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Avnet (NASDAQ:AVT)
Q2 2019 Earnings Conference Call
Jan. 24, 2019 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Please stand by, our presentation will now begin. I would now like to turn the floor over to Ina McGuinness. You may now proceed. Thank you.

Ina McGuinness -- Investor Relations

Thank you operator. Earlier this afternoon, Avnet released financial results for the fiscal second quarter of 2019. The release is available on the Investor Relations section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release, as well as on the IR section of Avnet's website.

Lastly, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not the guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's next most recent Form 10-K and 10-Q and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this release.

Today's call will be led by Bill Amelio, Avnet's CEO; and Tom Liguori, Avnet's CFO. And also, Phil Gallagher, global president, electronic components is here today to participate in the Q&A session. And with that, let me turn the call over to Bill Amelio. Bill?

Bill Amelio -- Chief Executive Officer

Thank you, Ina, and good afternoon everyone. I'm pleased to report another strong quarter of financial performance with Avnet. We exited calendar 2018 in a very different place than a year ago. Our execution is solid, and our strategy is really starting to pay off with growth across the globe and across our unique ecosystem.

Revenues for fiscal second quarter were up double-digits, and adjusted diluted earnings per share were up a healthy 33% from a year ago. Avnet continues to show strong operating leverage from the transformation initiatives we began roughly two years ago. We remain on track to meet the commitments we made at our Investor Day last June. Importantly, Avnet now has real momentum with our customers and our suppliers, and I will share a few sample of that in my brief remarks today.

The current condition in the marketplace are decidedly mixed. There's definitely a slowdown in Asia. It's unclear when that will correct itself. However, the Western markets of Europe and the Americas are steady with several areas of strength.

Defense and aerospace is very healthy, and Avnet's position in that vertical is improving. Industrial demand remains strong, and even transportation is doing well. Transportation is an area where unit demand has moderated, but content opportunities continue to increase, which is a growth driver for us. Now I'd like to give you a brief update on the progress we've made this quarter with our five strategies I've laid out for you previously.

The first is accelerating our core electronics component. In our Americas region, execution has improved dramatically in recent quarters. Revenues in Q2 were up nearly 8% from a year ago, and our forward indicators show a healthy and stable pipeline. This past quarter, the Americas region achieved its second consecutive quarter of design wins dollar growth which is an area now showing good growth and momentum.

Our customer satisfaction in the Americas has improved significantly, as evidenced by an increase in our Net Promoter Scores. And importantly, supplier confidence has been restored, which is opening up new doors for growth and collaboration. I want to thank the Americas team for the great work that they've done getting the Americas region back on very solid ground and growing again. And there's a lot more to come.

Europe remains steady with outstanding performance. Our Europe team delivered year-over-year double-digit revenue growth constant currency. It continues to be our most profitable region. In Asia, even though a slowdown has clearly hit the region, the team delivered over $2 billion in revenue, which represents a strong double-digit increase from the year ago.

The extent of the current slowdown in Asia is difficult to predict. During the quarter, we saw order weakness accelerate as time progressed, which makes calling the bottom somewhat challenging. We're monitoring our indicators in Asia very carefully, but we believe our forecast for the coming quarter captures the current situation appropriately. Our interconnect passes and electromechanical business also had a very strong quarter.

Revenues grew over 16% from a year ago, with margin higher than our corporate average. On the supplier front, I'm pleased to note that Avnet added two new global supply franchises to our line card this quarter and also expanded four regional supply franchises as well. These additions and expansions are indications of the unique value suppliers see in our ecosystem and our confidence in Avnet as a driver of growth. Our second key strategy is scaling our high profit margin businesses.

Let me start first with Premier Farnell. Revenue in the business grew 5% in constant currency from a year ago, but operating income grew almost 19% due to our cost reduction efforts. There was some softness in single board computing sales this quarter, which contributed to the slowing of growth, but new releases are coming soon that we are confident will return us to the past growth level. During the quarter, Premier Farnell added seven new global supply franchises.

Suppliers are recognizing how aligning with Premier Farnell gets their product into our unique ecosystem and also gives them access to a large number of customers and development projects under way at Premier Farnell. Avnet's design service revenue growth is another notable highlight. If we look at Avid, our dedicated design house that provides design services, simulation, testing and prototype assembly across a number of key verticals, revenue in the second quarter more than doubled from a year ago with significantly higher margins than our company average. Avnet's design service capability is a critical part of our overall ecosystem value proposition, which helps our customers get their product designed, tested and manufactured more quickly and cost effectively.

