Avnet - Q4 2018
August 8, 2018
Transcript
Operator (participant)
...Greetings, and welcome to Avnet's Q4 and Fiscal Year 2018 Conference Call. At this time, all participants are in a listen-only mode. A Q&A 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. I would now like to turn the conference over to your host, Ina McGuinness. Please go ahead.
Ina McGuinness (Head of Investor Relations)
Thank you, operator, and welcome to Avnet's Q4 Fiscal 2018 Business and Financial Update Call. As we provide the highlights for our Q4 and fiscal year 2018, please note that in the accompanying remarks, we have excluded certain items, including accelerated depreciation and tangible asset amortization expense, goodwill impairment, restructuring, integration, and other items, and certain discrete income tax adjustments for 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 we translate Avnet's non-U.S. dollar-based financial statements into U.S. dollars. When we refer to organic sales, we have adjusted the prior period to include the impact of acquisitions. For additional information, refer to the non-GAAP financial information section of our earnings press release, available on our website at www.ir.avnet.com.
Before we begin the presentation, let me remind you that today's remarks and presentation contain 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. Today's call will be led by Bill Amelio, Avnet's CEO, and Tom Liguori, Avnet's Chief Financial Officer. Also here today to participate in the Q&A session is Phil Gallagher, President of Electronic Components. With that, let me turn the call over to Bill Amelio. Bill?
Bill Amelio (CEO)
Thank you, Ina, and good afternoon, everyone. I'm very pleased to share our fiscal Q4 and full year results. It was not only a strong quarter, but a promising ending to an important transformative year for Avnet. Our Q4 results showed continued strong demand around the world, with our Electronic Components group delivering their strongest results of the year, growing nearly 6% sequentially and 10% year-over-year. Premier Farnell also had an outstanding quarter, growing 13% from a year ago. Q4 was our strongest adjusted operating income quarter in the last 5 quarters, which demonstrates that we not only are growing again, but growing profitably. This is a sharp turnaround from where we were 1 year ago and is evidence of our significant transformation underway at Avnet. Avnet's transformation is a result of us focusing efforts on 5 key strategic priorities.
Let's take a look at how we're doing as a company on these five strategies. The first is accelerating our electronic components business. We exited fiscal 2018, having replaced all of our revenue from supplier program changes that affected us a year ago. We made up the entire gap for both revenue and gross profit in just a few quarters. That rebound came about through a very focused attention to expanding our line card and finding innovative ways to support our customers through the transition, demonstrating our agility as an organization. Our customers have noticed, as demonstrated by the fact that our Net Promoter Score has rebounded back to previous high levels. As a result, our Americas components business has significantly improved. This quarter, we saw the Americas region grow 5% sequentially, with operating incomes that grew 19%.
We further strengthened our Americas business by adding Tony Roybal as president of our Americas Electronics group. Tony is a strong and seasoned executive, bringing over 25 years of semiconductor channel experience to Avnet, and is ideally qualified to lead our Americas region to continued growth and profitability. We continue to add suppliers at a meaningful pace. Just this past quarter, we added three new supply lines to our electronics component business and four new supply lines at Premier Farnell. The biggest addition was our recent announcement that Microsemi is once again a part of the Avnet line card. We have deep knowledge of their products and expect to see revenue from that line grow over the next several quarters. In addition, this quarter, Avnet returned to the Gartner Top Ten High-Tech Supply Chain list, another proof point of our outstanding execution and world-class capabilities.
This recognition demonstrates Avnet's unique ability to consistently serve our customers and suppliers on their terms anywhere in the world. Our second key strategy is to scale the high-profit businesses of Premier Farnell, Avnet Integrated, and IoT Solutions. Let me start with Premier Farnell. We added Premier Farnell in order to combine the capabilities for small order quantities for customers in the development phase, with Avnet's traditional volume-based capability as customers then ramp into production. When we acquired Premier Farnell, they had exited their fiscal 2016 with negative 4.4% revenue growth and operating margins under 6%. Now, the story is quite different. Exiting fiscal 2018, Premier Farnell is growing at double-digit pace with operating income margins nearly 12%. The improvement trajectory of this business is far more than just cost synergy.
The benefit of being part of Avnet is paying off in better overall customer experience and in the development and sharing of customer leads and inventory across Avnet and Premier Farnell. Our Avnet Integrated business has spent most of the past year merging global operations from design through supply chain and manufacturing to establish a truly global business capability, serving the integration needs of customers around the world. The fruits of this effort are starting to pay off. In Q4, revenue of our Avnet Integrated business grew 7% from last year, with operating income growth of over 60% and operating income margin improvement of over 150 basis points from a year ago. In our IoT area, our end-to-end solution pipeline is growing rapidly.
