from last year, and our quarterly dividend payment of $0.20 in the second quarter was 11% higher than the prior year quarter.
In total, we returned approximately $200 million to shareholders in buybacks and dividends as we remain confident in our long-term prospects. Let's turn to our business performance, starting with Premier Farnell on slide 14. In the quarter, Premier Farnell sales grew 2.8% year-over-year, with operating income increasing 19%. Sales growth in constant currency was 5.2%. Operating margins expanded to 10.8% from 9.3% in the prior year quarter and consistent with Premier Farnell's first quarter margins. Turning to electronic components. The electronic components segment delivered year-over-year sales growth of 12.4% to $4.7 billion, with an operating income margin of 3.4%, up from 3.1% a year ago.
Americas posted sales growth of 7.5% year-over-year, 2.3% sequentially, and continued to expand operating margins on a year-over-year basis. Our EMEA region continued to perform well, delivering 10.8% sales growth year-over-year, or 14.5% in constant currency, and led all regions in operating margin performance. Asia delivered $2.1 billion in sales this quarter, a 15.2% increase year-over-year. While we continue to post strong sales growth in Asia this quarter, we are seeing a slowing in the book-to-bill ratio, which ended at 0.8 to 1 in the second quarter. Moving down the income statement. Gross margin of 12.5% was flat sequentially, though down 85 basis points year-over-year due to the higher mix of Asia revenue.
We continue to demonstrate our ability to optimize our cost structure by reducing selling, general, and administrative expense by $12 million compared to the prior year quarter. We implemented several actions to further optimize costs as part of our long-term plan of $245 million of cost reductions from streamlining and automating processes, integrating back offices, and moving to lower cost regions. Building on Bill's earlier comments, this quarter we realigned parts of our IT, distribution, and business operations. These actions resulted in a $62 million integration and restructuring charge, which included non-cash impairment and severance costs. With our ERP systems now stable and enabling Americas' sales growth and margin expansion, we refocused our resources to more strategic applications such as CRM, pricing, and digital capabilities, all of which we expect to further facilitate margin expansion.
As a result, we impaired select IT assets that are being replaced or which we no longer plan to utilize. In distribution, we are realigning our warehouses for greater efficiency and lower costs, as well as to prepare for various Brexit scenarios. Globally, we continue to manage our labor costs and headcount as we optimize structure and process. Altogether, we expect these steps will deliver quarterly savings of $10 million or more once fully implemented. Adjusted operating income totaled $178.8 million, up 27.5% year-over-year. Adjusted operating income margins increased 44 basis points year-over-year, though declined 5 basis points sequentially to 3.5%. Our adjusted tax rate was 21%. We had unfavorable currency loss, which decreased our adjusted EPS by $0.02. Turning to the balance sheet and cash flow statement.
This quarter, net working capital days rose sequentially by 3 to 86 days. While working capital will fluctuate up or down in any given quarter, we continue to make progress with our inventory payables and receivables management. We expect to lower our days working capital to the low 80-day range by the end of our fiscal year. Our long-term target remains below 70 days. Cash provided by operations in the quarter was $72 million. While we had strong earnings, we made tax payments of $56 million for gains associated with the sale of our TS business, which impacted cash flow. We returned $197 million to shareholders in the form of a $0.20 per share dividend and share repurchases totaling $175 million. We also acquired Softweb. Combined, these increased our net debt position by $282 million in the second quarter.
Our gross debt leverage increased sequentially to 2.4, still a conservative level. As most of you know, we provide a quarterly scorecard to track our progress to plan for achieving a $7 in earnings per share. Looking at slide 17, which we call our scorecard, you can see our progress. This quarter, as a percentage of our total sales, are mixed from higher margin businesses decreased due to the fast growth in Asia. Hence, you see a yellow on our progress report. We continue to see opportunities to grow higher margin sales. The most recent example would be our acquisition of Softweb and its ability to accelerate our IoT offerings. We saw a slight uptick in working capital days, although we think this move to yellow will be short-lived. All other metrics are green, with every operating and capital metric showing improvement.
