Avnet - Q4 2015

Transcript

Operator (participant)

Our presentation will now begin. I'd like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Vince Keenan (VP of Investor Relations)

Good afternoon, and welcome to Avnet's fourth quarter fiscal year 2015 business and financial update. As we provide the highlights for our fourth quarter fiscal year 2015, please note that in the accompanying remarks, we have excluded certain items, including intangible asset amortization expense, restructuring, integration, and other items, and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U.S. dollar-based financial statements into U.S. dollars. In addition, when addressing working capital, return on capital employed, and return on working capital, the definitions are included in the non-GAAP section of our press release. Before we get started with the presentation from Avnet management, I would like to review Avnet's safe harbor statement.

This call contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. There are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Rick Hamada, Avnet's CEO, will provide Avnet's fourth quarter fiscal year 2015 highlights.

Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide first quarter fiscal 2016 guidance. At the conclusion of Kevin's remarks, a Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations are Gerry Fay, President of Electronics Marketing, and Patrick Zammit, President of Technology Solutions. With that, let me introduce Mr. Rick Hamada to discuss Avnet's fourth quarter fiscal 2015 business highlights.

Rick Hamada (CEO)

Thank you, Vince. Hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. Fiscal 2015 marked our second consecutive year of mid-single-digit organic growth, as reported revenue of $27.9 billion represented an increase of 5% in constant currency. Despite an environment of mixed economic signals and a strengthening U.S. dollar, our team delivered consistent improvement in our financial performance as revenue grew year-over-year and adjusted operating income margin expanded in all four quarters. Adjusted operating income grew twice as fast as revenue in... groups grew operating income double digits, and operating income margin increased by over 50 basis points.

Driven by this performance, adjusted operating income grew 4.4% or 11% in constant currency, and adjusted earnings per share increased 5.9% to $4.49. Another highlight for the fiscal year was the $584 million in cash flow from operations, an increase of 146% over fiscal 2014, and we returned $247 million to shareholders via our dividend and disciplined share repurchase program. Turning to our June quarter, high single-digit sales growth in constant currency at EM and EMEA and Asia region was offset by a decline in our computing components business at TS. As a result, revenue growth of 3.1% in constant currency equated to a 3.6% decline after translating our results in the EM sales, 5.5% year-over-year in constant currency, while Asia grew 2.9% and the Americas declined 1.5%.

Reported revenue of $6.8 billion increased 1% sequentially, which was below our normal seasonal range of +2% to +5% for a June quarter. Gross profit margin increased 7 basis points sequentially, while declining 31 basis points from the year-ago quarter, primarily due to the geographic mix shift to our lower-margin Asia region at EM. Operating expenses declined 8.5% year-over-year and were flat with the year-ago quarter in constant currency, as our team has continued to do a good job managing expenses while delivering steady organic growth for the past four quarters.

Adjusted operating income of $243.8 million increased 5.8% sequentially and was flat with the year-ago quarter due to the negative impact of currency. If you exclude the impact of changes in foreign currency exchange rates, adjusted operating income grew three times faster than revenue. Per share of $1.16 increased $0.02 from the year-ago quarter, which includes a negative impact of approximately $0.11 due to the aforementioned currency declines.

Finally, our disciplined approach to working capital management has also contributed to our progress, and working capital as a percent of revenue. As I highlighted at our recent Investor Day, despite the somewhat sluggish overall economic growth environment, there are exciting growth opportunities within technology being created by an accelerating pace of change.

From converged infrastructure and the Third Platform solutions they support, through to, to the Industrial Internet of Things, we believe there are multiple opportunities where we can leverage our distinct position in the technology supply chain. In fiscal 2015, our portfolio management discipline and the benefits from Avnet Advantage not only contributed to improved financial performance, but also allowed us to redirect some existing investment towards these specific opportunities.... With our strong financial position, we enter fiscal 2016, well-positioned to continue our momentum in organic growth and progress towards our long-term financial goals. Now, I'd like to turn the commentary over to Kevin Moriarty to provide more color on the financial performance of our operating groups. Kevin?

Kevin Moriarty (CFO)

Thank you, Rick, and hello, everyone. EM closed out fiscal 2015 with another strong quarter of high single-digit year-over-year revenue growth in constant currency, led by our EMEA and Asia regions. In the June quarter, revenue grew 3% sequentially in constant currency, which was within our normal seasonal range of flat to up 4%. On a year-over-year basis, reported revenue was flat and was up 7.2% in constant currency, which represents our ninth consecutive quarter of year-over-year organic growth. EM Asia and EM EMEA regions delivered a second consecutive fiscal year of strong growth in constant currency and grew 7.4% and 9.7%, respectively, in the June quarter, while the Americas region increased 1.8%.