In Q4, the number of new customers in our pipeline grew 59% sequentially, and the dollar value of that pipeline grew nearly 300%. These are solutions that combine hardware, software, security, cloud, and analytics that leverage our ecosystem's capabilities. Our third key strategy is to extend and deploy digital capabilities to drive growth and customer satisfaction and efficiency. I am pleased to report that our digital performance continues to grow at a rapid clip. Web-based sales more than doubled from a year ago and were up 18% sequentially. Digital transactions now represent 55% of Avnet's total transactions. This digital transformation lowers our cost to serve and provides truly unique omni-channel support capabilities, serving our customers on their terms.
We're also supporting our customers through artificial intelligence with a tool called Ask Avnet that operates across our entire ecosystem, helping customers find all the information they need to simply and effortlessly transact business with Avnet. Just this quarter, the number of Ask Avnet sessions across our ecosystem grew 200%, with the vast majority of users rating their experience positively. Avnet is leading the industry in offering AI tools to enhance the customer experience of our expanding customer base. Overall, our digital transformation efforts are by creating key strategic differentiators, from transactional functions, such as inventory management, to how we price and quote our customers, to how we manage and qualify customer leads, to how we design solutions with our ecosystem assets so, and so much more.
We've already seen both top and bottom-line improvements over the past year as a result of these initiatives, and this is just the beginning. Our fourth key strategy is to leverage our ecosystem to expand customer opportunities. Let me start with a recent example of how our ecosystem is working to bring new customers and new revenue streams to Avnet. We recently signed a deal with a cryptocurrency customer to design and manufacture a hardware wallet for cryptocurrency storage. Up to this point, the company only dealt in the software space. They reached out to an important part of our ecosystem that specializes in manufacturing solutions, Dragon Innovation, to provide consultation on developing and manufacturing their first hardware product. After finding out about all of Avnet's capabilities, they chose to have Avnet do the design, engineering, and manufacturing rather than doing it themselves.
Because of Avnet's expertise, the time to market will be much shorter, with lower risk and at lower cost. This is just one example of the willingness of new customers being served across different parts of our ecosystem, providing multiple revenue streams at higher profit margins. The number of these cross-ecosystem opportunities is growing and will continue to feed both top and bottom-line growth opportunities for Avnet. I also want to highlight an important point about our engineering communities of Hackster and element14. We announced just this quarter that these communities have crossed over the 1 million registered member mark. This is a significant milestone. We now have 1 million engineers and innovators helping to reshape the R&D model of the future. They are creating an increasing pool of business opportunities for Avnet and its ecosystem.
The communities form an increasingly valuable opportunity to our suppliers who are looking to engage engineers with their technology, as well as for customers of all sizes looking to speed their time to market and lower their costs. Our highly respected communities have unlocked access to several Fortune 1000 brands that are nontraditional but carry lucrative revenue opportunities. And finally, our fifth key strategy is to drive performance and operational excellence with continuous improvement. Tom will cover many of the financial metrics, but I wanted to highlight just a few areas where our focus on operational excellence is paying off. We've reached our $120 million annual cost savings target, and we're using these savings to not only reduce our costs, but also to fund important growth initiatives. We made significant progress in managing our operating expenses this past year.
Adjusted OpEx as a % of revenue and as a % of gross profit improved each and every quarter. Our adjusted operating margins overall increased 32 basis points from a year ago, and our adjusted operating income dollars reached $187 million this quarter, which is up $45 million from our Q1. We have lowered our net working capital days again this quarter by 7 days, and we will continue to focus on managing that in a disciplined manner going forward. I'm pleased with the significant progress that we've made operationally, and we are set up to grow profits at a rate faster than revenue growth going forward. So in summary, Q4 was a very solid quarter for Avnet and a solid ending to an important year. We're executing well, and we are accelerating our electronics component business.
Premier Farnell is adding meaningful to our profitability and our growth and our end-to-end solutions capability. Avnet Integrated and IoT have strong pipelines for revenue growth and at higher margins. Our ecosystem is truly unique and offers compelling value to our suppliers and our customers. Our digital transformation is delivering new and improved ways we serve our customers, and our relentless focus on operational excellence continues to improve our financial performance. The momentum we have exiting our fiscal 2018 is real and is why I'm so optimistic about Avnet's future and our ability to hit the financial targets we laid out in our recent Investor Day. Avnet is uniquely positioned to guide today's ideas into tomorrow's technology, providing full end-to-end solutions, including hardware, software, security, cloud, and data analytics, all the way from idea to product and from product to market.
With that, I'd like to have Tom give you some more color on our financial performance. Tom?
Thomas Liguori (CFO)
Thank you, Bill. Good afternoon, everyone. Today, we marked another quarter of solid progress. Revenues in Q4 reached $5.1 billion, an increase of 10% year-over-year. Adjusted earnings per share increased 18% year-over-year to $0.99 per share. Net working capital days declined by 7 to 86 days, all of which resulted in $236 million of cash flow from operations, the highest level in 5 years. Each of our segments performed well. Premier Farnell had another outstanding quarter. Revenues grew 13% year-over-year, and the team reached a record operating margin of 11.8%. Premier Farnell enjoys gross margins in the high 30% range and has a path to even higher operating margins by leveraging Avnet's global capabilities as it grows.