Our third key strategy, expanding our digital capabilities. Our digital investments are starting to show tangible benefits. For example, we have invested in specific tools to help our "turnaround time." In the areas where we have highlighted this capability, we have seen a significant reduction in turnaround time, as well as margin output. We plan on rolling out this capability more broadly over the next several months.

We've also invested in tools that tie our entire ecosystem together to improve the customer experience in lead profit. We're seeing strong gains in productivity and demand generation as a result. I will share more specific examples of this in the near future. Our IT roadmap has been greatly simplified.

We have prioritized some critical SaaS-based tools in areas such as pricing and data management that have yielded savings, process simplification with functional enhancements. On the e-commerce front, growth continues through our digital channels, and we remain on track to hit our stated goal of $1 billion of revenue through our e-commerce channels this fiscal year. Support strategy is leveraging our ecosystem to expand customer opportunity. Avnet continues to rapidly expand its IOC revenue pipeline with new customers and new opportunities.

In fact, we're adding new opportunities at an accelerated rate. In the first half of fiscal 2019, the three-year total IOC pipeline more than tripled to exceed $500 million. This number does not include device revenues we are already supplying to the market but represent end-to-end solutions of devices, software, gateways, security and cloud applications that are in development with our customers. Our ecosystem is starting to create a bit of a [Inaudible] effect.

Let me briefly explain what I mean. First, we have partners that work with us who can see that our end-to-end capabilities can see their time to market, reduce cost and reduce complexity in the development cycle. So they are sending leads and opportunities to Avnet as a result. A prime example of this is Microsoft, which I'll describe in just a moment.

In addition, other leads are being generated within the Avnet ecosystem as customers needing particular services are now being exposed to the other parts of Avnet ecosystem. This is creating the opportunity of multiple sources of revenue from a given customer. Avnet's ecosystem is also expanding our customer reach to include a growing list of non-traditional customers. For example, just this quarter, Avnet closed the following.

A multimillion-dollar deal with a breakthrough smart health company. Avnet provided the hardware designed through Avid, and the customer then decided to take advantage of Avnet for supply chain and component supply to get the solution to market. We closed several multimillion-dollar cryptocurrency solution opportunities that leverages our ecosystem from design to manufacturing. And I'm happy to report we recently began accepting cryptocurrency payments, which is a valuable service for certain customer types.

We also made a critically important acquisition that will greatly enhance our ecosystem and IOC capability by purchasing Softweb Solutions. Softweb has a proven track record bringing IOC solutions to market and possesses world class A.I., data advisory and digital development services. This is a major addition to our ecosystem. Softweb now brings the software, A.I., cloud and analytics expertise necessary to offer complete end-to-end solution for our customers.

I also want to make a point about Avnet's strategic relationship with Microsoft. Avnet is an important partner for Microsoft's premier business, Microsoft Azure, and was selected the first Azure Sphere distribution partner. As a result of this partnership, Microsoft is now leveraging Avnet's ecosystem and IOC capability to help its Azure customers get their IOC solutions to market faster. We have received significant tier one customer orders and engagements directly from Microsoft, and a great example of this is Starbucks.

Using the Avnet Azure starter kit platform, we've partnered with Microsoft to design an Azure-based solution that brings predictive capabilities and cloud connectivity to Starbucks coffee machines. We have begun shipments of this solution and will ramp up volumes over the next several months. This is just one of many opportunities we're working with Microsoft to bring secure IOC solutions to market, leveraging our unique ecosystem. The last of our five strategies is focusing on driving performance and operational excellence with continuous improvement.

Our results this quarter clearly demonstrate the earnings leverage we are realizing through our transformation and cost optimization efforts. An example from this quarter is how we successfully migrated certain sales operations and customer service functions to low cost regions here in the Americas and in other areas of the world. We have managed to reduce administrative and support costs while simultaneously improving our customer satisfaction scores and relationships. We remain on track to deliver to our committed target of $245 million in our overall savings over the next three years.

And Tom will talk more about that in a moment. In summary, Avnet is executing well and has come a long way from a year ago. We are optimistic and confident about the things we can control and have contingency plans in place for things that are outside our control. Our ecosystem is truly unique, and the value we offer is creating real benefits for our suppliers and our customers.

