Avnet - Q3 2019
April 25, 2019
Transcript
Operator (participant)
Welcome to the Avnet Third Quarter Fiscal 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ina McGuinness. Please go ahead.
Ina McGuinness (Head of Investor Relations)
Thank you, operator. Earlier this afternoon, Avnet released financial results for the fiscal third 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. In addition, please note that we have recently made some changes to our branding, and we will now be referring to Avnet Premier Farnell business division as Farnell. 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 a 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-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 presentation. Today's call will be led by Bill Amelio, 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. And with that, let me turn the call over to Bill. Bill?
Bill Amelio (CEO)
Thank you, Ina, and good afternoon, everyone. I'm pleased to report another solid quarter of execution for Avnet. Our ecosystem strategy is gaining momentum, driving deeper and more profitable customer engagement. As a result, we are well positioned to capitalize on several important longer-term trends we believe will prove very positive for Avnet. We're witnessing the transition to a data-driven economy that is expanding Avnet's addressable market through innovations in silicon, software and artificial intelligence, and 5G connectivity. Our customers are increasingly looking for full solutions to take advantage of these trends. Avnet's end-to-end ecosystem provides them a simpler, faster, and more cost-effective route to market. Our solutions pipeline continues to grow as we expand our customer reach beyond traditional technology firms to include non-traditional customers looking to harness the power of technology to improve their business efficiency and gain more insight about their customers.
These changes play right into Avnet's strength on our ecosystems and capabilities to guide our customers' ideas to reality. Turning to our performance in the third quarter. The market remains clearly mixed. We saw good performance in the Western regions of Americas and EMEA, and continued weakness in Asia. Revenue was down slightly from a year ago, due primarily to the decline in Asia, but when looking at revenue and constant currency, we grew slightly. More importantly, we increased adjusted operating income margin by 23 basis points year-over-year and increased adjusted earnings per share by 7%. We also generated strong positive cash flow of $269 million. In terms of vertical market performance, there was notable strength in defense and aerospace, and we continued to gain share in this segment.
Other key vertical markets, such as industrial and automotive, slowed down slightly, due mostly to the downturn in China, but are still performing relatively well in the Western economies and are contributing meaningfully to our bottom line. Passive and interconnect revenues were strong for the quarter, growing high single digits from a year ago. These product lines have better margins and are a key part of our growth focus. Our OpEx is trending down as we committed it would. This is clearly helping us improve our profitability. Year-over-year, spending is down meaningfully, and we remain very disciplined in our spending approach and our investment priorities. In short, the areas under our control are performing well with solid execution, and we have clear contingency plans in place in the event of macroeconomic challenges.
Before turning to specific business areas that we normally discuss, I am pleased to note that Avnet was recently awarded as one of the world's most ethical companies for the sixth consecutive year. This is a tremendous honor for Avnet and reflects our culture and values. It also points to the quality of our employees and demonstrates our commitment to doing business the right way. Now, let me add a little bit of color to our electronic component business at the regional level. First, the Americas. We're pleased with the continued strong recovery of the components business in the Americas. Revenue was up high single digits from a year ago, and we also grew our operating margins over the same period. In addition, the Americas had its best design win performance in the past six quarters.
We entered the Q3 with great momentum in our Americas components business, including a positive book-to-bill ratio. Overall, Americas performance is slightly up from a year ago. This is due to some important changes we made in our Avnet Integrated strategy. We're leading with our innovative capabilities that deliver high value, high complexity, integrated solutions. As a result, we're moving away from a number of smaller, less profitable business opportunities, which has caused our revenue to slow in the near term. In EMEA, we had another steady quarter. Our Abacus business, which specializes in interconnect, passive, and electromechanical segment, had a record quarter, highlighting our strong execution in that part of the European market. In Asia, revenues were down both sequentially and from a year ago.
The Asia market is undergoing a major reset as it works through macroeconomic challenges that have been with us for some time. In the midst of this downturn, our Asia team has performed very well, balancing costs with market reality. While the market challenges remain, they're starting to show some signs of stability, albeit at a lower level. Our book-to-bill in the region has improved, and recent passage of the stimulus measures in China could improve conditions. Now let's turn to our Farnell business. Revenues for the quarter were flat sequentially and down slightly in constant currency from a year ago. However, profitability was very strong, with operating income margins up 160 basis points from last year, and overall profitability up over 8%. Execution within Farnell remains very strong. However, growth is currently challenged by a couple of factors.