Within the electronic components segment, Avnet Integrated, another one of our higher margin businesses, grew revenue 7% year-over-year. With a keen focus on streamlining costs, the Avnet Integrated team increased operating margins 150 basis points year-over-year. Americas continued to accelerate, growing revenues 5% sequentially and operating income by 19%. Our EMEA team delivered 7% revenue growth year-over-year and continued to be our best-performing region in electronic components in terms of operating margin. Lastly, our Asia team added franchises and customers and grew at a total of 20% pace year-over-year. Just as important, they held margins steady and were able to improve working capital days while achieving this growth.
As a testament to the quality of our business growth and management team, Asia contributed more than $100 million of operating cash flow this quarter while growing revenues 20%. Going down the income statement. Gross profit percent declined 61 basis points sequentially due to a higher mix of Asia revenue. Asia, while fast-growing and generating excellent cash flow, has a lower gross and operating margin percentage, which tends to lower our consolidated metrics. Our management of operating expenses paid off this quarter. We held spending flat year-over-year while growing revenues 10%. As Bill said, we reached the $120 million annual cost savings target and reinvested the savings for growth and strategic initiatives. Our goal is to continue to maintain operating expenses relatively flat by streamlining costs and reallocating savings to our growth initiatives.
Operating margins increased 32 basis points year-over-year and 4 basis points sequentially to 3.7%. Operating income dollars reached $187 million, up $45 million from Q1. Other expense of $8.2 million was largely foreign currency expense from a stronger dollar. Our tax rate of 23.3% was as expected. Adjusted earnings per share of $0.99 beat the midpoint of guidance and is an increase of 18% year-over-year. Excluding the just mentioned foreign currency expense, earnings would have been $1.04. Turning to the balance sheet and cash flow, net working capital days improved sequentially from 93 to 86 days. Notably, cash flow from operations in the quarter was $236 million.
We ended the year with $621 million of cash, a sequential increase of $191 million, and maintained our debt leverage at 2.2 times. We sold $78 million of Tech Data stock, which completes the sale of the remainder of the Tech Data equity we own. The proceeds generated were used to repurchase $117 million, or 2.9 million shares of Avnet stock. Approximately $272 million remains under the current share repurchase authorization. This week marked the final settlement with Tech Data of the working capital and tax matters associated with the sale of our TS business. As part of the settlement, we received in August a cash payment of $120 million.
At our Investor Day in June, we laid out our road to value creation, consisting of, first, scaling our higher margin business, such as Premier Farnell, Avnet Integrated, Demand Creation, and IoT. Second, optimizing our cost structure and operating margins. And third, deploying capital to the highest returns, which includes our working capital reduction initiative, capital allocation plan, and share repurchase program. We added a scorecard to our earnings call on slide number 17 to discuss our quarterly progress in these important areas. Our higher margin businesses continue to grow and be accretive to earnings. To illustrate, in Q4, Premier Farnell and Avnet Integrated comprised just 16% of our total revenues, though contributed 34% of total operating profits. While revenues from these two businesses grew 10% year-over-year-...
We have not yet seen an uptick in this overall metric, measuring the % of total revenues coming from higher-margin businesses due to Asia's high growth rate, which this quarter was 20% year-over-year. We made significant progress in managing operating expenses. OpEx as a % of revenue and as a % of gross profit improved in each quarter during 2018. We further streamlined our cost structure at the end of June, implementing an additional $37 million of reductions as we enter fiscal 2019. This is on top of the $120 million Bill already mentioned. Operating margin improved every quarter this year. For working capital, we are ahead of schedule. This quarter, we had a 3+ day improvement in both our inventory days and payable days. We expect very good progress throughout 2019.
We redeployed the funds freed up from working capital to repurchase shares, reducing share count by 6 million, or about 5% of shares outstanding during fiscal 2018. Overall, we are one quarter into our three-year target of achieving $7+ adjusted earnings per share. Our scorecard shows we are tracking well to our initiatives. We have tremendous runway available to optimize each of these metrics and create shareholder value. Looking forward to have that September quarter, we expect sales to be in the range of $4.8 billion-$5.2 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.95-$1.05. At midpoint, guidance represents year-over-year revenue growth of 7% and adjusted EPS growth of 32%. With that, let's open the line for Q&A. Operator?
Operator (participant)
Thank you. At this time, we'll be conducting a Q&A session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'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, please, while we pull for questions. Our first question comes from the line of Joe Quattrocchi with Wells Fargo. Please proceed with your question.
Joseph Quatrochi (Director and Equity Research in Technology Hardware and Semiconductor Companies)
Okay, great. Thanks, and congrats on the quarter, guys. Couple of questions from me. First, I was wondering if you could kind of, I know in the press release it said book-to-bill is comfortably above one. I was wondering if you could give us a little bit more detail around that and then kind of the puts and takes of the demand, demand environment.
Bill Amelio (CEO)
Yeah. Book-to-bill is excellent across all regions. We're above 1.1 in every region, and it continues a good strength. So nothing more to say about that. We're pretty excited about the prospects ahead.