Gross profit margin decreased year-over-year, primarily due to the geographic mix shift to the lower margin Asia region, a reduced contribution from the higher margin EMEA region due to currency translation, and a decline in Asia due to an increase in select high-volume supply chain engagements. Operating income declined $1.1 million year-over-year to approximately $406 million, and operating income margin was flat with the year ago quarter, as our strong performance in EMEA was offset by the strengthening U.S. dollar. If you exclude the impact of changes in foreign currency exchange rates, EM EMEA grew operating income 3.1x faster than revenue, and operating income margin expanded greater than 120 basis points year-over-year.

EM would have been at 5% operating income margin at last year's Q4 exchange rate within our long-range planning target. In the June quarter, EM's working capital declined 1.9% from the year ago quarter on a reported basis, but was up 6.9% in constant currency to support the strong year-over-year organic growth. While the strengthening of the U.S. dollar throughout fiscal 2015 had a negative impact on EM's reported revenue and profitability, the team's focus on value-based management was evident in other key financial metrics we track. In fiscal 2015, EM increased return on working capital 38 basis points, and economic profit dollars increased 27%, with all three regions contributing. Now, turning to TS.

Our team continued their focus on improving profitability as operating income margin expanded for a third consecutive quarter, and return on working capital grew 322 basis points from the year ago quarter, despite the negative impact of the strengthening U.S. dollar. Even though sales in our enterprise IT business were consistent with the year ago quarter, revenue of $2.48 billion declined 9.2% in reported dollars due to the impact of currency and a significant decline in our computing components business. Revenue declined 3.5% in constant currency, primarily due to this decline in our computing components business, which included the impacts of weak demand and our disciplined review of certain low-margin engagements.

At a regional level, our EMEA region declined 2.3% year-over-year in constant currency, while the Americas decreased 4.2%, and Asia was down 14.8%. Both gross profit and operating income margin increased year-over-year, driven by improvements in our EMEA region and our computing components business. A significant highlight of the quarter was the continued progress in our enterprise IT business at TS EMEA, where disciplined gross margin and expense management combined to drive TS EMEA's operating income margin up 55 basis points for the full fiscal year. Driven by this improvement, TS's operating income margin improved to 3.1% for both the fourth quarter and the full fiscal year.

Working capital velocity increased a quarter turn sequentially, as working capital declined 6.6% from the March quarter in reported dollars and 7.6% in constant currency. Now, turning to cash flow from operations. In addition to improved profitability and returns, the team remained disciplined on managing working capital, which helped to drive cash flow from operations to nearly $300 million for the June quarter and $584 million for the full fiscal year. Excluding the impact of changes in foreign currency exchange rates, working capital declined 1% sequentially and increased 2.4% from the prior year quarter to support the strong organic growth at EM. In fiscal 2015, we returned roughly 42% of cash flow from operations to shareholders through dividends and our disciplined share repurchase program.

During the fourth quarter of fiscal 2015, we paid a dividend of $0.16 per share or $21.7 million, and we purchased $16 million worth of our shares. As we highlighted on our recent Investor Day, we view share repurchases as an internal form of M&A. With the recent decline in our stock price in July, we have invested another $64 million in our shares over the past five weeks. Even with this investment, we have approximately 238 million dollars remaining in our existing authorization and are prepared to buy additional shares when we believe our stock represents a compelling value. Another initiative that we introduced at our recent Investor Day was Avnet Advantage for the long run.

As a reminder, this is an unprecedented approach to leveraging our global scale and scope, focused on centralizing and streamlining processes to further drive productivity and efficiencies across all regions and both operating groups. While we announced this initiative at our Investor Day, many projects were already underway, and as such, we recorded approximately $59 million in restructuring costs during fiscal 2015, a majority of which relate to Avnet Advantage projects and certain portfolio decisions we are in the process of implementing. As a result of these actions, we expect to realize approximately $50 million in incremental annualized cost savings, with 60% accruing to the TS business and the remainder to EM. These actions also provide improved leverage in our model as we continue our progress towards our margin and return goals.

Also, at our Investor Day, we added a new efficiency metric to our key financial goals. We view this metric as a key barometer for measuring the progress of driving productivity through broader enterprise effectiveness initiatives like Avnet Advantage and as we continue to standardize platforms. We are currently targeting a range of 66%-68%. In fiscal 2015, our adjusted operating expense decreased points to 69.5%, and we expect the combination of organic growth and expense reductions to further drive improvement going forward. Now, turning to our outlook. Looking forward to Avnet's first quarter of fiscal 2016- in the fiscal quarter, we expect EM sales to be in the range of $4.15 billion-$4.45 billion, and sales for TS to be between $2.25 billion and $2.55 billion.

Therefore, Avnet's consolidated sales are expected to be between $6.4 billion-$7 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.97-$1.07 per share. This guidance does not include any potential restructuring and integration charges or the amortization of intangibles. The guidance assumes 137 million average diluted shares outstanding and an effective tax rate in the range of 27%-31%.