First, Brexit, which is clearly impacting investing and purchasing decisions in the U.K. This represents 20% of our global sales of Farnell. The second factor is the slowdown in sales of single-board computing. This is something I mentioned in our last call, and continues to be a headwind to growth. Currently, we expect this to remain through the current quarter, but anticipate this to reverse itself starting in the September quarter. I want to share several key steps we expect will improve Farnell's growth. First, we're making strategic investments in adding more SKUs and inventory to address customer requests. Next, we're introducing new quoting and pricing tools in Farnell that we piloted first in Avnet. These will greatly improve the customer experience and efficiency. We're also investing in digital infrastructure to improve web speed and customer experience.
Lastly, we're making targeted marketing investments in search and pay-per-click to improve awareness and search results. We expect these investments to have meaningful positive impact on Farnell's business and put it on a path to outgrow the industry. One last comment on Farnell. The lead sharing program between Avnet and Farnell is going very well. We now have over 2,000 approved design registrations that have been shared, with a conversion rate of 57%. This progress demonstrates the customer lifetime value benefit of bringing a catalog distributor together with a high-volume solution provider. Next, I want to mention the progress in our digital transformation. We continue to roll out important new capabilities that provide improved insights, efficiencies, and better customer experience. Here's a couple of examples. First, something we call My Digital System.
This provides a product recommendation to our sales team from system-generated insights from both internal and external recommender engines. This enables our sales team to quickly and efficiently discover new sales opportunities at our customers. This tool is currently in pilot phase in Europe, with wider deployment scheduled for later this calendar year. The next example is the deployment of robotic process automation, where we are leveraging a spectrum of intelligent technologies to automate repetitive tasks in areas such as supply chain, finance, IT, and logistics. This improves productivity by eliminating mundane, repetitive tasks, and improves quality and customer experience. In the first year of adoption, we're well on our way to exceed our aggressive goal. I've mentioned previously the rollout of a new pricing and CRM tool that are improving margins and sales productivity. This quarter, we will complete the rollout of our global CRM in a single instance.
We've already demonstrated measurable improvements in our sales productivity. The global instance allows us to share customer insights and information across regions for a superior customer experience. Our new pricing tools are moving from pilot to broader implementation this year, and have already shown a positive margin impact where they've been deployed. Now, let's turn to how we are leveraging our ecosystem to expand customer opportunities. Our IoT pipeline has now grown to over $600 million, with recent key wins in areas such as industrial equipment and manufacturing. These wins are in addition to what we've already realized in healthcare, retail, and consumer segments. Our partnership with Microsoft continues to deepen and is providing numerous customer opportunities for us. We developed with Microsoft and announced at CES the Azure Sphere Starter Kit. This starter kit supports rapid prototyping of highly secure, end-to-end IoT implementations using Microsoft's Azure Sphere technology.
Avnet and Microsoft are currently in the process of seeding tens of thousands of these exclusive kits and modules to high-value and high-process customers. Our technology partners continue to expand. Just this quarter, Avnet, Microsoft, STMicro, Octonion launched SmartEdge Agile, our first artificial intelligence-based edge solution. For example, you can attach the device to a machine or manufacturing equipment, and the embedded AI engine learns normal operating behavior for things like temperature, vibration, humidity, auto range, et cetera. If the machine ever operates outside of its normal behavior, an alert is immediately sent to the maintenance for intervention. This predictive maintenance capability happens with no additional coding or hardware. It's simple to deploy, but powerful in providing key insights. This is just one way SmartEdge Agile can help businesses improve their operations with AI-based solutions from Avnet and its partners. The integration of Softweb is going very well.
This acquisition rounds out our portfolio with deep expertise in artificial intelligence and IoT software development, and is the result of a long and successful partnership. Lastly, I want to mention our progress in operational excellence and our cost structure. As you can see from the results this quarter, our transformation efforts have clearly paid off by allowing us to grow margins and profitability even during a slowdown. For example, we've recently made significant progress in resizing and restructuring our IT organization. We have increased utilization of low-cost regions for certain functions, and we've recently upgraded and improved the efficiency of our Asia and EMEA distribution centers. These moves and many others are helping to create a better customer experience, improve our execution, and contribute to our growth.