Joseph Quatrochi (Director and Equity Research in Technology Hardware and Semiconductor Companies)
Okay, fair enough. And then just kind of on the working capital management side, I know that, you know, you're working to reduce that, but how do you balance, I guess, your inventory levels with the sustained growth that you're seeing and the goal to bring that down?
Bill Amelio (CEO)
Well, as you can imagine, we've got many SKUs across the world, and we have an opportunity to be able to ensure that we optimize where we think that there's going to be additional demand. We can bring in product for that, but where there isn't, we want to have move it as fast as we possibly can. So we're balancing across the globe, and that's one of the changes that we've made over the course of the last couple of years, where we have the opportunity to be able to manage not only in region but across regions where we have to.
Joseph Quatrochi (Director and Equity Research in Technology Hardware and Semiconductor Companies)
Okay, thank you.
Operator (participant)
Our next question comes from the line of Shawn Harrison with Longbow Research. Please proceed with your question.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Afternoon, everyone, and my congrats on the progress in 2018 as well. First question is, maybe a bit for Tom here. You said you were ahead of schedule on the cash cycle improvement. I know the goal is less than 70 days. Would you expect a linear improvement in fiscal 2019 toward that 70 days, or since you're running ahead of plan, could you get that cash cycle reduction more than 5 or 6 days as you move through 2019?
Thomas Liguori (CFO)
Well, when we were at Investor Day, we told you at the end of 2019, it'd be 83 days. So we're ahead of schedule to that. And, you know, I think we're feeling good right now that we'll beat our 2019 number.
That said, you know, we're down 14 days, I think, in 6 months, which is really tremendous progress by all of the teams. And, you know, you should expect, while we would hope to see sequential, you know, declines after making 14 days, there may be, you know, a few up, a few down, but overall, it's in a great direction and gives us a lot of confidence to get to 70 or below.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Okay, and then as my follow-up, the incremental $37 million of cost reductions you announced here on the call, how much of that will be reinvested in the business versus a net number kind of leading to a decline in operating expenses?
Thomas Liguori (CFO)
Yeah, that was $37 million company-wide. It wasn't related to any specific business, company-wide. You know, the important thing to remember is our goal is, okay, as we grow, to hold operating expenses flat. So a good part of it will be reinvested in growth, which is, you know, the variable costs for distribution centers and commissions and things, things of that. We have a really good project going on in this current quarter. We're opening our new distribution center in Asia, and that's a good example of, you know, reapplying some funds, and we're pretty confident by the second half of this year, we'll start to get some productivity improvements, and that you'll see in the financials from that.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Thank you.
Bill Amelio (CEO)
Thanks, Shawn.
Operator (participant)
Our next question comes from the line of Matt Sheerin with Stifel. Please proceed with your question.
Matthew Sheerin (Managing Director in Technology Hardware and IT Distribution Companies)
Yes, thanks, and good afternoon, everyone. A couple of questions. The first, just following up on the question on Book-to-bill and demand. At your guidance, basically guiding a relatively flattish quarter and quarter. It looks more seasonal than anything. You've been running, particularly if you take out the market share losses, well above, as your peers have, seasonal for three or four quarters. It looks like a return to seasonality. Is there anything you can read into that? Talk generally about lead times. Your inventory days were down, so it looks like there may be signs of stabilization in terms of supply. Could you just give us more color on the demand environment?
Bill Amelio (CEO)
Well, lead times for sure, they're still extended, but they are stable, so they haven't gotten worse. That's for sure. And as far as our seasonality, we're in the range of the seasonality that we typically would have, -2 to +2, so there's nothing more to read into that.
Matthew Sheerin (Managing Director in Technology Hardware and IT Distribution Companies)
So Phil, do you have anything to add?
Philip R. Gallagher (President of Electronic Components)
Yeah. Hey, Matt, how you doing? No, look, the book-to-bill is 1 to 1, give or take, plus or minus in each region, so, you know, really positive. Lead times, just expand on those. Not a big change from the last quarter, Matt. I mean, hey, you we know there's definitely some constraints out there. We're managing through it. Even going back to the last question, our inventory, we're constantly optimizing our inventory against our supply chain needs with it from our customers, where we get good forecast. The demand environments were pretty good. I mean, the verticals, transportation/automotive continue to be strong. Industrial continue to be to look really positive. So, no, I think we're steady as we go into the next quarter, as best we can see it.
Matthew Sheerin (Managing Director in Technology Hardware and IT Distribution Companies)
Okay, that's helpful. Then, Tom, you talked about OpEx staying sort of flattish, and if we, you know, apply that to the September model and back into your the gross margin, look like that's going to be down sequentially. And that is also just a function of seasonality in Asia, typically up, and you're growing faster, looks like, in Asia than you are in other markets? Is that basically the reason why gross margins should be down?
Thomas Liguori (CFO)
I don't think gross margins will be down. I don't... So I'm not exactly sure, Matt, how you got that number. One thing to keep in mind is, you know, this is seasonally, when Asia has the peak revenues, okay? So as we get into January, February, Chinese New Year's, seasonality, that's the low point. That's where mix will help us, and we're feeling pretty good about our operating margins, getting to 4% or above, sometime the second half of the year.