In addition, the above guidance assumes that the average U.S. dollar to euro currency exchange rate for the first quarter of fiscal 2016 is $1.09 to the euro. This compares with an average exchange rate of $1.33 to the euro in the first quarter of fiscal 2015, and $1.11 to the euro in the fourth quarter of fiscal 2015. With that, let's open up the lines for Q&A. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you'd like to ask a question, 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. One moment while we poll for questions. Please limit your question to one question and one follow-up question. Our first question comes to the line of William Stein from SunTrust. Please go ahead with your question.

William Stein (Managing Director and Senior Analyst)

A week in the upcoming quarter, how often does that happen? And what is the effect you're expecting in each of the segments? In other words, if you didn't have that extra week, perhaps maybe you can kind of talk about what you would be guiding, and then I do have a follow-up, if I can.

Kevin Moriarty (CFO)

Yes. So, well, hi, Kevin. It really is just a function of the calendar and how we close out the 52, 53 week, year. Unfortunately, it's not one of these things that you can average the 14 weeks across both businesses and determine the impact. So when we step back and we think about it and what we included in our guidance for both operating groups, the extra gross profit we get from the extra week of the revenue really is offset by the incremental week of expenses.

William Stein (Managing Director and Senior Analyst)

Okay. Maybe I'll try a different one then. I'm hoping you can comment on what the M&A environment in semis, what that impact on your business might be. In particular, I think Altera is a relatively large supplier, and given that you carry AMD, I wonder if the- ... you know, is there any anticipated either expansion or more problematic effect of that pending merger? Thank you.

Rick Hamada (CEO)

Gerry, go on.

Gerry Fay (President of Electronics Marketing)

Sure, Will, Gerry, what I'd say is that it's a really hard question to answer because it's different by supplier. But generally, we have been positively impacted by this trend, as suppliers look to create strategic partnerships with their distributors. The DTAMs continue to grow as a percentage of the total TAM over time, and I don't see that changing. As the supplier portfolios continue to expand through the consolidation, we think we are well positioned to take this expanded portfolio to market, given our ongoing investment and demand creation resources, and our global scale and scope.

Rick Hamada (CEO)

Yeah, Will, this is Rick. It really, there's context to each one of these deals. Sometimes it's two existing partners getting together, and then sometimes it's one of our key partners acquiring some new technology or helping us expand the market a little bit, which gives us more opportunity to have conversations with engineers. So there's real context to it, but as Gerry said, net-net overall, it's generally been a positive development for us.

Operator (participant)

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

Steven Fox (Managing Director and Equity Research Analyst)

Thanks, good afternoon, guys. Just first off, on the component side of the business, it looked like it came in pretty much as you thought it would. Can you give us some description of how you think, the channel is positioned relative to demand for inventories, what you're seeing from your customers that would suggest either better or worse trends for the next couple quarters? And any other broad, you know, comments around the chain, and then I had a follow-up, please.

Gerry Fay (President of Electronics Marketing)

Yeah, this is Gerry, I'll take that one, Steve. What I would say is, you know, right now, looking at everything that we see, our backlog, we don't see much change in either customer demand or cancellation rates. I think our inventory is well positioned. On our last call, I talked about some of the pre-investments we made as some of the pricing changes, so I think we're well positioned.

You can see, we've managed our inventory well within this quarter, so I think we're well positioned for this coming quarter when it comes to inventory. We haven't seen much in the way of issues and being able to pass on some of the small price increases that have happened. I would say based on where we sit today, we feel fairly comfortable with both our inventory level and what we're seeing in the market as far as how customers are reacting.

Steven Fox (Managing Director and Equity Research Analyst)

Great. That's helpful. Then secondly, just looking at the Technology Solutions business, it looked like it was mildly disappointing on the top line versus where your guidance was. Would you relate all that to computer components? And just, if not, what else was disappointing in the quarter? And along the same lines, do you see sort of a bottom yet for the computer components business? Where are we at in terms of the revenue run rate? Thanks.

Rick Hamada (CEO)

Yeah, Steve, it's, it's Rick, and I'll turn it over to Patrick. Yeah, you, you have the story pretty right. It wasn't all computing components, but I'd say that, that was probably the biggest surprise of the overall impact to the top line. I'll let Patrick add some more color from a regional and on our enterprise business.

Patrick Zammit (President of Technology Solutions)

Okay. So on the computer component side, indeed, so that explained most or a good portion of the miss. Reason is, this business has been impacted by a sluggish PC market, and also by some change in technology in that segment. I would say that probably from a quarter-on-quarter standpoint, Q4 was the bottom. We are expecting sales to rebound quarter on quarter now. Year on year, we still have the impact of the base, so last year, where we had the very high sales. So we still expect year-on-year to keep on decline, but quarter on quarter, we believe we've reached the bottom last quarter, and year on year, expect growth to materialize in the first half of calendar year 2016.