We remain on target to achieve our stated $245 million in OpEx savings over the next three years. We continue to have a very sharp focus on efficiency and operational improvement. In summary, Q3 was a solid quarter of execution for Avnet. We are performing well in a mixed market environment and building a growing higher margin pipeline of future opportunities. With that, let's dig deeper into our financial results with our CFO, Tom Liguori. Tom?
Thomas Liguori (CFO)
Thank you, Bill, and good afternoon, everyone. This quarter, we executed well in our efforts to control costs, expand operating margins, and grow earnings per share. Let me take you through our highlights for the quarter on slide 14. We delivered revenues of $4.7 billion, which was down sequentially, though in line with our expectations. In constant currency, year-over-year revenues rose slightly 1.2%. Our transformation efforts continue to show positive results. Adjusted operating margin increased to 3.8% from 3.6% in the prior year quarter. Adjusted earnings per share increased to $1.09, a 6.9% year-over-year increase. We had strong cash flow from operations this quarter of $269 million, with working capital reductions contributing almost half of that.
Our working capital dollars decreased, days increased due to the lower revenues in Asia. Isolating Asia, net working capital days for all of our other businesses combined declined by six days sequentially. Our buyback program continues. Diluted share count in the third quarter was 109 million shares, 9% lower compared to the prior year. Our quarterly dividend payment of $0.20 was 5% higher than the prior year quarter. Turning to business performance, starting with Electronic Components on slide 15. The Electronic Components segment reported sales for the third quarter of $4.3 billion. The sequential and year-over-year decline was primarily due to the slowdown in Asia. Electronic Components operating margin improved 15 basis points sequentially to 3.5%. Farnell revenues were essentially flat sequentially and down 1.5% year-over-year in constant currency.
As Bill mentioned, uncertainties with Brexit impacted market demand and our revenues during the quarter. In spite of the market headwinds, Farnell operating margins expanded to 12.4% in the quarter, a 160 basis point improvement both sequentially and year-over-year. By region, Asia revenues declined $419 million sequentially, and as Bill said earlier, the market is starting to show some signs of stabilizing. EMEA revenues declined year-over-year due to currency changes. In constant currency, EMEA grew 4.7% sequentially and 3.8% year-over-year. Americas revenue was flat in the third quarter and up 1.6% year-over-year. While electronics components revenue grew in the high single digits, we pared down smaller, less profitable business in Avnet Integrated.
Moving down the income statement on slide 16. Gross margin of 13.3% improved 80 basis points sequentially. We continue to manage our cost structure. This quarter, selling, general, and administrative expenses declined $3.6 million sequentially and $37.3 million year-over-year. About half of the year-over-year improvement was due to currency movement. We implemented several actions to further optimize costs as part of our long-term plan of achieving $245 million of savings. Presently, we're slightly over a third of the way towards this target. Adjusted operating income totaled $178.1 million, up 4.3% year-over-year. Adjusted operating income margin was 3.8%, up from 3.6% a year ago and 3.5% in the prior quarter. Our adjusted tax rate was 21%, in line with expectations.
Turning to the balance sheet and cash flow statement on slide 17. Cash provided by operations in the quarter was $269 million. The sale of real estate in Europe generated $41 million of non-operating cash flow. We returned $139 million to shareholders in the form of a $0.20 per share dividend and share repurchases totaling $117 million. We ended the quarter with a net debt position of $1.35 billion. Our gross debt leverage was 2.5, and net debt leverage was 1.6. As most of you know, we provide a quarterly scorecard to track our progress to our plan for achieving $7 earnings per share. Looking at slide 18, you can see our progress. This quarter, as a percentage of total sales, our mix from higher margin businesses improved.
Each business unit has a number of opportunities to grow higher margin sales and are pursuing these aggressively. Our operating expenses continued to improve with spending down both sequentially and year-over-year. Adjusted operating income margin of 3.8% is a sequential and year-over-year improvement. As mentioned earlier, while working capital dollars decreased, days increased due to the lower revenues in Asia. Excluding Asia, net working capital days decreased by six. Looking forward, slide 19. In the fourth quarter, we expect revenues to be similar to the third quarter, which is below typical seasonality and with a change in mix. While we continue to monitor Asia, our guidance today reflects a slight sequential uptick in Asia revenues and macro headwinds in Western regions.