Looking forward, we see a sequential decline in sales due to slowing in Asia. All other regions are expected to be flat to up sequentially. Even with lower sales, we expect a sequential and year-over-year growth in adjusted EPS as a result of our cost optimization programs and lower share count. In the March quarter, we expect sales to be in the range of $4.5 billion-$4.9 billion. We expect adjusted EPS to be in the range of $1.03-$1.13. At midpoint, guidance represents year-over-year adjusted EPS growth of 6% on a 2% decline in sales. Overall, we are pleased with our second quarter results, and we expect continued progress in growing adjusted EPS in spite of an uncertain macro environment. With that, let's open the line for Q&A. Operator?
Operator (participant)
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 key. Our first question comes from the line of Adam Tindle with Raymond James. Please proceed with your question.
Adam Tindle (Analyst)
Okay, thanks, and good evening. I just wanted to start on the Americas region. I know accelerating Americas was a key component to the Analyst Day bridge, to the 4.5%-5% operating margin and $7 EPS targets. We've seen a couple of quarters of revenue growth turnaround in the region, but I'm hoping that you can comment a little bit more on margins in the region. Just how far are we below historical levels at this point? What inning are we in? And talk about the steps that you're taking, what still needs to be done to get that to optimal levels. So magnitude, timing, and logistics of America's profitability.
Bill Amelio (CEO)
Thanks, Adam. Bill, I'll give you some of that data. Some, of course, is a little bit more than I want to give it this time, but to give you what inning it is, I think that's a good way to characterize where we are. I'd say we're in the third inning. I'd say we're now actually seeing a lot of momentum in the Americas. We're surprising on the upside, and we will continue to see positive signs in front of us. When we think about the system issues we talked about in the past, are all behind us now. We've put in place many improvements and enhancements, and we're now essentially leading the way with the Americas.
With respect to how far we're off historic levels, we're not where we want to be, and we've got work still to do to get the historic levels, but we're clearly way above where we were just a couple of years ago. So we made great improvements. There's still more opportunity to go in the future.
Adam Tindle (Analyst)
Okay. Maybe just as a follow-up, I wanted to ask, maybe one for Tom on the March quarter guidance. I think you're implying that revenue declined 7% sequentially at the midpoint, but flattish operating profit dollars sequentially. So I'm just hoping that you can walk through the assumptions underlying this, because we typically see some negative operating leverage with a quick change in revenue growth like this. But I know there's some cost initiatives. So just some of the buckets that give you confidence that you can, you know, keep the profit dollars flattish while revenue declines sequentially.
Thomas Liguori (CFO)
Sure. I'd say the first is mix. We'll have the more profitable mix. Most of the revenue decline is Asia, plus it's Chinese New Year. So this is why in Americas, the EMEA, kicking, you know, fairly strong. Adam, so we'll have a higher gross profit. With respect to the OpEx, we talked about, you know, some of the initiatives are in place. Over time, that'll be a $10 million improvement in OpEx per quarter. You know, expect $3 million or $4 million of that to pop up in this coming quarter. Going down the income statement, you know, interest expense and other, income expense, expect those to stay about flat. And I believe in the press release, we talked about lowering the share count slightly to about 110 million shares.
But I think if you go through that, you'll come up with midpoint of our guidance, about $1.80.
Adam Tindle (Analyst)
Okay. And just to clarify on the cost cut, the $245 million in cost cuts. I'm sorry if I missed it, but where, how much have you achieved this thus far?
Thomas Liguori (CFO)
In this coming quarter, expect $3 million+ improvement in the operating expense line.
Adam Tindle (Analyst)
Okay. But of the $245 million that you outlined at the-
Thomas Liguori (CFO)
Oh, of the two... I'm sorry. We're about a third of the way identified, so a little over $80+ million.
Adam Tindle (Analyst)
Got it. Okay. Thank you very much.
Thomas Liguori (CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Sean Harrison with Longbow Research. Please proceed with your question.
Sean Harrison (Analyst)
Hi, afternoon, everybody.
Bill Amelio (CEO)
Hi, Sean.
Sean Harrison (Analyst)
Hi. If I may, on just looking at more on a year-over-year basis, outside of Asia, are you expecting any year-over-year declines, either in the Americas or EMEA? And was the book-to-bill above parity in the Americas and in EMEA for the December quarter?
Bill Amelio (CEO)
So as-
Thomas Liguori (CFO)
Yeah. Go ahead.