Matthew Sheerin (Managing Director in Technology Hardware and IT Distribution Companies)
Okay, so you expect margins, particularly, because you also talked about Premier Farnell and the Avnet Integrated also growing faster, and obviously, they have better margins, and I don't know if there's seasonality in those businesses as well.
Thomas Liguori (CFO)
You know, yeah, actually, Q1 is typically their lower seasonality. So if you look at our current quarter in the mix, you know, what you saw in the results is fairly typical. Asia has a larger mix of the revenue.
Matthew Sheerin (Managing Director in Technology Hardware and IT Distribution Companies)
Okay, thank you.
Thomas Liguori (CFO)
Thank you, Matt.
Operator (participant)
Now, our next question comes from the line of William Stein with SunTrust. Please proceed with your question.
William Stein (Senior Analyst for Technology)
Great, thanks for taking my question, and congrats on the good results and outlook. I'm wondering if you can give us an update on the ERP implementation. How far are we along? Maybe just remind us as to what's outstanding and what's the timing to complete this effort?
Bill Amelio (CEO)
Yep, it's going great. Our Americas system is stabilized, and as I said on last call, the strategy is that we will be implementing the next phase of it in our Avnet Integrated business, and that will be happening as we speak, and that will be going live over the course of the next 18 months.
William Stein (Senior Analyst for Technology)
Okay, and then as a follow-up, if I can, any comments by end market in terms of the strength that you saw in the quarter, and in particular, any spots of weakness? We've heard from some semi and other component suppliers, some mixed things about automotive in particular more recently, and wondering what you're seeing in that regard. Thank you.
Philip R. Gallagher (President of Electronic Components)
Yeah. Hey, Will, it's Phil. How you doing? Let me just expand a little bit from Matt's question. So our two largest and fastest-growing are, and we call it really transportation versus automotive, because it's further expanded beyond the automobile, right? With what's going on with the EV and the grid and ADAS, I mean, across the board, farming equipment, et cetera. It's all getting more electronics, if you will, attached to it. So we're still seeing good demand there in all regions of the world. We play a little bit with the tier ones from a fulfillment, but you'll get into tier two, tier three. It's really an expanding market, right in our sweet spot. So that's actually going, you know, quite well for us.
Industrial, you know, probably combined with the applications of IoT, expanding—it's actually expanding the industrial customer base really is, again, a longer tail, I should say, as well as some nontraditional customers coming in. So they're not startups, but they're traditionally customers that don't have electronics in them, okay, but obviously want to start using some more applications on IoT. So actually, the industrial always strong in Europe, continues to be strong in Europe and doing well here and, and, and in Asia. I just got back from Asia last week, and, you know, things look very positive there. And of course, you have defense aero, a bigger segment for us here in the Americas, is looking to be very strong, and it's—and that's, that's, that's a sizable business for us here.
So no, I mean, again, don't want to sound overly optimistic because, you know, we never know. But right now things look pretty good in the different segments, which is why we think we're not seeing as much of the typical cyclicality either that we've seen in the past.
William Stein (Senior Analyst for Technology)
Great. Thank you.
Operator (participant)
Our next question comes from the line of Jim Suva with Citi. Please proceed with your question.
Jim Suva (Stock Analyst focusing on Technology Sector)
Thank you very much, and congratulations on the results. This is kind of more of a bigger picture question, but you can answer it however you want. You know, in the past 12-24 months, the industry has changed a lot. You know, Avnet lost some pretty big supplier contracts, and Avnet won some very important supplier contracts. Can you help us understand right now, is that because the environment's still pretty much in flux and some big changes still happening in the works? Have things calmed down? Are the suppliers looking for you to do more or less? So there's just, there was just so many changes in the past couple of years.
I just want to get a pulse on where we stand today, because you've won a lot, and I'm wondering if there's a lot more left for you to win, or it's kind of a slowdown or just kind of a pulse on the industry from a supplier-distributor relationship.
Philip R. Gallagher (President of Electronic Components)
I'd say it's more stable today than it was a couple of years ago, and I think, I would foresee it being that way with respect to the supply lines, with the exception of if some acquisitions occur in the, in the supply space, that could then change some of the rules of the game. But what we're seeing right now, we're, we're seeing stability with all our top suppliers. We spend a lot of time with them. Between Phil and I, we visited over hundreds of our decision makers out in the supply chain, and we have regular ops reviews with them and make sure that they understand exactly what our commitments are, and then we work diligently to ensure that we achieve those commitments.
Bill Amelio (CEO)
Yeah, Jim, I'll jump on that as well. For sure, you're right. The last couple of years, there's a lot of movement, okay? A lot of it caused by accelerated M&A and consolidation on the supplier side. It was accelerated, but it wasn't new. If you go back 25, 30 years, unfortunately, some of us that have been around that long, these things happen. I mean, they just seem to happen. There was a lot in a short period of time, okay? Some yin and yang back and forth. So you're absolutely right. But right now, to Phil's point, we don't sit in the supplier boardroom, so we don't know what they're absolutely thinking and what the next shoe may drop.