We expect revenues to be in the range of $4.5 billion-$4.9 billion, an adjusted EPS of $1.00-$1.08. At midpoint, guidance represents year-over-year adjusted EPS growth of 5% on a 7% decline in sales. In summary, during the third quarter, we continued to progress in improving the revenue mix of higher margin businesses, controlling costs, managing working capital, and generating cash for shareholder distributions. We are controlling those areas of the business where we can make an impact, regardless of the macro environment. We are committed to executing our plan as demonstrated this quarter. With that, let's open the line for Q&A. Operator?
Operator (participant)
Thank you. We'll now be conducting your question-and-answer session. If you'd like to be placed in the question queue, 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'd 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. Once again, that is star one to be placed in the question queue. One moment, please, while we poll for questions. Our first question today is coming from Adam Tindle from Raymond James. Your line is now live.
Adam Tindle (Managing Director Infrastructure and Security Software)
Okay, thanks, and good afternoon. I just wanted to start maybe on gross margins. I know the target from the Analyst Day showed a number of positives on a bridge that led to improvement throughout the year. Obviously, you had Asia soften pretty significantly, which should have helped mix, but looks like guidance implies that gross margin is going to be down more than 50 basis points as fiscal 2019 shapes up. So I'm just hoping that maybe you can revisit the assumptions on the bridge. What are kind of the main detractors that maybe weren't in that bridge, and how can we think about a sustainable level of gross margin?
Thomas Liguori (CFO)
Sure, Adam. So I recall the bridge went to 13.6. This quarter, we're at 13.3, and you're right, it'll decline with the change in mix in Q4. So really, when you look at that chart and you look at the bridge, the number one reason that's causing the change is mix. So this quarter, we'll have higher mix of Asia revenue and lower mix of the Western regions, which is really causing the change in our gross margin.
Adam Tindle (Managing Director Infrastructure and Security Software)
Okay, maybe we can follow up, because there was 100 basis points of risk adjustment in there as well. I didn't know if maybe there was something in that bucket that is materializing. But maybe I can touch on-
Thomas Liguori (CFO)
No, that's a really good question. So just to answer that, no, this is a change in mix.
Adam Tindle (Managing Director Infrastructure and Security Software)
You mentioned you're just over a third of the way through the $245 million of cost savings. Can you give us a sense for timing in fiscal 2020? Is it just kind of another third materializes then, and we should get that benefit to profit dollars dropping through as a result?
Thomas Liguori (CFO)
Yes, it's pretty linear over three years.
Adam Tindle (Managing Director Infrastructure and Security Software)
Okay, and maybe just one, one more piece of color on that. You had low-cost geographies and back-office integration of just about $100 million of savings between those two items, and they were, I think, $0 last quarter, so all on the come. Can you maybe just talk about the logistics to those items and the timing to start those initiatives? Thanks.
Thomas Liguori (CFO)
Yeah, those are... Okay, the third that we're through is optimizing the cost structure, which was some reductions we had made earlier in the year. So the low-cost geos, these are mostly in the back office. Those plans are pretty well in place. You'll start to see those materialize through fiscal year 20. And we'll report on them just as we've been doing every quarter.
Adam Tindle (Managing Director Infrastructure and Security Software)
Got it. Thank you.
Operator (participant)
Thank you. Our next question is coming from Shawn Harrison from Longbow Research. Your line is now live.
Shawn Harrison (Senior Research Analyst and Associate Director of Research)
Good afternoon, everybody. Wanted to drill into Farnell and particularly the growth rate. I understand the Brexit dynamics and, you know, the single board issues. But absent that, when do you think you'll have the inventory in place and the additional SKUs and everything else to really accelerate the growth rate? Because, you know, to me, that should be a double-digit growth business, and obviously you're pretty far away from where that business should be right now.
Bill Amelio (CEO)
Sure, Sean, I'll take that. This is Bill. Good, good to hear you. We're in a process of putting new warehousing space in place, and that's the construction is finished, and we'll be in the process of ramping that up at the end of the year. It's going to take some time. We got to fit it out, of course, put the conveyors in, et cetera. That'll allow us to expand pretty significantly. In the meantime, where we have productivity improvements, we are adding additional SKUs, and we'll continue to do that through the rest, through the rest of the year. As I pointed out, we have three other areas that we're focusing on as well.