Bill Amelio (CEO)
I'm sorry. As we, as we exited December, we were at parity or above in the western regions, and we're, as we said in the press release, at 0.8 in Asia, and we're still seeing positive momentum in both the western regions.
Sean Harrison (Analyst)
...And so the expectations, they would be flat to up year-over-year in the March quarter in terms of revenues?
Bill Amelio (CEO)
That's correct.
Sean Harrison (Analyst)
And then as a follow-up, I guess, within Asia, are you—I'm guessing you're seeing an increase in order cancellations and things of that nature, but is—are you getting any visibility in terms of, you know, when it may bottom out? I know it's a tough time of year to figure that out with Chinese New Year, but what are the metrics that have turned negative for you in Asia?
Bill Amelio (CEO)
Well, you hit the one that's the big one, which is cancellations. Definitely has been more erratic than it was previously, and we're looking at backlog orders, lead times, every metric that you can imagine to make sure we're able to call that. And as I talked about in my remarks, that, you know, we think we've called it right to where the guidance is, and we think we've been anything a little conservative, so we think we've got this one at least contained.
Sean Harrison (Analyst)
Okay. And then last, if I may, Tom, with the goal for cash cycle days to exit the year, do you have a target for free cash flow in the back half of the fiscal year in terms of dollars or anything that you can share?
Thomas Liguori (CFO)
This quarter—that's a good question. This quarter, cash from ops was about $70 million, and we expect in the third quarter to be $150 million plus.
Sean Harrison (Analyst)
Okay, perfect. Thank you so much.
Thomas Liguori (CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Steven Fox with Cross Research. Please proceed with your question.
Steven Fox (Analyst)
Hi, good afternoon. I was wondering if you could dig in a little bit more on the Premier Farnell performance. You mentioned some slowing on certain compute products. What was that related to, and how do you see that rectifying? And then, from the operating profit leverage you're getting, like, where do we think we are just specifically with Premier Farnell on getting more leverage over the next few quarters? And what kind of growth profile do you think it has now for, let's say, the next, you know, few quarters as well? Thanks.
Bill Amelio (CEO)
Sure. So as you know, Premier Farnell is one of our high margin businesses, and we've seen growth at 7% with 50 conversion rate. So that's pretty good. Yeah, it slowed this quarter. We pointed to single board computing, and that was due to some revs that are out there, and we see that there will be improvements with respect to that product roadmap, and that we should see our growth bounce back again. So we're pretty certain that we're going to see that come back again. Additionally, we've been working diligently on the cost position in Premier Farnell and continue to make improvements there, and we've still got a ways to go there from the standpoint of us continuing to add more margin percentage points up on the board for Premier Farnell.
Philip R. Gallagher (Global President, Electronic Components)
Yeah, Steve, this is Bill. I'm just jumping in. I mean, we've been maniacally focused in the last couple of years on the operational side, okay, and the stabilization side of Premier Farnell, and that's really where we've been driving, and we see it as a high growth is still pointed out. But we're really pleased, frankly, at the point of our operating margin growth as compared to the revenue growth, okay? Because that allows us to invest and double down in Premier Farnell, which is what we plan to do. We've got other investments to get to that growth where we need to see it.
Steven Fox (Analyst)
That's helpful. And then just as a quick follow-up, I understand that you're hopeful that Asia has sort of bottomed, but if we go under that scenario, I guess when I look at what you just talked about with Premier Farnell and some of the other digital properties, are you saying that your mix now is helping, you know, margins for the next few quarters, or is there still some seasonal swings we have to think about? Thanks.
Bill Amelio (CEO)
Well, let me correct one thing. We didn't say that Asia bottomed out. We simply said that in our assumptions on how we put our guidance together, that we think we've taken into account what we think is going to be in the quarter.
Steven Fox (Analyst)
Oh, okay.
Bill Amelio (CEO)
I think just to... the other question was what?
Philip R. Gallagher (Global President, Electronic Components)
The mix.
Steven Fox (Analyst)
Yeah, just sort of-
Bill Amelio (CEO)
Yeah, the mix. We're going to be definitely more heavily weighted in the West than the East in this coming quarter, so that's why we get a margin uplift associated with that.
Steven Fox (Analyst)
And beyond that, Bill, do you have any sort of thoughts on trend line with mix?