Our IOC strategy is accelerating with strong growth in our customer pipeline. Many of the solutions we are working with our customers to bring to market will make a real difference in the world and drive continued growth and profitability as well. With that, let me turn the call over to Tom for some additional commentary on our financials. Tom?

Tom Liguori -- Chief Financial Officer

Thank you, Bill. Good afternoon everyone. We are pleased to report strong results this quarter with year-over-year sales growth in a streamlined cost structure. Both of these contributed to adjusted EPS for the quarter of $1.04, a 33% improvement year over year and above the midpoint of our guidance range.

Our financials for the second quarter reflect a number of year-over-year improvements. Sales increased 12% to $5.05 billion. Adjusted diluted earnings per share increased 33% to $1.04. Americas' acceleration continued with sales growth and year-over-year margin expansion.

Selling, general and administrative expenses declined by $12 million. Our diluted share count is 10 million shares lower, an 8.5% reduction from last year. And our quarterly dividend payment of $0.20 in the second quarter was 11% higher than the prior-year quarter. In total, we returned approximately $200 million to shareholders in buybacks and dividends as we remain confident in our long-term prospects.

Let's turn to our business performance starting with Premier Farnell on Slide 14. In the quarter, Premier Farnell sales grew 2.8% year over year, with operating income increasing 19%. Sales growth in constant currency was 5.2%. Operating margins expanded to 10.8% from 9.3% in the prior-year quarter and consistent with Premier Farnell's first-quarter margins.

Turning to electronic components. The Electronic Components segment delivered year over year sales growth of 12.4% to $4.7 billion with an operating income margin of 3.4%, up from 3.1% a year ago. Americas posted sales growth of 7.5% year over year, 2.3% sequentially and continued to expand operating margins on a year-over-year basis. Our EMEA region continues to perform well, delivering 10.8% sales growth year over year, or 14.5% in constant currency, and led all regions in operating margin performance.

Asia delivered $2.1 billion in sales this quarter, a 15.2% increase year over year. While we continue to post strong sales growth in Asia this quarter, we are seeing a flowing in the book to bill ratio, which ended at 0.8 to 1 in the second quarter. Moving down the income statement. Gross margin of 12.5% was flat sequentially, so down 85 basis points year over year due to the higher mix of Asia revenue.

We continue to demonstrate our ability to optimize our cost structure by reducing selling, general and administrative expense by $12 million compared to the prior-year quarter. We implemented several actions to further optimize cost as part of our long-term plan of $245 million of cost reductions from streamlining and automating processes, integrating back offices and moving to lower cost regions. Building on Bill's earlier comment, this quarter we realigned parts of our IT, distribution and business operations. These actions resulted in a $62 million integration and restructuring charge, which included non-cash impairments and severance cost.

With our ERP systems now stable and enabling Americas' sales growth and margin expansion, we refocused our resources to more strategic applications such as CRM, pricing and digital capabilities, all of which we expect to further facilitate margin expansion. As a result, we impaired select IT assets that are being replaced but which we no longer plan to utilize. In distribution, we are realigning our warehouses for greater efficiency and lower cost, as well as to prepare for various Brexit scenarios. Globally, we continue to manage our labor costs and headcount as we optimize structure and process.

Altogether, we expect these steps will deliver quarterly savings of $10 million or more once fully implemented. Adjusted operating income totaled $178.8 million, up 27.5% year over year. Adjusted operating income margins increased 44 basis points year over year, so defined 5 basis points sequentially to 3.5%. Our adjusted tax rate was 21%.

We had unfavorable currency loss. This decreased our adjusted EPS by $0.02. Turning to the balance sheet and cash flow statement. This quarter, net working capital days rose sequentially by 3 to 86 days.

While working capital will fluctuate up or down in any given quarter, we continue to make progress with our inventory payables and receivables management. We expect to lower our days working capital to the low 80-day range by the end of our fiscal year. Our long-term target remains below 70 days. Cash provided by operations in the quarter was $72 million.

While we had strong earnings, we made tax payments of $56 million for gains associated with the sale of our TS business, which impacted cash flow. We returned $197 million to shareholders in the form of a $0.20 per share dividend and share repurchases totaling $175 million. We also acquired Softweb. Combined, these increased our net debt position by $282 million in the second quarter.

Our gross debt leverage increased sequentially to 2.4, still a conservative level. As most of you know, we provide a quarterly scorecard to track our progress to plan for achieving a $7 in earnings per share. Looking at Slide 17, which we call our scorecard, you can see our progress. This quarter, as a percentage of our total sales, our mix from higher margin businesses decreased due to the fast growth in Asia.