But we feel very good, very comfort—never comfortable, but confident, okay, in where we sit with our supplier relationships right now, and particularly with the bringing the Microsemi back is a big win, a big win for us.
Jim Suva (Stock Analyst focusing on Technology Sector)
Great. Thank you so much for the details and clarification, and congratulations on the results.
Bill Amelio (CEO)
Thanks, Jim. Appreciate that.
Operator (participant)
Our next question comes from the line of Param Singh with Bank of America Merrill Lynch. Please proceed with your question.
Paramveer Singh (Senior Analyst and Member of IT Hardware Team)
Hi, thank you for taking my question. So, you know, guys, looks like, you know, you did phenomenal with Premier Farnell margins here. But we have heard from the channel that a lot of companies like Premier and its competitors are benefiting from some sort of shortage where people, instead of buying from traditional distributors because they are getting allocated, are buying small lots from companies like Premier and overpaying for it in some ways. So do you feel that's part of the reason why you're getting such phenomenal margins in, in the Premier business? And do you think that this 12%-ish margin is sustainable, excess?
Bill Amelio (CEO)
Okay, short answer to your question, no. Now, with respect to sustainability, our game plan is to get that number higher. That's what we want. We think there's some more room to grow operating margins in the Premier Farnell space, and we're going to do it. We've demonstrated now, you know, we've almost doubled the profitability in that business unit, and we went from one that was shrinking to one that was growing. So we're very comfortable with the position that we're at. We're really comfortable with our competitiveness, and this whole play with ecosystem plays extremely well with Premier Farnell, and the lead sharing is really phenomenal between Premier Farnell and our core component business, so it's going better than we expected. So I'm very bullish on that acquisition and what it brought to Avnet.
Paramveer Singh (Senior Analyst and Member of IT Hardware Team)
Have you guys quantified any metrics on, what lead generation from the Premier business is going into your core business and, and how that's benefiting you? Or that's-
Bill Amelio (CEO)
Yeah, I'll give you, I'll give you some color. We just saw something that we weren't expecting to happen, that's happened, that's pretty exciting, is the fact that we're registering designs from Premier Farnell early, early in the life cycle, and they get passed on to the core component business. And the amount they get approved are higher than any other leads that we have in the business. They're getting approved at a rate of 66%, which is pretty phenomenal. We're now, we piloted that in Europe, and we're already at $12 million that have been approved, and that's going to grow pretty substantially over the course of the next several quarters. So that's one example. I gave an example in my remarks earlier about how the leads get moved around the-
... ecosystem, I use Dragon as one example, but that happens not only in Dragon, it happens with Hackster, it happens with Premier Farnell. All of a sudden, we get a non-traditional company lead that we're able to capitalize on and bring it into the core and start ramping up production. And there's plenty of that that's going to happen. In future earnings calls, we'll flesh that out a bit more to give you an idea of exactly why that means so much to the company.
Philip R. Gallagher (President of Electronic Components)
Yeah, Param, this is still the other direction of leads, if you will, not just from Premier to the Avnet core, but it's also Avnet core back to Premier, where we're calling on engineering and where a lot of our traditional customers are doing NPI, our new product introduction, where we have leverage and scale. You know, we're expanding with Premier Farnell into the core base. So it's really going back and forth both ways, and teams are working really hand-in-hand out there in the field.
Paramveer Singh (Senior Analyst and Member of IT Hardware Team)
Okay, great. Thanks for the color, guys. And then really quickly, I have a follow-up. You know, based on the guide, it, it looks like, I'm just trying to figure, it looks like that the core business margin might be flat, slightly down sequentially in your guide. Is that based on mix of region or is there something that, that I might be missing there?
Thomas Liguori (CFO)
Yeah, that, that again, would be higher mix of Asia business.
Paramveer Singh (Senior Analyst and Member of IT Hardware Team)
Understood. Great. Thanks a lot, guys. Really appreciate it.
Thomas Liguori (CFO)
Thanks.
Philip R. Gallagher (President of Electronic Components)
Thanks a lot.
Operator (participant)
Our next question comes from the line of Steven Fox with Cross Research. Please proceed with your question.
Steven Fox (Senior Equity Analyst in the Technology Supply Chain, Storage Industry, and Auto Technology Services)
Hi, good afternoon. First question, I was just curious on the positive cash flows for the quarter. How much would you say was a result of just your own internal improvements on working capital versus just natural improvements in growth, et cetera? And then I had a follow-up.
Thomas Liguori (CFO)
A good part of it, you know, $140 million-$150 million-ish.
Steven Fox (Senior Equity Analyst in the Technology Supply Chain, Storage Industry, and Auto Technology Services)
And so when we look at going forward, proportionally on the days improvement you're talking about, is there any reason to think that you shouldn't annualize to something similar as we go through this fiscal year?