Bill Amelio (CEO)
Well, I think we'll follow the same seasonal pattern we've previously seen. So I think we'll, you know, continue to see robust growth in Asia. I mean, Asia's been outgrowing every region.
Philip R. Gallagher (Global President, Electronic Components)
Well, let me point it out too, Steve, that although we saw the book-to-bill start to slide through the quarter in December, we still shipped over $2 billion in Asia, which is a near record. So that was, that was the highlight. But obviously, the book-to-bill started to deteriorate.
Steven Fox (Analyst)
Understood. Thank you.
Operator (participant)
Our next question comes from the line of Param Singh with Merrill Lynch. Please proceed with your question.
Sean Harrison (Analyst)
Hey, great. Thank you for taking my question. So, you know, firstly, on going back to the Premier business here, you know, I understand you're going to get some leverage here, but, you know, the operating margin you had a couple of quarters ago was 11.8, and, you know, what really gets you to kind of like a 15% margin that you've been targeting or thinking about? And then I have a follow-up.
Bill Amelio (CEO)
If you recall, we put together a $245 million roadmap. One of them was back office integration, and a portion of that's what we're going to be doing between our core Avnet business and Premier Farnell, with areas such as legal, HR, finance, and global information systems, et cetera. So we have room to make some more moves there. We also have a pretty solid strategy with low-cost jurisdictions. We're able to grow and use a low-cost area versus growing in high-cost areas. So those few things will essentially continue to improve our operating expense line.
Sean Harrison (Analyst)
Then how come, like, it was down in the last couple of quarters? Any reason why for that?
Bill Amelio (CEO)
What was down again, Param?
Sean Harrison (Analyst)
The operating margin in Premier Farnell last couple of quarters.
Bill Amelio (CEO)
Well, I just think you're seeing quarter-to-quarter misses. I mean, we've clearly got a path to get much higher. We just haven't told you exactly how high it's going to get, but we've got definitely a few points ahead of us.
Param Singh (Analyst)
Okay. And then as my follow-up, what are you seeing in terms of demand between your IP&E and then your regular semis business? Because it definitely looks like IP&E is helping revenues and margins at this point. And is there any difference in demand? Because, you know, some of the bigger OEMs on the semi side are looking at much weaker trends.
Philip R. Gallagher (Global President, Electronic Components)
Yeah, I'll touch it. Let me touch it now, Bill. Thanks. It's well, let's call it a mixed bag. I mean, our IP&E business, but to your point, is absolutely growing at a nice clip. Okay, we've got a great focus on that. We've got a separate division in Europe with Abacus that's really killing it. We got a real focus in Asia and the Americas as well. So we're seeing a nice, you know, double-digit teens kind of growth year-on-year in the IP&E. You really get into the lead times, and then that's really the leading indicator. And, you know, the lead times are really all over the map.
Everyone is assuming the lead times in all capture are coming in due to some announcements to some large consumer companies, and frankly, we're just not seeing that yet. So some of the capacitors, they might be stabilizing, but they're stabilizing at, I'm looking at the sheet, at 38 weeks, 42 weeks, 30+ weeks. So it's not like all this product's getting freed up, and all indications are, particularly in passives and some resistors, caps and resistors, the lead time is gonna stay out there for a little while, and it can always change. Even discretes, discretes actually lead times, you go back several quarters, we're in the 10-16 weeks or out to 24-25 weeks now, okay? So again, it's a mixed bag. Obviously, memory, we know what's going on in memory.
You know, our mix today is still about 23%+, IP&E, balance semiconductors, in total.
Param Singh (Analyst)
All right. Thank you so much for all the color, guys.
Philip R. Gallagher (Global President, Electronic Components)
Hope that helps. Mm-hmm.
Operator (participant)
Our next question comes from the line of Matt Sheerin with Stifel. Please proceed with your question.
Matt Sheerin (Analyst)
Yes, thanks. Just following up on the guidance by region. If you sort of do the math on sort of flattish to slightly up year-over-year growth in both North America and Europe, it looks like Asia is gonna be down 20%-25% sequentially. I guess the question there is, I understand the bookings weak macro, but do you think there's gonna be an inventory overhang? Because obviously there's probably a lot of inventory from your customers, and their own demand is weak. So, you know, I think, Bill, you talked earlier about you're really not knowing whether, you know, Asia is gonna bottom this quarter or not. You know, what's your thoughts there, and will we start to see pricing pressure because of some of that inventory issue?