Now, again, I would like to insist on the fact that the team reacted extremely well to the difficult market conditions, adjusting the cost base and working on the gross profit. Then we had a small disappointment in storage in North America, primarily on legacy storage technology. So again, on storage is really a critical area of growth for us. We had a great quarter last quarter. This quarter was a little bit below expectations, and we are not concerned. We believe that, again, our strategy to grow in converged, hyper-converged, flash arrays is going to generate continuous growth in the coming quarters.

Operator (participant)

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

Sherri Scribner (VP and Senior Equity Research Analyst)

Hi, thanks. I wanna tackle the extra week question again. I'm just trying to think about, in terms of how much it adds to your revenue, for the September quarter. I understand that, the extra SG&A costs offset, any gross profit benefit, but I'm just trying to think about how much that extra week adds to EM and TS sales, given the guidance is, you know, relatively in line with typical seasonality.

Rick Hamada (CEO)

Yeah, Sherri, this is Rick. Let me add some color, and then I'll maybe ask Kevin to follow up with any other details. The interesting part of this 14th week, I think we all asked earlier, it happens about every five years based on the way we do our fiscal calendars, so we don't have a lot of track record and empirical evidence to do this. But we can tell you, EM and TS are two different stories here. One more week for EM is generally linear at best and perhaps slightly below, because those quarter ends and calendar month ends are just not as critical. For TS, it's a whole different story.

As we talked about for the last couple of years, as we've tried to handicap the calendar cutoffs, and by the way, I'm gonna be happy to be out of that business here for the next number of quarters. But in any event, we're talking, you know, significant in the terms of hundreds of millions U.S. dollars in maybe the first two days of a fiscal quarter for us, which are the last two days of a calendar quarter, as occurred for us in this Q1, etc.

So the skews between the two businesses are completely different. I think what Kevin tried to reinforce was that in the guidance that we've provided now for the September quarter, we factored in our best available information into the guidance for both groups. You will see at EM, it's a more muted impact to normal expectations, as opposed to TS, where the guidance is moderately above, quote, unquote, "normal seasonality," because of that, we're gonna capture two quarter ends, if you wanna think of it that way, in this Q1. Kevin,

Kevin Moriarty (CFO)

I don't know.

Rick Hamada (CEO)

Okay?

Sherri Scribner (VP and Senior Equity Research Analyst)

That's really helpful. Thank you very much. Then can I just ask a question on the SG&A, as you guys have been working on some restructuring? You guys did a good job with SG&A this quarter. I assume it ticks up in 1Q with the extra week, but how should we think about it for 2Q and 3Q and going forward now that you've done some good cost saving work? Thanks.

Kevin Moriarty (CFO)

Sherri, hi, it's Kevin. I would point to, you know, for the upcoming quarter, it's in the range of $142 million-$152 million. Now, there's a few moving parts there. Obviously, the incremental week of operating expenses. We also have the our normal Q1 equity grant that we also account for in this quarter, offset by a lot of the restructuring comments you just that we made earlier. So net-net, that's what we're expecting for the current quarter.

Now, we traditionally don't give guidance past the upcoming quarter, and obviously, there could be a few moving gives and takes, depending on currency and M&A activity. But directionally, we'd expect it to be, you know, and our Q2 will go up just due to the, you know, trajectory of the TS revenue, right? If you think about the calendar close, traditionally, our operating expenses may go up slightly from Q1, but then, kind of stabilize from there.

Operator (participant)

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

Mark Delaney (Managing Director and Senior Equity Research Analyst)

Yes, good afternoon, and thanks very much for taking the questions. The first question is on EM. I was hoping to follow up a little bit more on the cyclical environment and what you guys are seeing, and I was hoping you could help us reconcile the better trends that Avnet's reporting within the EM segment relative to pretty weak results from a number of semiconductor companies, you know, including in areas that, you know.

I think Avnet has exposure to, like industrial, appliances, automotive, and some of the semi companies have specifically talked about seeing weakness in the distribution end market. And so any sort of reconciliation between what a number of investors have been hearing from semi companies and what Avnet and Arrow have been able to report and guide for this quarter would be helpful.

Gerry Fay (President of Electronics Marketing)

Sure, Mark, it's Gerry. I'll take that one. I think if you look at the results from the suppliers, it's actually been kind of mixed. And over the last couple of days, some of the suppliers that have gone out have been actually a little more bullish than the ones who went earlier. I would say, you know, given the large number of customers we've serviced in many different verticals, we're not as exposed to either particular customers or some of the end markets that they are. Some of them cited weakness in wireless and in comms and some of their biggest customers. So I think that's the big difference between maybe what you see with us and our biggest competitor and some of the suppliers.

