Please stand by, our presentation will now begin. I would like to turn the floor over to Joe Burke, Senior VP, Treasury and Investor Relations.

Thank you, operator. Earlier this afternoon, Avnet released financial results for the first fiscal quarter of 2020. The release is available on the Investor Relations' section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet's website. Lastly, some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Such forward-looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward-looking statement or supply new information regarding the circumstances after the date of this presentation. Today's call will be led by Bill Amelio, Avnet's CEO; and Tom Liguori, Avnet's CFO. Also, Phil Gallagher, Global President, Electronic Components joins us to participate in the Q&A session. With that, let me turn the call over to Bill Amelio. Bill?

Thank you, Joe. And thanks to everyone for joining us for our First Quarter Fiscal Year 2020 Earnings Call. This quarter, we delivered sales of $4.6 billion and adjusted EPS of $0.60, which were in line with our guidance. Both macroeconomic headwinds and continuing uncertainty around tariffs impacted sentiments, and buying patterns across key geographies and verticals. As a result, we saw market trends decline in the first quarter of fiscal 2020, which was a continuation of some of the patterns that began about nine months ago. No one knows exactly when the market will return to more favorable dynamics. What we do know is that macro data, including the United States Purchasing Manager Index or PMI, hit a 10-year low in September. As you know, a PMI of greater than 50 indicates industrial expansion. And changes in PMI are often indicative of year-over-year organic sales growth trends for distributors, in turn, the sales of semiconductor companies. With PMI data across United States, Europe, and China all currently below 50, we are continuing to monitor conditions closely. We think that Brexit and tariff concerns play a key role in the low PMI data across Europe and China. Tom will run through the specifics of our performance by geography during his remarks. But in general, the macroeconomic data are consistent with what we saw in the first quarter and what we're seeing in our geographies as we look into our December quarter. The Americas is the latest to see slowing. Conversely, the leveling out of sales in Asia that we saw makes us optimistic that we may have turned the corner in that geography. Meanwhile, EMEA remains under pressure. For the first quarter, by vertical, we saw mid to long-term opportunities in retail and healthcare, with positive trends in defense and…

Thank you, Bill. Good afternoon everyone. Let me start with the highlights in our key metrics on Slide 15. First quarter's revenue, operating margins, and earnings were affected by product and customer demand trends that were, to a large degree, driven by an industry-wide slowdown. We delivered revenue of $4.6 billion, slightly above our guidance midpoint and down 1% sequentially and down 9% from the year ago period. Gross margin declined 76 basis points year-over-year to 11.8%. This was mainly due to due to lower sales and margins at Farnell, with global pricing pressures and a higher mix of Asia revenue also contributing. We continue to focus on managing costs and so our SG&A expenses declined $19 million year-over-year. Progress is on track with our additional cost reductions of $50 million that we called out last quarter. These reductions will be fully implemented by the end of the March quarter. Working capital days improved from 88 days to 84, contributing to the $196 million of cash flow generated in the quarter. We continue to repurchase shares, ending the first quarter with diluted shares of 104 million, down from 115 million a year ago. Adjusted earnings per share totaled $0.60, the low end of our guidance range, with lower spending helping to partially offset the gross profit decline. Turning to business performance on Slide 16, Electronic Components results reflect the shifting demand environment. Electronic Components revenue was down sequentially at $4.3 billion and operating margins came in at 2.6% compared with 3.3% in the prior quarter. Sales for Avnet by region were as follows; Americas, with revenue of $1.2 billion, was down approximately 4%, both year-over-year and sequentially. Similar to others in the industry, our Americas business slowed during the quarter, a trend which is expected to continue into the second…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Hi. Thank you for taking my questions. Just wanted to talk about the TI transition. Can you help us understand the cadence of how that revenue will go out? Is it -- should be modeled at $500 million a quarter going out? Or Tom, I think you said something about by the summer of 2020, most of that would be out. So, just trying to understand the pace of how that $2 billion in revenue exits? And is it more on the EC side or -- and how much of that is EC versus Farnell, if you can give any guidance? Thank you.

Yes, as you can imagine, this is pretty fresh. So, what we've said was by the December of next year will be all out. And I would, at this juncture [indiscernible] more linear over the course of the year. But most likely, nothing is going to happen for the first quarter.

Okay, okay. And just as a follow-up, I mean, I'm looking at the two charts, the margin bridges that you gave. It looks like from the chart that the TI impact to Farnell is in the second half of next year, whereas the 75 bps come out of EC upfront in -- from the first quarter and more in the first half of the year. Am I reading that correct?