Thomas Liguori (CFO)
Well, the, you know, I think what we've said before, Steve, which is true, every day is worth about $50 million. But what you see is, right, we're growing. So when we talked about Investor Day and getting to $7 a share, you know, we were—we're assuming that we're going to reduce working capital, but, you know, it's roughly, I think, half would get reinvested for growth. So we had, we had a really good cash flow quarter. Are we going to have four in a row of $230 million? No, I don't think so. I hope so. But, you know, it's in the right direction.
Steven Fox (Senior Equity Analyst in the Technology Supply Chain, Storage Industry, and Auto Technology Services)
Got it. And then just on the gross margins, I was wondering if we can get a little bit more detail on how much of the gross margin decline was directly due to the Asia mix, and maybe how much of the positive offsets were related to the Americas profit improvement and the Avnet Integrated growth. Thanks.
Thomas Liguori (CFO)
The good news on this is just about all of it is due to mix, and if you look at the gross profit percentage by business, they're generally improving. So that's a good sign, you know, for us going forward.
Steven Fox (Senior Equity Analyst in the Technology Supply Chain, Storage Industry, and Auto Technology Services)
Great. Thank you.
Thomas Liguori (CFO)
Thanks, Steve.
Operator (participant)
Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question.
Mark Delaney (Managing Director In technology, Consumer Discretionary, and Industrials)
Hi. Yes, sir. Good afternoon. Thanks for taking the questions. First question is a follow-up on the Asia region, and it's been for a little bit more color about why Avnet thinks that region in particular has been growing at such a strong rate and even faster than some of the other regions. And you know, on the topic of Asia, especially for China, how are your customers thinking about potentially managing through some of the tariffs, and has that changed the demand patterns at all?
Philip R. Gallagher (President of Electronic Components)
I'll take the tariff question first, and then we'll go to the first question. The good news is it only represents a small portion, 1% of our overall line card is impacted by the tariffs based upon our evaluation to date. That could obviously change if the rules change. Our Americas business will be most affected, and our expectation is that product price increases that come our way will be passed on to the customer. So that's kind of the overall game plan with the tariffs. Yeah, I'll jump on the Asia in general, and China, greater China, we should say, is the fastest growing part of the region. Again, as I said to Matt, I was just there last week. It's just strong. I mean, right now, the demand is just—it's just good.
Of course, this quarter, as Tom pointed out, the ramp-up quarter in Asia Pac, getting ready for some of that consumer base and getting ready for the holidays in December. But if I look at Asia today versus many years ago, many years ago a big part was outsourced, right? A lot of it was outsourced from the U.S., predominantly U.S. and Europe as well, into Asia Pac, you know, starting in Southeast Asia, working south to, you know, China and Vietnam, et cetera. So you still have that element that's there, okay, which is terrific. And we track well over 1,000 OEMs that do design in other regions into Asia, and we have a great tracking system, so that continues to grow.
But what you really see is organic growth now, in China, you know, particularly in China. I was there last week. The amount of innovation, okay, that's going on in engineering and their own designs and own products, that's continuing to expand. So just summarize, of course, consumer is strong. We don't play as much in that, but we do still play in that. But it's the diversification of the market. So automobile is a perfect example. I mean, ADAS, there's a ton going on in indigenous Chinese-manufactured automobiles that we're playing in today that wasn't there many years ago. So I think that kind of sums it up.
Thomas Liguori (CFO)
So great, great strength in Taiwan, great strength in China, great strength in Southeast Asia. So it's, we're hitting on all cylinders over in Asia at this sort of juncture in the verticals that Phil mentioned, both industrial and transportation, are doing extremely well.
Mark Delaney (Managing Director In technology, Consumer Discretionary, and Industrials)
That's helpful. And for us on Microsemi, which was mentioned a few times now, and on-
... a positive development. Can you give us how long that will take to fully ramp? And then should we think about that coming in at fulfillment margin, just given that, you know, I'd imagine you're maybe starting from scratch, I mean, since you lost your prior design registrations. Thank you.
Bill Amelio (CEO)
Sure. That's exactly right on that. We expect to see revenues picking up in the back half of the year, so, stay tuned. So that's a great pickup for us, as Bill mentioned, and we're pretty excited about having the line back. We have great expertise. As you know, we had that line for a long time, and we were, in fact, the best demand creator in that line for Microsemi, and we will continue to be that way as we move forward.
Mark Delaney (Managing Director In technology, Consumer Discretionary, and Industrials)
Thank you.
Operator (participant)
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment, please, while we pull for questions. Our next question comes from the line of William Stein with SunTrust. Please proceed with your question.
William Stein (Senior Analyst for Technology)
Thanks for taking my follow-up. First, a clarification. Bill, I think when you were asked about book-to-bill before, the press release said above 1, and I think your comments. I wasn't sure if you said 1.1 or 1:1.
Bill Amelio (CEO)
1.1. 1.1.
William Stein (Senior Analyst for Technology)
1.1. That's so that's what it was globally? And okay, so that-
Bill Amelio (CEO)
No, I said it was greater than that in every region.