If you look at by region, the Americas has been kind of flattish, and if you look at our growth this quarter, it was around GDP. Europe continues to be solid for us, and, in Asia, we're still growing but at a slowing rate. And, I think this is more about our expectations for our high volume fulfillment business than anything else. So everything we look at, cancellation rates, backlog, everything seems to be fairly much in line what we would expect for the quarter and what we're looking for, in this next quarter.

Mark Delaney (Managing Director and Senior Equity Research Analyst)

That's helpful. And then for a follow-up question on the cost side, OpEx and margins generally were better than I was expecting for this quarter, so that was nice to see. I was hoping to get some more clarity on the Avnet Advantage program and where we stand. You know, I know at the analyst day, you talked about $100 million-$125 million of sales, I think, over three years.

And then, Kevin, you mentioned $50 million incremental. Maybe you can just kind of pull that all together. You know, is $50 million on top of that $100 million-$125 million you'd already talked about? And then how much has already been realized?Because I think the OpEx was lower already this quarter, so how far along are you already with that process?

Kevin Moriarty (CFO)

Sure. Sure. Hi, Mark. It's all part of the overall program. This is not on top of, so it's all part of that broader initiative that we've been managing on. So what I commented on in the call is another $50 million of incremental annualized, and the best way to think about that is an incremental benefit as we go through the current upcoming quarter of, say, $7 million-$10 million.

We've had roughly $5 million in the most completed quarter of our Q4, but the additional benefit, it will occur as we go through the rest of the fiscal year. And the full annualized benefit of this $50 million, we expect to get by the end of the fiscal, our current upcoming fiscal year. So as we progress through the year, we'll continue to see the incremental benefit, and we're gonna continue to work on the broader project, and I'll update you as we go through the rest of the year, in terms of the status of the broader program.

Operator (participant)

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

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Yes, thank you. Sorry to go back to the extra week question again, but if you look at your the normal seasonality that you talked about in the September quarter, you're typically up 1% to down 3% in EM, and it looks like midpoint of guidance is gonna be, you know, right in the middle of that range. But even if you factor in half a week, because of the seasonality and the way the quarter falls, are you still looking at down, you know, below seasonal? And I'm just trying to figure out, you know, what area or what region you're seeing the weakness in. A number of suppliers have been talking about distribution orders being cut, both in the Americas and in Asia. And so are those areas a little bit weaker than others?

Gerry Fay (President of Electronics Marketing)

So, Matt, it's Gerry. Let me take a first shot at that. I wish estimating this, as Rick said, was an exact science. If you think about our seasonality, actually, at our investor day, we said seasonality is -2-+2 for this quarter. So, I don't know if you've picked up on that. But if you look at our. Yeah. So if you look at what the extra week might be, I would say, think of it as a low single digit impact to revenue. So that would put us, depending upon, you know, guidance, that puts us either right at the low end of seasonality or just slightly below seasonality.

When you talk about weakness, I would say, the Americas, as we've been saying, has been fairly flattish, so it's not surprising that maybe some of the suppliers are saying that they see weakness in orders from the Americas. I don't think it's been weaker from us than it has been. In Asia, I would say the big change for us, outside of the macroeconomic stuff that you hear in Asia, is our high volume fulfillment business. If you remember, this is a quarter, as we've gone through, this is a quarter that's down compared to many of our other quarters. So that's where I'd say we see the weakness in Asia at this point. Back to what I had talked about earlier, everything else we see in the environment is fairly what we would expect at this point. So Rick, anything to add?

Rick Hamada (CEO)

No. And Matt, I think another theme I'm hearing in a couple of the questions is around the some of the commentary from some of the semi suppliers on the status of distribution orders. And I would just remind everybody, we are quite transparent and open on what our working capital and velocity goals are. We're very transparent about what's going on with our levels of inventory, etc. And I hope you would conclude, as we do, that we believe that we're managing that to the appropriate expectations and the kind of guidance that we're providing. So very consistent with hopefully the external expectations we set for the way we look at the market and the way we invest for that growth.

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Okay. And then just turning to TS and the PC components business, which I know has been down pretty significantly. Could you give us some, just quantify the magnitude of the drop either year-over-year and quarter-on-quarter? And do you think that's bottomed in terms of deselecting the low margin business and demand in general?

Rick Hamada (CEO)

Patrick?

Patrick Zammit (President of Technology Solutions)

Okay. So, Patrick. So the drop year-on-year was significant, was 30% in delivered dollars. So it was really significant. I would, as I mentioned before, I think we've reached a bottom in terms of volume in Q4 fiscal year 2016. Okay, I expect now the same rebound. And again, it's the result of the combination of the market conditions and also from portfolio management, whereby we have deselected some business where we know that we will not get to our results, okay?