Ruplu, hi, this is Tom. So, as Bill said, we're not agreed to or sure of the exact timing. So, what we're trying to do with these charts is -- there's a number of things up in the mix, right? The macro slowdown at Farnell and the TI transition. So, we're trying to give you some feeling of where we expect to be in the middle of the summer. The exact timing and the sequence of these events are subject to change, but that was the spirit of these charts.

Okay. Thank you for taking my questions. Appreciate it.

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

Okay. Thanks. Good afternoon. I just want to also start on TI, Bill. I understand they've had a strategy to continue to move more direct, but what explanation do you get for why the strategy is now being accelerated? It didn't sound like there was anything operationally Avnet did to lose this business? And then also it looks like your major competitor hasn't filed a similar notification and may even be a beneficiary of some of this. So, why is Avnet seemingly on the wrong end of this one?

Well, as I said in my remarks, there was nothing to do with relationships, with performance. That's been really good. So, no issue associated with that. And on this one, you really have to talk to TI why they accelerated, the reason why they decided to make a shift. And as you know, it wasn't just Avnet; they essentially de-franchised all the Asia distributors as well. So, there's a massive move. And according to TI, they will be taking a lot of that direct. So, while there'll be one distributor that will benefit, the fact is, everyone will be losing probably about 30% to 40% of what was out there previously and that's supposed to go direct.

Okay. Maybe just one on the operating margins. Then last quarter, the explanation was that Farnell was impacted from demand moving back to broadline, and the core EC margin was actually stable at 3.3% as a result. This quarter, Farnell margins were still light and a little softer than expected, but EC margins also fell significantly. So, maybe just help us understand the explanation. Because it looks like revenue was actually little better than you were expecting, so the volume was there. I know there's a geographic mix component, but I have a hard time getting the math to blame all of it on that. So, maybe just some help with the dynamic on operating margin in the core EC business?

Okay. A couple of points. As we noted, Asia stabilized this quarter -- or stabilizing this quarter and we saw a pretty big uptick quarter-over-quarter at 9%. So, you've got to shift towards Asia, which is lower margin. And then we started to see more of the slowdown in EMEA, and now we're starting to see early days in the Americas, both of which demonstrated more pricing pressure this quarter than last quarter.

Okay. Thanks.

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

Yes, thanks. I just want to get back to the plan to fill the void left by TI in terms of the gross profit dollars. Even if it's a sort of a higher, more demand-creation, value-add business, you're still probably looking at $1 billion or more of revenue that you're going to have to make up. Is that coming -- is that a share issue or do you see the potential for some direct business to move through distribution? Exactly what is the plan to increase that because that's a decent amount of market share, it would seem.

Let me get a couple of data points, Mike but I think that's a helpful question. First of all, as you recall, a few years ago, we lost $1 billion with suppliers, with four different suppliers, and they were much higher margin. So, the hole is much bigger than we were able to fill that gap up in months, not years. Additionally, more recently, EBV, we had to shift all of our TI business away from EBV, and they rapidly were able to fill that hole back up. And the way we've been able to do that is kind of threefold. One is, of course, we will -- on new designs, design-in other suppliers. But that, as you know, is a six-month to a couple of year journey. Additionally, there are roughly 30% of the components that are commodity components that we could we could easily switch out faster. And then finally, customers tend to have dual source with the distributors, and they want to keep that balance. So, you will see a share shift of other suppliers' components back to Avnet. And by those three things, you'll see us start to fill this gap up over the course of the next year to 18 months.

Hey Bill, let me add. Hey Matt, its Phil, how are you doing? Yes, and as we fill that gap, okay, which we obviously planning to do that with the balance of the line card, that gap would be filled with frankly higher margin suppliers. So, you kind of nailed it $1 billion-ish is roughly the number right with the delta in the margin from the different suppliers. So, that's how we think we'll fill the gap and we'll fill the gap.

Okay. And then that number, that operating margin target you gave for next summer, Tom, is that contingent primarily on lower OpEx versus SG&A -- I'm sorry, versus gross margin continuing to be depressed here because of mix and pricing issues? Or you expect your gross margin to shift as well?

So Matt, in both of the Farnell and TI charts, there's a bar that has modest market recovery. So, any change in pricing will be reflected in that, and most of that is volume. Anything to the left of that is predominantly, you’re correct, OpEx.

Got it. Okay. Thank you.

You bet.

Thank you. Our next question comes from the line of Joe Quatrochi with Wells Fargo. Please proceed with your question.

Yes, thanks for taking the question. A couple, if I could. The $35 million of incremental cost reduction-related TI, is that on top of the $245 million that you've already outlined?

Yes, Joe. That would be on top, and that's the variable cost associated with the revenues.