William Stein (Senior Analyst for Technology)
Greater than 1.1 in every... Okay.
Bill Amelio (CEO)
Yes.
William Stein (Senior Analyst for Technology)
Okay, that's great. And, one more, if I can. I apologize if this was asked already, but, you know, we've, we all know that there have been shortages and extended lead times, in particular in capacitors, but also discretes. Is that influencing the bookings? Has that extended it at all? I, I know the last time we asked, it sounded like this is a problem that's being managed reasonably well and customers weren't in line down situations, but if you could provide any update on that, it'd be helpful. Thank you.
Philip R. Gallagher (President of Electronic Components)
Yeah, well, it's Phil. First of all, on the bookings, we track as best we can the bookings and make sure we're sanitizing and cleansing the bookings as they come in, so we keep as accurate as possible we can our backlog and our book-to-bill. So we do watch for what you talked about very closely and so do our suppliers, as do they. As far as yeah, some of the capacitors you talked about, MLCC, some discretes. Yeah, it's tight out there, and we're all expediting, and we're all doing all we can to keep our customers' lines moving forward. There are some challenges for sure, but it's not a—I wouldn't call it a significant impact, or a threat to future revenues at this point in time.
Bill Amelio (CEO)
I usually quote to you the cancellation rates and expedite rates across the world, and they're pretty stable, so there's no shocking news with respect to that. And you'd see that jump up one way or the other if we were starting to see issues with our customers.
William Stein (Senior Analyst for Technology)
Great. Thanks, guys.
Operator (participant)
Our next question comes from the line of Shawn Harrison with Longbow Research. Please proceed with your question.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Hi. First, if I may, a clarification. Tom, did you say that you were expecting the EBIT margin to be north of 4% in the back half of fiscal 2019?
Thomas Liguori (CFO)
Yes.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Okay. That's nice, positive.
Bill Amelio (CEO)
I'll bring some of the exact.
Thomas Liguori (CFO)
Yeah, we said operating margin, operating margin.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Operating margin in excess of 4% in the back half of 2019.
Thomas Liguori (CFO)
So that... Go ahead.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
I'm sorry.
Thomas Liguori (CFO)
No, part of that is mix-related, right? Because when we get to the second half, we're gonna have a lower percentage of Asia, greater percentages of the other businesses on top of, you know, just the continued transformation efforts we have every quarter.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Okay, and then two clarifications, additional details. What is the expected CapEx number for fiscal 2019? And then also, should we expect kind of the ongoing dynamic has been that Tech Data proceeds have been used to buy back stock. Is that what we should expect for the latest level of proceeds?
Thomas Liguori (CFO)
The CapEx is about $150 million for 2019. And, you know, in general, we're gonna stick to the capital allocation plan, which is about 50% to share repurchase over the long term.
Shawn Harrison (Senior Research Analyst in Technology and Industrial Supply Chain)
Okay. Thank you.
Thomas Liguori (CFO)
Thanks, Shawn.
Operator (participant)
Our next question comes from the line of Adam Tindle with Raymond James. Please proceed with your question.
Adam Tindle (Managing Director in Infrastructure and Security Software, Supply Chain, and Connected Devices)
Good afternoon, guys. This is actually Madison on for Adam. I know gross margins were impacted in the quarter by the mix of the Asia region. Could you guys just give us an update on how some of the other aspects are trending from a gross margin standpoint, whether it's Avnet Integrated or demand creation?
Thomas Liguori (CFO)
Yeah, generally, the decline in gross profit is because of mix, which is because of Asia. The good news is, if you look at the gross profit percentage in each individual business, they are generally increasing, I'm sorry. They are generally increasing quarter-over-quarter.
Adam Tindle (Managing Director in Infrastructure and Security Software, Supply Chain, and Connected Devices)
Okay, thanks. And then I know in the press release you mentioned that online sales doubled year-over-year. Can you just give us an update on what that run rate is?
Thomas Liguori (CFO)
So digital sales.
Bill Amelio (CEO)
Oh, digital sales. Digital sales are up 18, 18%, and we are, we had an absolutely great quarter, and we look forward to having a great year coming up. So essentially, if you look at our core business, we actually doubled digital sales year-over-year, so that's really great. And we had Premier Farnell and all of our electronic transactions that we do, almost 50% of what we do now is handled digitally.
Adam Tindle (Managing Director in Infrastructure and Security Software, Supply Chain, and Connected Devices)
Okay, great. Thanks, guys.
Thomas Liguori (CFO)
Yeah. Roughly $1 billion, Adam.
Adam Tindle (Managing Director in Infrastructure and Security Software, Supply Chain, and Connected Devices)
Okay, thank you. Roughly $1 billion, you said?
Thomas Liguori (CFO)
Yes.
Adam Tindle (Managing Director in Infrastructure and Security Software, Supply Chain, and Connected Devices)
Okay. Thank you.
Operator (participant)
Ladies and gentlemen, we have reached the end of our Q&A session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.