So the combination of the two. We still have some work to do on the deselection. Now on the other hand, we expect the markets to see some improvement in the market conditions. So again, for the next quarter, we expect the quarter-on-quarter increase. So the bottom, and year-over-year, again, we believe that we see the growth again year-over-year from the second half of our fiscal year 2016.

Rick Hamada (CEO)

First half of calendar.

Patrick Zammit (President of Technology Solutions)

First half of calendar.

Rick Hamada (CEO)

Yep.

Operator (participant)

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

Jim Suva (Senior Equity Research Analyst)

Thank you, and congratulations to you and your team there at Avnet. My first question is, you mentioned that the stock buyback is your version of M&A. I wanted to ask a little bit of detail on that. First of all, can you talk about your pipeline of M&A activity? And, you know, before you start or stop and say that, "Hey, it looks pretty robust," you know, let's take a step back and look at this statistically, because if it is robust, the statistical probability of over a year of no M&A would not really support a very strong, robust pipeline.

So therefore, one's got to statistically believe, unless you want to go to Las Vegas and totally bet, but one would have to believe that your M&A pipeline has either slowed or you've been more selective, or internally, you're focused on other things. So can you help us calibrate if now maybe stock buyback is a high, a little bit notched higher up on the list than that was before. And then my follow-up, can you help us understand on your stock outlook for your share count, does that include the additional stock that you mentioned you repurchased that fall in the month of July? Thank you.

Rick Hamada (CEO)

Yeah. So Jim, it's Rick, let me take a stab, and then I'll turn it over to Kevin. First of all, starting with your last question first, the number Kevin quoted, the $64 million that we spent, that is during the month of July, so that is all in our fiscal Q1. I think we highlighted earlier in the script that the actual repurchasing activity in Q4 was $16 million. So we've just tried to make the point with the recent pullback in the stock, which really started to occur in early July, we have kept true to our word to step up and put our money where our mouth is on the buyback. Now, on the bigger question of buyback as an internal form of M&A, we just always tried to characterize that's the way we look at it.

We like investing in our own equity when we believe it's a compelling value, and we will continue to approach it that way. You're absolutely right. If you just look at the facts and say, "Hey, look, we've had less M&A activity," I cannot argue or dispute that with you. And instead of just saying maybe a robust pipeline, etc, I would like to, you know, clearly reinforce, as I think I did on the last couple of calls, that deploying capital towards the creation of future EBITDA and cash flow and the growth of Avnet, it remains a very important part of our overall profitable growth plans.

We will only do so when we find a combination of good culture, a good strategic fit, and an acceptable, sustainable, you know, projection on returns that makes sense based on the commitments we've made to all our various constituencies, including shareholders. So I cannot argue with the facts that there has been less activity, but I can continue to reinforce that this has not dropped in priority at Avnet. Secondarily, we did talk about the nature of M&A has changed from Avnet moving more from serial acquirer to more selective and strategic acquirer. That's still, you know, an overall part of the story, but that doesn't mean that we're not interested in continuing to find ways to contribute to Avnet's long-term growth perspective with intelligent investment of that capital.

Operator (participant)

Okay, thank you. Our next question is from the line of Shawn Harrison from Longbow Research. Please proceed with your question.

Shawn Harrison (VP and Senior Equity Research Analyst)

Hi, congrats on the results. Two quick clarifications before my real question. Did I miss a book-to-bill ratio for the quarter and where that is right now? And then the second part would be on the fulfillment business in Asia, are you taking on less fulfillment business this year, or is it you're seeing what's in that business weaken a little bit versus normal seasonality?

Gerry Fay (President of Electronics Marketing)

So I'll take both of those, Shawn. I'll start off with the first one. So we finished Q4 at point nine seven, which was, you know, below one, but that's not an abnormal thing for us in that quarter. It's our year-end, so we generally have very high shipping days in the June quarter. So current book-to-bill is above parity at one point three, and it continues to be-

Rick Hamada (CEO)

1.03%.

Gerry Fay (President of Electronics Marketing)

1.03%. That's right. Thank you.

Shawn Harrison (VP and Senior Equity Research Analyst)

That would have been really something.

Gerry Fay (President of Electronics Marketing)

Yeah. And it continues to trend in a positive direction. So I'd say in general, the market we serve looks relatively stable given the backlog and the bookings. If you think about the fulfillment business, we continue to monitor that on a quarterly basis, and as long as the metrics make sense to us, we continue to take the business on. As I continue to say, it's opportunistic. Right now, if you look at what we're projecting from a downtrend in that business, it's market driven, not deselection on our client at this point.