Bill Amelio (CEO)
Well, we're managing working capital very, very diligently, even though we have a couple of days this, this quarter, we expect that to come back down again. So we are, in fact, all over this subject, and I'm not concerned with us having a glut of inventory over in Asia. We will get a move.
Philip R. Gallagher (Global President, Electronic Components)
Yeah, Matt, I'll, I'll add that. You know, so, so we indicated Asian, and, and when we look at the—what we really track first is the cancellations and adjustments in backlog. And what we saw in Asia came to fruition, as we saw in our book-to-bill, come down, okay? And, and we're continuing to manage that. In, in the West, and again, we look at cancellation rates maniacally, we're not seeing major adjustments, in number of days or dollars of, of cancellations or adjustments from our, from our customers. As we do, to Bill's point, you know, we, we, we move on that immediately, and, and our suppliers work with us on that as well.
Matt Sheerin (Analyst)
You know, I guess the question also was, so as customers, particularly Asia, sit in more inventory, don't you think they're gonna go through a correction that might hurt you, you know, again, going into the June quarter?
Philip R. Gallagher (Global President, Electronic Components)
Well, we don't have insights all where our customers are, Matt. What we track is the MRP. Again, 50% of our business is coming in from an MRP and some kind of scheduled forecast sharing. So we will see it in that, okay? And again, right now, you're not seeing that in any real fashion, let alone a dramatic one. But, yeah, I'm sure there's some excess inventory out there. You know, there's, I'm sure there is.
Matt Sheerin (Analyst)
Yep. Okay, fair enough. And then as you look to the June quarter, and I appreciate that you haven't given any guidance there, but you are looking at, you know, continuing to improve operating margins. But if you look at sort of the seasonal, Pat, if you're just seasonal in revenue in the June quarter, you'll still probably be down year-over-year. So the question is, will you still be able to grow your operating margin year-over-year with some of the initiatives that you've been doing? Or is that gonna be tougher?
Thomas Liguori (CFO)
First of all, I think you'll continue to see improved mix. You'll definitely see it in March. The expectation you see it in June as well, Matt, and both of those help with our our consolidated gross profit percentage and with the operating margin. So we think internally of, you know, the upper 3% range operating margins for the second half of the year. Now, what's also helping that is we went through the, you know, the IT and distribution changes we're making, and those will layer in over quarters, but in March, we'll be down, you know, $3 million plus or so, probably a similar amount in June. So for right now, you know, we don't know where, right, to Bill's point, Asia will land, but trajectory, so these, our operating margin percentage, should be increasing through the second half of the year.
Matt Sheerin (Analyst)
Okay, great. All right. Thank you.
Bill Amelio (CEO)
Thanks, Matt.
Operator (participant)
Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question.
Param Singh (Analyst)
Yes, good afternoon. Thanks very much for taking my questions. The first question is on the European region, and certainly heard comments about overall book-to-bill being positive in Europe. So maybe you could dig in a little bit more into the European region. I think some of the semiconductor and connector companies have started to see a slowdown in Europe, and-
Mark Delaney (Analyst)
...auto and in- and industrial, and I think even FedEx has seen some weaker European trends. So any more color on what you guys are seeing in Europe would be helpful, so we can kind of think about what Avnet is seeing relative to some of the other parts of the supply chain there.
Bill Amelio (CEO)
Yeah, Mark, this is Phil. Let me tackle that one. I just spoke to the regional presidents this morning, as a matter of fact. So, yeah, the book-to-bill, okay, as it came through Q2, okay, in Europe, was just around 1 to 1, just over 1 to—well, not 1.1, 1.01 to 1, okay? So we still see it positive in Europe across the board. You know, is it where it was, book-to-bill ratios from a year ago, okay, 1.251? No. So we've definitely seen a bit of a correction in Europe, so I don't think we're—we're not saying that. However, with that in mind, we're still seeing consistent performance from our team in Europe. Germany, we're reading the same headlines you are.