Web speed is important to us, pricing and quoting is important to us, and being able to add additional marketing spend to specifically target demand creation in areas where we think we have an opportunity. So with those things in place, we believe we can close the gap to the market in this particular space. But if you look at the overall market in this space, though, it is in fact starting to come down, not double digit today. So I think it's come down pretty dramatically, and I think when you see the results all come in from especially distributors, you'll see those, they're down much lower than they were in previous quarters.
Shawn Harrison (Senior Research Analyst and Associate Director of Research)
Okay, and I guess as a follow-up, the single-board computer dynamic, why does that resolve itself, for lack of a better phrase, in the second half of this calendar year?
Bill Amelio (CEO)
There's a new refresh coming out. We've spent time looking at the functionality of that and believe it's more robust than the release we just had that we're living through, and we will essentially have exhausted all that inventory of the previous version by the time we get through the September quarter.
Shawn Harrison (Senior Research Analyst and Associate Director of Research)
Okay, and then as one brief follow-up, Tom, where do you think you should be in terms of cash cycle exiting the calendar year, knowing, you know, there's some regional dynamics working against you?
Thomas Liguori (CFO)
Well, our cash should be above our net income. Is that what you were asking me?
Shawn Harrison (Senior Research Analyst and Associate Director of Research)
Yeah, I'm sorry, the days of your cash cycle.
Thomas Liguori (CFO)
Oh, days. Okay. So let me explain that, because that is a little confusing. You know, it's all in Asia. All of the other businesses combined, they came down 6 days. So Asia, this is, you know, timing of cash inflows and outflows when you have a decline in revenues. So in Asia, revenues came down $400 million. Well, when you look at the details of working capital in Asia, the receivables came down nicely, inventory came down. There's still more to do on both of those, but the offset was payables. So we ended up making a lot of payments for inventory that was purchased in Q2. You'll see that right in the balance sheet. Our payables in Asia were down $250 million, so that skews the total net working capital days. We may see that continue into Q4. I mean, I think it'll come down from 91 into the high 80s. But that said, you know, in this period, we are focused on generating cash out of working capital, and that's why we got to the $269 million cash flow from ops this quarter.
Shawn Harrison (Senior Research Analyst and Associate Director of Research)
Yeah, that, that is a very strong number. Great explanation. Thank you.
Operator (participant)
Thank you. Our next question today is coming from Joe Quatrochi from Wells Fargo. Your line is now live.
Joe Quatrochi (Director and Equity Research Analyst)
Great, thanks for taking the question. I was wondering if we could kind of drill down the high margin business, some of the puts and takes there. I think, you know, that business was down again year over year. And then if you even adjusted for, Farnell, I think it was, also down. So just kind of curious of what's driving that?
Thomas Liguori (CFO)
Yeah, Farnell, it's really everything that Bill just talked about. So specifically in the quarter, you know, Brexit, you think between January and the end of March, we had daily reports of, you know, is it a hard Brexit, is it a soft Brexit? Is it March 29th, April 10th, April 12th? Caused a lot of uncertainty. When you look at, you know, GDP and economic consensus out of the U.K., you know, activity was down. In fact, even the Chamber of Commerce made a comment about, you know, it's the worst numbers in decades, and, you know, U.K. is 20% of Premier Farnell sales, so that, that affected us. That said, no, we-- there's much more we need to do. We've been adding SKUs, but I-- if we're a third of the way there, that's probably a fair indicator.
Bill Amelio (CEO)
So clearly, Premier Farnell is the leading driver of our high margin businesses there, but right behind that, we have Avnet Integrated, which we're doing some work with it, that we pointed out in my remarks, where we are tuning up the Americas business to make sure we get growing those customers that are bigger customers and higher margin opportunities for us. And we made a shift this past quarter to do that, and you'll start to see that and essentially give us some pop in the future quarters with respect to AIS. Demand creation is another area in our core electronic component business that is, we're starting some real traction there, and we're seeing the registrations move up into the right, which takes some...