Shawn Harrison (VP and Senior Equity Research Analyst)

Okay, and then my follow-up, Kevin, as I look at trying to triangulate free cash flow for next year, do you have a CapEx estimate? And then also, you guys are making improvements in working capital management each year. Is there a certain amount of maybe a day of working capital that you could take out next year? Is there a certain target you can highlight?

Kevin Moriarty (CFO)

Sure. I'd say on the CapEx, I would range it in the $140 million-$170 million range for next year. On terms of working capital improvement, obviously, there are things that we continue to work on and are focused on, whether it be a full day that we're focused on that specific type of goal, but we are obviously very focused on return on working capital improvement and return on capital employed improvement.

Rick Hamada (CEO)

Yeah, Kevin, I'd just say, I'm, Shawn, I'm not sure we've done the calculation, but obviously you guys know our long-term goals. You know our current performance, the gaps to get there, and there are contributions both from a profitability and a velocity point of view that will get us there, so.

Shawn Harrison (VP and Senior Equity Research Analyst)

Okay.

Operator (participant)

Okay, thank you. Our next question comes from the line of Brian Alexander from Raymond James. Please proceed with your question.

Adam Tindle (Managing Director of Equity Research)

All right, thanks, guys. This is Adam in for Brian. I just had a question specific to the EMEA components business. Both you and, and your major competitor grew double digits in the quarter in, in EMEA components. You've talked about the goal of growing above the long-term industry CAGR of somewhere around 3%-4%. As you think about the drivers behind the current level of growth in, in EMEA, do you believe that this will sustain above market? And can you talk to us a little bit about that?

Gerry Fay (President of Electronics Marketing)

Well, it's Gerry, Adam. Yeah, it's always hard to predict what the market's gonna do, so we try not to do that past the current quarter. I would say, if we look at the drivers of what's growing our business in Europe, I think automotive and industrial continue to push on there. I think a lot of that has to do with the FX rates. So I think, the weak euro helping exports, particularly in some of the markets we're strong in, such as Germany. So, based on what we see, from a, you know, growth perspective and normal seasonality in Europe, I don't see any big changes on the horizon at this point.

Adam Tindle (Managing Director of Equity Research)

Okay, thanks. And maybe I'll try to tackle the you versus semi commentary in a different way here. So, working capital was up both year-over-year and sequential due to the components business. Do you expect this to normalize over the next few quarters as you focus on your return on working capital target of 28%, considering you were at 22.5% this quarter?

Gerry Fay (President of Electronics Marketing)

Well, I don't know if, Kevin, you want to take that, because that's our return on working capital. You're talking about the total-

Adam Tindle (Managing Director of Equity Research)

We're talking about the enterprise.

Gerry Fay (President of Electronics Marketing)

The EM business. So I'll let you answer the enterprise.

Kevin Moriarty (CFO)

Obviously, the disciplined approach that we follow, our stated goal to what Rick said earlier, that would obviously inventory management is a key component, but other elements are as well critical too. But it will both come from profits as well as working capital management.

Rick Hamada (CEO)

But to maybe drill down a little more specifically, Adam, I think the question you're after is, so Gerry, how do we feel, how do we feel specifically about inventory velocity at EM today globally?

Gerry Fay (President of Electronics Marketing)

Yeah, I think when you look at inventory velocity, even though our working capital grew at the end, it was in receivables. So that's really driven by, you know, the big uptick we had with customers at the end of the quarter. Inventory's been relatively stable. We grew inventory 2.4% this quarter, and I think given some of the earlier investments we made last quarter in Europe, I feel very good about where our inventory is. I would be forecasting our inventory will be flat, exiting Q1 versus Q4, given the market dynamics where we're at. I think that that's fairly good, you know, management of working capital. I think if you look at some of the things that the suppliers have said about lead times, I think lead times are very stable right now.

I think customers have become accustomed to that. And so, you know, if you think about us having to hold more inventory for customer demand, that's just not, that just doesn't make sense right now, given how well lead times are. So I think we're doing the appropriate job of managing inventory, and we have those conversations constantly with our suppliers when it comes to lead time. So I feel pretty good about our inventory position at this point.

Rick Hamada (CEO)

Yeah, and, and Adam, on our scope, our inventory turns for EM globally have been very consistent throughout the, basically the second half of, fiscal 2015, and just very, very slightly, I would say flattish, but actually just a, just a very slightly up on a year-over-year basis in Q4.

Adam Tindle (Managing Director of Equity Research)

All right, guys. Thanks a lot.

Rick Hamada (CEO)

Yeah.

Operator (participant)

Okay, our next question comes from the line of Ananda Baruah from Brean Capital. Please proceed with your question.

Ananda Baruah (Director of Research and Senior Equity Analyst)

Hey, thanks, guys. Congrats on the solid results. A couple, if I could. The first is on the cost savings and on the operating margin expansion. The margins were strong this quarter. Could you talk about the drivers of that in the context of your cost savings plan? And if you're getting more drop through than you originally anticipated, could you talk about where that's coming from and how we should expect those dynamics to kind of manifest going forward? And then I have a follow-up. Thanks.