Hence, you see a yellow on our progress report. We continue to see opportunities to grow higher margin sales. The most recent example would be our acquisition of Softweb and its ability to accelerate our IoT offerings. We saw a slight uptick in working capital days, although we think this move to yellow will be short lived.

All other metrics are green, with every operating and capital metric showing improvement. Looking forward, we see a sequential decline in sales due to slowing in Asia. All other regions are expected to be flat to up sequentially. Even with lower sales, we expect a sequential and year-over-year growth in adjusted EPS as a result of our cost optimization programs and lower share count.

In the March quarter, we expect sales to be in the range of $4.5 billion to $4.9 billion. We expect adjusted EPS to be in the range of $1.03 cents to $1.13. At midpoint, guidance represents year-over-year adjusted EPS growth of 6% and a 2% decline in sales. Overall, we are pleased with our second-quarter results and we expect continued progress in growing adjusted EPS in spite of an uncertain macro environment.

With that, let's open the line for Q&A. Operator? 

Questions and Answers:

Operator

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 Adam Tindle with Raymond James. Please proceed with your question.

Adam Tindle -- Raymond James -- Analyst

OK, thanks and good evening. I just wanted to start on the Americas region. I know accelerating Americas was a key component to the Analyst Day bridge to the 4.5% to 5% operating margin and $7 EPS target. I've seen a couple of quarters of revenue growth turnaround in the region, but I'm hoping that you can comment a little bit more on margins in the region.

Just how far are we below historical levels at this point? What inning are we in? And talk about the steps that you're taking, what still needs to be done to get that to optimal levels. So magnitude, timing and logistics of Americas profitability.

Bill Amelio -- Chief Executive Officer

Thanks, Adam. Bill. I'll give you some of that data, some of course a little bit more than I want to give at this time. And to give you what inning it is, I think that's a good way to characterize where we are.

I'd say we're in the third inning. We're now actually seeing a lot of momentum in the Americas with surprising on the upside. And we continue to see positive signs in front of us. As we think about the system and issues we talked about in the past are all behind us now.

We've put in place many improvements and enhancements, and we're now essentially leading the way with the Americas. With respect to how far we are off historic levels, we're not where we want to be, and we've got work still to do to get to historic levels. But we're clearly way above where we were just a couple of years ago. So we made great improvement, there's still more opportunity to go in the future.

Adam Tindle -- Raymond James -- Analyst

OK. And maybe just as a follow up, I wanted to ask maybe one for Tom on the March quarter guidance. I think you're implying that revenue declined 7% sequentially at the midpoint but flattish operating profit dollars sequentially. So I'm just hoping that you can walk through the assumptions underlying this, because we typically see some negative operating leverage with a quick change in revenue growth like this.

But I know there's some cost initiatives. So just some of the buckets that gave you confidence that you can keep the profit dollars flattish while revenue declined sequentially.

Tom Liguori -- Chief Financial Officer

Sure. I'd say the first is mixed. We'll have the more profitable mix. Most of the revenue decline is Asia.

Plus, it's Chinese New Year, so this is when Americas and EMEA's kicking fairly strong, Adam, so we'll have a higher gross profit. With respect to the OPEX, we talked about some of the initiatives are in place. Over time, that'll be a $10 million improvement in OPEX per quarter. Expect $3 million or $4 million of that to pop up in this coming quarter.

Going down the income statement, interest expense and other income expense, expect those to stay about flat. And I believe in the press release we talked about lowering the share count slightly to about 110 million shares. But I think if we go through that, we'll come up with midpoint of our guidance, about $1 [Inaudible].

Adam Tindle -- Raymond James -- Analyst

OK, and just to clarify on the cost, the $245 million in cost cuts. Sorry if I missed it, but how much have you achieved thus far?

Tom Liguori -- Chief Financial Officer

So in this coming quarter, expect $3 million-plus improvement in the operating expense line.

Adam Tindle -- Raymond James -- Analyst

OK. But of the $245 million that you outlined at the...

Tom Liguori -- Chief Financial Officer

Oh, I'm sorry. We're about a third of the way identified. So a little over $80 million.

Adam Tindle -- Raymond James -- Analyst

Got it. OK, thank you very much.

Tom Liguori -- Chief Financial Officer

Thank you.