You know, there's lag time there before that turns into revenue, but that will in fact happen over time. And then interconnect, passive, and electromechanical, it's been a really, I'd say, a real bright spot for us, and we've seen that grow and at higher profitability than our, than the average of the rest of the company. So I think there's some real positive areas that we can point to in that area and say, "Hey, just keep watching that space, and we're hopeful as Premier Farnell starts getting back to our growth position, that'll start changing that pretty quickly.
Joe Quatrochi (Director and Equity Research Analyst)
Okay, that's helpful. Then just on the inventory days, you know, how should we think about the inventory levels in Asia and, you know, are they high today, and how long could it take to kind of work those down?
Thomas Liguori (CFO)
Asia inventory in terms of days is higher than normal, so that will, you know, start to normalize more in the fourth quarter, Joe.
Joe Quatrochi (Director and Equity Research Analyst)
Okay, thank you.
Operator (participant)
Thank you. Our next question is coming from Matt Sheerin from Stifel. Your line is now live.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Yes, thank you. Just a couple of questions from me. One, could you provide any bookings trends, book-to-bill ratios by region, and how it's looking now versus the end of the quarter?
Bill Amelio (CEO)
Sure. Phil's gonna take that one.
Phil Gallagher (Global President of Electronic Components)
Yeah. Hey, hey, Matt, good afternoon. Thanks for the question.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Hey, Phil.
Phil Gallagher (Global President of Electronic Components)
So right now, if you look at the components level globally, we're very close to 1-to-1, okay? With the Americas above 1-to-1, looking very good. Europe, just a little below 1-to-1, and Asia, you know, below 1-to-1, but improving, which is why I made the comment that Bill made in the script, you know, improving from a book-to-bill. But although the billings are down, but at least we're starting to get some improvement from the last, you know, let's say, couple months to a quarter.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay.
Bill Amelio (CEO)
Big reset in Asia.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Yeah.
Bill Amelio (CEO)
Obviously, when you move $400 million quarter to quarter, that's a big move, and now we're starting to see at least stabilization at a lower level.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Yeah. Got it. Just on gross margin, and you talked about some of the strengths, one being the passives area. That's also an area where there were broad shortages in many areas. Now we're seeing really just a few large case size MLCCs, ACs, and a couple of others. But in most cases, you talk to suppliers, lead times have come in dramatically, so you would think that you might see some inventory correction that customers there. And as volumes do come back, whether it be in Asia and other regions, shouldn't we see a return to more normal pricing, meaning ASP pressure, you know, that you really haven't seen in the last couple of years? And, you know, would that impact margins?
Bill Amelio (CEO)
Well, I look at it this way. First of all, the published lead times have not come down dramatically. They've definitely stabilized, in some cases come down, but in general, you still see them up. Actuals, as you point out, have come down, and we continue to track that. And I think a lot of the inventory correction that you said, we've seen it in Asia. There's a little bit potentially happening in Europe. America still seems to be pretty strong with respect to our bookings. So we're less concerned than the Americans of an inventory correction. And in general, ASPs didn't move much up on the upcycle of this, so I'm not that concerned that they're going to move that much or that far down either. I mean, I think we're in pretty good shape.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay. And then on Avnet Integrated, you spoke about some of the issues there. Also, at your Analyst Day, you talked about that being one of the, sort of the, rising stars, if you will, of that business, higher margin, higher growth potential. Now there seem to be some issues. So, what could you just elaborate a little bit more on those issues and growth potential and margin potential there?
Bill Amelio (CEO)
Well, no, I didn't say there was any issues in our interconnect, passive, and electromechanical.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
No, Avnet Integrated, I'm talking about.
Bill Amelio (CEO)
Oh, Avnet Integrated. Oh, Avnet Integrated. What we did in Avnet Integrated, specifically, I mean, let's divide it into three quadrants, the Europe, Middle East, and Africa, Americas, and Asia. So Asia is growing like we expect, albeit from a very small base. Europe, Middle East, and Africa is really doing well. So that's. We organized that operation a year and a half ago. We made some major changes there, and we're starting to see the fruits of that labor, and we're really happy with that. In fact, we outstripped our capacity, and we'll put more capacity in place over in Europe. So great story there.