Rick Hamada (CEO)

Yeah. Ananda, it's Rick, and I'll let Kevin weigh in as well. Just wanna kind of paint the picture a little bit here. On the margin expansion specifically, it's a combination of, I believe, really solid gross margin management as well as the cost management. So it's not 100% of cost contributing. And then, Kevin, I don't know if you wanna break down the leverage any further there.

Kevin Moriarty (CFO)

Yeah. What I would point to is when you think about where we're saying, specifically, where the savings are going to be coming from. I'd point to probably 60% coming out of TS and 40% coming out of EM. So back to Rick's point, gross margin improvement, but with the tight cost controls, is really lifting the operating margin rate.

Rick Hamada (CEO)

Yeah, and so gross margin management is, that's just a way of life for us. But some of the trends and topics we've talked about today, such as the decline in the computing components business, generally helps with the gross margin. The teams have been working within their core businesses along those lines as well. It’s a multifaceted, multilevel approach, so it's great to be able to look at specifically what's going on on the cost equation, but the margin, op margin expansion is a multifaceted story.

Ananda Baruah (Director of Research and Senior Equity Analyst)

If you guys—if we were to normalize for whatever the margin impact, negative margin impact, from the PC components business would be, would you guys have still generated leverage above what your expectations were for the June quarter?

Rick Hamada (CEO)

Yes, we would have.

Ananda Baruah (Director of Research and Senior Equity Analyst)

So then I guess to follow up on that, Rick, should we expect something to normalize back from your current leverage profile that you put up in the June quarter? Or for all intents and purposes, are you actually, you know, are you tracking ahead of where you thought you would be right now with regards to the business model?

Rick Hamada (CEO)

Yeah. You know, I would say there were some, there were some upside surprises in Q4, and we've integrated that new information into our expectations going forward.

Ananda Baruah (Director of Research and Senior Equity Analyst)

Okay, that's awesome. And then, a follow-up for me is, just sticking with PC components. You talked, you guys have talked about a couple times on the call about expecting a sequential uptick, in the June quarter, in the September quarter from the June quarter. Both, you know, kind of Western Digital and Seagate have talked about a flattish PC environment.

Actually, maybe even flattish desktop space. You know, you can make the argument that they're kind of actually talking about slightly down in the September quarter. So, I just would love you to put some context around, your comments about expecting, sequential growth during the quarter. Is there inventory build that's involved in those comments? Because inventory, through the supply chain is pretty shallow. Or are you actually expecting stronger sell out to customers as part of that outlook? Thanks.

Patrick Zammit (President of Technology Solutions)

Okay, so it's Patrick. So in fact, one of the issues we've been confronted to in the last quarter was excess inventory in the channel. This excess inventory has been addressed. It's not yet completely fixed, but it has been addressed. And so demand from all resellers is increasing, and so that seems to have a positive impact. The second thing is we continue to invest in some newer technologies, especially when it comes to memory. And we are seeing some good traction here. So we have expanded our line card with very interesting partners, and we expect to take the effects coming out of that. So these are two reasons for the sequential improvement.

Operator (participant)

Okay, our next question comes from the line of Amitabh Passi from UBS. Please proceed with your question.

Tejas Venkatesh (Associate Director and Equity Research Analyst)

Hi, this is Tejas on behalf of Amit. I just had a quick question. I was wondering if you could comment on the trends you're currently seeing in the storage and networking end market. Thank you.

Patrick Zammit (President of Technology Solutions)

The storage and networking. The networking continues to be very strong for us. It's continues to be a very attractive technology. So as I was mentioning before, what we see is a clear acceleration of the demand for converged and hyper-converged solutions. And obviously it has a positive impact, it has a positive impact on us. On the other hand, we see some slowdown on legacy storage technologies, okay? But we believe it seems to be compensated or over-compensated by the growth on converged and hyper-converged.

And then in storage, you have an acceleration also of the growth for flash array, okay? Coming, by the way, from new entrants or from new manufacturers, but also from legacy storage manufacturers. I would say that across the board, we see strong demand on the newest technologies. Legacy storage technology is being impacted, and it has had a negative impact for us this quarter. Not a massive one, but an impact. But overall, I would say the trend, we remain positive on the trend on storage, and it remains a strategic growth initiative for us.

Operator (participant)

Okay, gentlemen, there are no further questions at this time.

Vince Keenan (VP of Investor Relations)

Okay, thank you for participating in our earnings call today. Our fourth quarter fiscal 2017 earnings press release and related CFO commentary can be accessed and downloaded in PDF format on our website, under the quarterly results section. Thank you.

Operator (participant)

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