Okay, perfect. And then, sorry if I missed it, but I was curious, any update on what your three-year forward pipeline for IoT was this quarter?

We did not give the revenue for that, but remember IoT is 15% plus op margin, so it's very consistent with what we've been saying.

It's continuing to grow. And the game plan now is to convert that to revenue. So, we could start talking about both pipeline and revenue in future quarters.

Okay. So, it's up from the, I think, 6.30 last quarter?

Yes.

Thanks.

Thanks Joe.

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

Hi, afternoon everyone. Tom I was wondering maybe you could talk about the working capital associated with the approximately $2 billion of revenues at TI? What kind of cash flow will you see in terms of a benefit as this business exits?

No, I appreciate that question. So, $2 billion is right, $500 million of roughly a quarter. Most of the inventory is consigned. So, you're looking at about 60 days' worth of receivables, $300 million plus or so of cash flow associated with it.

And you would see that if it winds down by -- let's say, middle of next summer, you would see that type of cash flow come out over the next nine months, give or take?

Correct. I mean, those receivables are good. Their current customers -- and that will come in as the sales wind down.

Got you. And then as a follow-up, the December quarter guidance, does it assume any further margin erosion at Farnell? Or is it more just the regional mix dynamics associated with the broadline business?

Farnell, which we said in the script, Shawn, is seems to have stabilized. So, we're not assuming further margin or pricing erosion. Most of the decline you see from September to December associated with what Bill was talking about, right, that we just started seeing the Americas slowdown. We continue to see some in EMEA and we are assuming some level of pricing pressure during that time.

Okay. Thank you.

And Asia, continuing. Asia's looking very stable, very solid, which is good.

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

Hi, thanks for the question. In your slides -- slide 20, you have one bar chart; I'm showing 60 basis point positive margin contribution from recapturing lost sales. Can you elaborate on why the timeline is after summer 2020 and not sooner? And then I have a follow-up.

Sure. Because there's a lag time between when you win the business and when it actually transitioned and you saw showing revenue in the P&L. So, Tim, we've tried to be conservative here and assuming we gain some business in the first half the year, we'll probably see it in the P&L for the second half of the year.

Got it. And then I think you mentioned the market improvement could help margins by 30 basis points. Can you elaborate that the market improvement that you are referring to, does that mean the semi cells return to growth? Or just flattish is kind like stabilizing compared to the current involvement? Thank you.

So market improvement varies by slide, but it's basically reflecting some upturn in revenue which would be accompanied by very small perhaps improvement in pricing. That's what market improvement is. So, for instance, what what we're trying to say in Farnell is we know historically that three quarters after a downturn, they typically get a 6% or higher revenue growth. So, market improvement in that is typically we're showing at 6% revenue increase from today through that period. And we're modeling based on what we're seeing in Asia, which is now three -- two or three quarters later, now they have a 9% sequential growth. So, I think if you do the math on those, some that pretty close to these numbers.

Got it. Thank you.

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

Hi, this is [Indiscernible] on for Mark. Thanks for taking the question. My question was what are some key metrics Avnet is watching for when the current downturn could bottom?

There are several factors that we're looking at. For example, we measure stated lead-times from suppliers versus actual. So, we wish that delta. And as that starts to shrink, we know that things are starting to put it back up. We will also look at gross profit percentages through time. And we look at ASPs through time, when we look at cancellation rate and ex that irate. All those together give us a basket of what we think is a predictor of what we think the economies are going.

Okay. Thanks. And then just as a follow-up, are you anticipating any impact from margins from the TI business due to a reverse leverage effect given that there's potentially more -- potential for more fixed cost of Avnet to be spread over less revenue?

Just -- yes, we're going to be taking out the variable cost. And the game plan over time, of course, as we place that revenue as we have in previous situations like this. So, we would may have a temporary couple of quarter issue, but we will work our way through that.

Let me add, too, since there's been a couple of questions on market recovery. We're not trying to predict a market recovery here. What we're trying to give all of you is our margins without a market recovery. And if one were to occur based on historical, what our margin would be. And we'll leave it up to you to predict the timing of the market recovery.

Thanks.

Thank you. There are no further questions at this time. Mr. Amelio, would you like to make any of your closing remarks?

Sure. Thank you, operator. I appreciate that. Today, we reiterated a clear plan that allows us to improve upon the aspects of our business that are, of course, within our control. As a result of these plans, Avnet will be even better positioned to accelerate its growth when the demand environment improves. As always, we thank you for your interest in Avnet. We look forward to reporting to you our progress in the coming weeks and months. Thank you. Have a great day.

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