Americas, we've essentially looked at our profile pipeline, determined the best way for us to move forward in a high-margin way, and we're essentially exiting some contracts that I would say are smaller and less profitable for us and focusing our attention on what's in our pipeline that are richer margin and that are larger opportunities, and that's happening as we speak. Additionally, we put on new capabilities that opened up more pipeline for us with a variant configurator opportunity that allows us to get a lot more customers into the pipeline that have a richer margin profile.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay, thank you.
Bill Amelio (CEO)
Thanks, Matt.
Operator (participant)
Thank you. Our next question today is coming from Steven Fox from Cross Research. Your line is now live.
Steven Fox (Managing Director)
Thanks. Good afternoon. First, again, on the IP&E, you mentioned a high single-digit growth in that business. Can you just sort of dig into how you were able to outperform the overall company in those markets? Was it adding line cards? Was it execution in certain markets, pricing, et cetera? Can you give us some color there? And then I had a follow-up.
Bill Amelio (CEO)
Pricing has been pretty stable across the board, and we've been able to get more supply in the last few quarters. That's been very helpful as well. But I would say it's pretty balanced across the world. We've seen great performance in every one of the regions, so it's been pretty solid for us. And it's in all the end markets that we participate in. Industrial and automotive and mil-aero all have their own consumption of IP&E.
Phil Gallagher (Global President of Electronic Components)
Yeah, Steve, this is Phil. We have a big focus on this across the world. You know, it tends to be a higher margin business, and additionally, we have a dedicated BU business unit division in Europe as well, Abacus, and they've had a tremendous growth in the European market. So it's really pretty much the same across the board.
Steven Fox (Managing Director)
Okay, that's helpful. And then in terms of the pipeline you talked about for IoT, non-traditional customers, the $600 million. When you start to build up that type of backlog, how do you think about it in terms of actually turning into revenues, you know, maybe upside versus downside things? How should we think about that actually contributing down the road? Thanks.
Bill Amelio (CEO)
We expect that that pipeline will convert 50% of it within three to five years. That's kind of our current projection. The way we think about it is this, is it takes some time with respect to use cases. The way the selling motion works is you work with a customer, you get a use case in place, you prove out the proof of concept, and you show that the ROI is really there for the customer. Once that occurs, then we develop a playbook for the sales team to be able to replicate that across that industry as well as other industries. To take an example, like predictive maintenance is an example. You build out a use case for one customer, then demonstrate that works for others, and then you build a pipeline associated with that. That always takes the time to get that to convert from an opportunity into actual revenue, but we're furiously working on many different proof of concepts and use cases as we speak.
Steven Fox (Managing Director)
Great. That's very helpful. Thank you.
Operator (participant)
Thank you. Our next question is coming from Tim Yang from Citi. Your line is now live.
Tim Yang (VP and Equity Research Analyst)
Good afternoon. Thanks for taking my question. A quick follow-up on Farnell. How should we think about the timeline for the business to return to growth? And I have a follow-up.
Bill Amelio (CEO)
Well, it's hard to predict the macroeconomic conditions, but short of any other issues, and in fact, if we get a break on Brexit and some help on China tariffs, that starts going our way toward the back end of the year, you'll start seeing us get back to a growth, growth posture in Premier Farnell. So we're really encouraged, and when we start layering in those investments, even in a no-growth environment, we should have an opportunity to be able to take share.
Tim Yang (VP and Equity Research Analyst)
Got you. That's helpful. And then on automotive and industrial end market, can you talk about your demand visibility compared to a quarter ago?
Bill Amelio (CEO)
Sure. I'll have Phil handle that specifically.
Phil Gallagher (Global President of Electronic Components)
Yeah. Yeah, thanks, Tim. Well, you know, in transportation for us, we classify transportation just beyond the automotive. You know, it's in the range of 12%-14% of our total business. We're actually seeing it's still pretty good. It's definitely down a bit from a year ago, no doubt, in all the regions, but actually holding up pretty well, you know, relative to what we're reading out there, okay? As far as industrial, steady. I mean... Again, particularly in the Western regions, we've seen a bit of a hit in the Asia market, in the industrial, particularly in China. But in Europe, really long tail of customers in industrial space, it really fits right into our sweet spot as well as the Americas. And as we highlight in the script, we're seeing a really nice growth, high double digits in the defense and aerospace as well.
Tim Yang (VP and Equity Research Analyst)
Great. Thanks for the color. Thank you.