For us, we're seeing that still strong. Yes, automotive in total units might be down, but the electronic content's going up, and that's, on a relevant basis, a newer segment for distribution for Avnet. So we're still seeing nice growth out of the transportation market. The industrials are still steady, okay? Again, as we see it today, thus the forecast we put out for the March quarter for the West, including Europe. So, that - and we're just giving you what we're seeing today.
Mark Delaney (Analyst)
That's helpful, Phil. My second question is on the topic of tariffs, and I know it's a tough issue to understand exactly all the ramifications it may be having on distributors and semiconductors, but any color you guys can give us about how customers may be responding. Do you think any of your customers may have pulled orders in to the end of 2018 to try to get ahead of potential tariff increases? And I know Avnet was passing on some of the higher costs to the extent certain suppliers were raising their prices to you. You know, any update on your ability to be effective with those price increases?
Bill Amelio (CEO)
Yeah, I'll make some comments about that. We had an extensive plan in place to litigate any profit leakage associated with tariffs, and essentially what we were able to accomplish is ship direct from Hong Kong or ship through a warehouse that we've put in Guadalajara to customers that were outside the United States, that we had previously shipped in the United States and out of the United States, to regions like Canada, Latin America, and South America. So that's helped us out. We've also worked with suppliers to resource out of China into other second source areas that they had, whether it would be in Malaysia, Philippines or Thailand or Vietnam, to be able to, if it was going to the United States, move them in those particular facilities versus coming directly out of China, and then use China for other regions in the world.
We additionally, additionally worked with suppliers on importer of record, because if they're the importer of record, the tariff that we pass on to the customer would be less. So as you can see, it's a pretty complicated arrangement that we've put in place. We have plenty of people working on it. At this juncture, we've been doing extremely well being able to pass that on, and we have not seen any indications that we're going to have any issues collecting, because we made it very clear that that's not a tariff that we are going to absorb inside the company.
Mark Delaney (Analyst)
Yeah, that's helpful, Phil. And my last one is on the Softweb Solutions acquisition. I think it was immediately accretive to trying to understand what the EPS impact is for next quarter, and I think it's $0.05-$0.10 by fiscal 2021 of accretion. What sort of linearity should we be thinking about as that ramps up to higher levels of earnings contribution? Thanks very much.
Thomas Liguori (CFO)
Hi, Mark, this is Tom. I would say it's somewhat linear, but really, you know, the financial benefit of Softweb is what it does to accelerate our IoT capabilities. So while there's a financial benefit listed in the press release of $0.05-$0.10, that's from the company we acquired itself. The benefit to us at Avnet is that it accelerates the other projects that some of which Bill mentioned earlier in the script, to get those revenues faster, because we believe those IoT revenues are higher operating margins. You know, what we see as IoT is 20% operating margin. So that's really the financial benefit to us as Softweb, but why we made the acquisition.
Bill Amelio (CEO)
So building on that, as Tom suggested, so now not only are we participating in the device revenue and margin, we're also participating in the gateway, the network, the cloud, the analytics, the applications, and we're setting up a platform with Softweb that will allow us to be able to handle even third-party applications and content providers. So we think we're setting up something that really just puts us in a great position to get recurring revenue at higher margins.
Mark Delaney (Analyst)
Thank you.
Operator (participant)
Our next question comes from the line of William Stein with SunTrust. Please proceed with your question.
William Stein (Analyst)
Great. Thanks for taking my questions, guys. There's been some discussion in some of the earlier questions comparing sort of your outlook to some of the semi companies, and I just want to make sure I understand one thing about the timing. I think last quarter, you more or less sounded all clear with regard to demand trends, while semis were already you know, seeing weakening demand signs, and I think there was a question as to whether you might see things one quarter later. Fair to say now in retrospect, that's essentially what happened, and with regard to when it stabilizes, we should sort of look to the semis to give us an indication as to when that happens for them, that happens probably a quarter later for you.
Is that a fair way to think about sort of how the cycle is going to influence your business, or is there something about that that's unfair?
Bill Amelio (CEO)
Well, what I would correctly say, I believe if I would looked at the transcript, that we had actually said Asia was softening last quarter. We didn't give any indication of what it meant to book-to-bill, but we said we were definitely starting to see trends that our book-to-bills were coming down from inflated levels that Bill had mentioned previously. So I think that's the only difference in the dialogue that you just gave us.
William Stein (Analyst)
... Okay, that's a good clarification. A couple others, if I can. Bill, in the past, you've talked about trying to finesse the transition of customers from the Premier Farnell platform, where your company enjoys a richer margin level and the sort of core Avnet, where it's not as rich, and trying to make that less of a sort of step function decline in margins as volumes ramp. Any progress on that, or is that a much more further out in the future, sort of operating feature that you'll introduce?
Bill Amelio (CEO)
No, we, we've seen tens of thousands of leads pass between Premier Farnell and the core, and the core back to Premier Farnell. So in fact, what we—what surprised us, Bob, was how many more actually got passed from the core back to Premier Farnell, because they were, what I'd say, difficult businesses for us to manage because they were small customers, but they wanted to be part of the Avnet family, and they were actually moved into Premier Farnell, which could help service them much better. And in fact, we got higher margins for it as well. So yes, we're absolutely seeing this as part of the process that makes this whole ecosystem come alive.
William Stein (Analyst)
One other, if I can. Can you remind us of the targets you set at the Analyst Day and your relative confidence in those, now we're, you know, a couple of quarters after that, you know, how you feel about achieving those now?
Bill Amelio (CEO)
Well, we had a scorecard up that Tom showed in his presentation, so that's what I point you to that, and I'd say we're really confident that we're going to get those all green. Right now, we have a couple that are in the yellow, but we're going to get them green, and we're going to keep working hard to make that happen.
William Stein (Analyst)
Okay. Thanks, guys. Appreciate it.
Operator (participant)
Our next question comes from the line of Joe Quatrochi with Wells Fargo. Please proceed with your question.
Joseph Quatrochi (Analyst)
Yeah, thanks for taking the question. I wanted to double-click on the weakness you're seeing in Asia. I know last quarter you talked about weakness in China. I was wondering, you know, is it still mainly China, or has that spread to other countries within there? I know your business in Taiwan is actually quite large as well.
Bill Amelio (CEO)
Yeah, we would say it's mostly China, but it's definitely spread across more countries in Asia, but China is definitely the most affected.
Joseph Quatrochi (Analyst)
Okay. As a follow-up, how do we think about, Tom, your OpEx structure from a variable versus fixed kind of standpoint? Rather, you know, if we were to see the market kind of continue to slow down, how do we think about, you know, your ability to accelerate some of those cost down efforts that you're implementing?
Thomas Liguori (CFO)
It's one of the benefits of our model. We have a plan on the $245 million, and if revenue softens, we would accelerate.
Bill Amelio (CEO)
If you, if you remember, if you go to that chart that has the $245 million on it, you see one of the bars there, that's the growth bar. Essentially, that's the variable cost that we would take out if we weren't growing, but we'd still go focus and take out the cost, especially with those other four buckets of cost takeout.
Joseph Quatrochi (Analyst)
Okay. Thank you.
Operator (participant)
Our final question comes from the line of Jim Suva with Citi. Please proceed with your question.
Tim Yang (Analyst)
Hey, this is Tim Yang calling on behalf of Jim Suva. Thanks for taking the question. Maybe a follow-up question on the channel inventory. Your December quarter inventory came down on a quarter-over-quarter basis, while in the past two years, your December inventories normally are sequentially up. So do you feel comfortable with your current inventory level, or do you think that right now, like, maybe going forward, you need to work down the inventory?
Bill Amelio (CEO)
Well, our strategy is to go to 70 days over the long haul, so clearly, we got to go work on each element of working capital, whether it's accounts receivable, accounts payable, and of course, inventory. So, yes.
Tim Yang (Analyst)
Okay. And then a quick follow-up. On the seasonality, to March quarter, your guidance is a little bit lower than the normal seasonality. Do you think the June quarter will be back to the normal seasonality, or you don't have the visibility right now? Thanks.
Thomas Liguori (CFO)
Well, you know, March quarter is heavily influenced by the book-to-bill in Asia. So you know, that's a fair question. I think if you took Asia out, we're probably tracking well with the seasonality.
Operator (participant)
Ladies and gentlemen, this concludes today's question and answer session, as well as today's call. We thank you for your participation. You may now disconnect your lines at this time. Have a wonderful day.