Operator (participant)
Thank you. As a reminder, ladies and gentlemen, that is star one to be placed into question queue. Our next question is coming from Mark Delaney from Goldman Sachs. Your line is now live.
Mark Delaney (Managing Director and Senior Equity Analyst)
Yes, good afternoon. Thanks for taking the question. First, just on the housekeeping type question. Tom, you mentioned the $15 million gain from the real estate sale in your prepared remarks. You know, I'm assuming that's what's behind the $9 million of other income that was part of the continuing earnings, but I just wanted to check where that may be in the P&L.
Thomas Liguori (CFO)
The $15 million is in restructure.
Mark Delaney (Managing Director and Senior Equity Analyst)
Okay, got it. And then I wanted to also follow up on the OpEx outlook and some of the commentary there. If the analyst day, if I'm not mistaken, if the growth from the company kind of from the top line was in line with expectations, quarterly OpEx could be $490 million or so, and if there was no growth in the business, quarterly SG&A would be running around $435 million or so. Is that still the right goalpost for us to be thinking about?
Thomas Liguori (CFO)
Yeah, Mark, I think those are reasonable ranges. You know, I think what you're seeing this quarter, and what I expect you to see in Q4 is, you know, pretty sizable reductions year-over-year in our OpEx. So, you know, I think we're pretty much right on track with the OpEx compared to our Investor Day discussion.
Mark Delaney (Managing Director and Senior Equity Analyst)
Okay. And then, I guess my final question, just on gross margin percentage year-over-year, it was right around 13% for 4Q fiscal 2018. Just trying to get a sense for what your expectations are for the June quarter, so for 4Q this year.
Thomas Liguori (CFO)
For the fourth quarter?
Mark Delaney (Managing Director and Senior Equity Analyst)
The upcoming quarter, just trying to, you know, gross margin percentage, kind of flat, up, down.
Thomas Liguori (CFO)
Gross margin would sequentially decline. The way to think about the midpoint of our guidance is if you take the midpoint of revenues, you know, the operating margins would be in the 3.6 range, and everything else is pretty constant. So the 3.8 in Q3 to the 3.6, that's the mix change.
Mark Delaney (Managing Director and Senior Equity Analyst)
Okay, got it. Thank you very much.
Operator (participant)
Thank you. Our next question is coming from Adrienne Colby from Deutsche Bank. Your line is now live.
Adrienne Colby (Associate Analyst)
Hi, thanks for taking my question. I wanted to ask about Farnell. You outlined a bunch of initiatives for improving efficiency, you know, some of the quoting and marketing tools. I just wanted to check if are there any sort of higher level integration efforts that are still underway? The rebranding obviously happened, but I don't know if there are any other assets that you acquired along with Farnell. There's more rebranding or any other back-office integration that needs to happen at this point.
Bill Amelio (CEO)
We have a couple of points. First of all, we are doing some more back-office integrations with respect to, you know, the various different functions, because we took a light touch at the beginning of our journey with Premier Farnell, and now we are looking at areas where we think there's some additional efficiencies, and we're doing some more work in low-cost jurisdictions. We're doing some more work with what we can do, connecting electronic core, electronic component core, with what we're doing with Premier Farnell. So that's all going well for us. Regarding branding, branding is a journey. So the first journey was what you saw and what we announced right now, and as time goes on, you'll see it get more tied into the Avnet business with respect to overall branding. But where we are now is a step in the journey.
Adrienne Colby (Associate Analyst)
Thank you. And as a follow-up, in terms of the weakness you saw related to Brexit, were those order cancellations, or, should we think about that decline in sales as deferrals? So, do you expect it to come back when there's more clarity about Brexit?
Bill Amelio (CEO)
When you think of the Farnell business, think about it as somebody goes online or calls up a salesperson. If the material is there, they buy. So it doesn't tend to be more. You're thinking more of what our core Avnet business is versus the Farnell business. So Farnell is literally, if the supply is there, they buy. So what happened in the U.K., which represents 20% of the Farnell business, is people just paused on not buying at all.
Adrienne Colby (Associate Analyst)
Thank you.
Operator (participant)
Thank you. That does conclude our question and answer session. Ladies and gentlemen, it also does conclude our teleconference for today. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.