Operator

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

Shawn Harrison -- Longbow Research -- Analyst

Hi, afternoon everybody.

Bill Amelio -- Chief Executive Officer

Hi, Shawn.

Shawn Harrison -- Longbow Research -- Analyst

If I may on just looking at it more on a year-over-year basis, outside of Asia, are you expecting any year-over-year declines, either in the Americas or EMEA? And was the book to bill above parity in the Americas and in EMEA for the December quarter?

Bill Amelio -- Chief Executive Officer

I'll start and [Inaudible]. As we exited December, we were at parity or above in the western regions, and we're, as we said in the press release, 28 in Asia. And we're still seeing positive momentum in both the western regions.

Shawn Harrison -- Longbow Research -- Analyst

And so the expectation is they would be flat to up year over year in the March quarter in terms of revenues?

Bill Amelio -- Chief Executive Officer

That's correct.

Shawn Harrison -- Longbow Research -- Analyst

And then as a follow-up I guess within Asia, I'm guessing you're seeing an increase in order cancellations and things of that nature, but are you getting any visibility in terms of when it may bottom out? I know it's a tough time of year to figure that out with Chinese New Year, but what are the metrics that have turned negative for you in Asia?

Bill Amelio -- Chief Executive Officer

Well, you hit the one that's a big one, which is cancellations. Definitely has been more erratic than it was previously. And we're looking at backlog orders, lead times, every metric that you can imagine to make sure we're able to call that. And as I talked about in my remarks, we think we called it right to where the guidance is, and we think we've been [Inaudible] a little conservative.

So we think we've got this [Inaudible] contained.

Shawn Harrison -- Longbow Research -- Analyst

OK. And then last if I may. Tom, with the goal for cash cycle days to exit the year, do you have a target for free cash flow in the back half of the fiscal year in terms of dollars or anything think that you can share.

Tom Liguori -- Chief Financial Officer

OK, so this quarter, to answer your question, this quarter cash from ops was about $70 million. And we'd expect in the third quarter to be $150 million plus.

Shawn Harrison -- Longbow Research -- Analyst

Perfect. Thank you so much.

Bill Amelio -- Chief Executive Officer

Thank you.

Operator

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

Steven Fox -- Cross Research -- Analyst

Hi, good afternoon. I was wondering if you could dig in a little bit more on the Premier Farnell performance. You mentioned some slowing on certain compute products. What was that related to, and how do you see that rectifying? And then from the operating profit leverage you're getting, like where do we think we are just specifically with Premier Farnell on getting more leverage over the next few quarters? And what kind of growth profile do you think it has now and, say, the next few quarters as well.

Thanks.

Bill Amelio -- Chief Executive Officer

Sure. So as you know, Premier Farnell is one of our high-margin businesses. We've seen growth at 7% with 50% conversion rates. So that's good.

And yes, it slowed this quarter. We point it through board computing. And that was due to some revs that are out there, and we see that there will be improvements with respect to that product roadmap and that we should see our growth bounce back again. So we're pretty certain that we're going to see that come back again.

Additionally, we've been working diligently on the cost position in Premier Farnell computing to make improvements there, and we've still got a ways to go there from the standpoint of us continuing to add more margin percentage points up on the board for Premier Farnell.

Phil Gallagher -- Global President, Electronic Components

Yes, Steve, this is Phil, but let me just jump in. We've been maniacally focused in the last couple of years on the operational side, OK, in the stabilization side of Premier Farnell, and that's really where we've been driving. And we see it as a high growth, as Bill pointed out. Well, we're really pleased frankly at the point of our operating margin growth as compared to the revenue growth, OK? That allows us to invest and double down in Premier Farnell, which is what we plan to do.

We've got other investments to get to that growth where we need to see it.

Steven Fox -- Cross Research -- Analyst

That's helpful. And then just as a quick follow up, I understand that you're hopeful that age Asia is sort of bottomed. But if we go on to that scenario, I guess when I look at what you just talked about with Premier Farnell and some of the other digital properties, are you saying that your mix now is helping margins for the next few quarters, or is there still some seasonal swings we have to think about? Thanks

Bill Amelio -- Chief Executive Officer

Let me correct one thing. We didn't say that Asia bottomed out. We simply said that in our assumptions on how we put our guidance together, that we think we've taken into account what we think it's going to be in the quarter. So I think just...

Then the other question was what?

Tom Liguori -- Chief Financial Officer

The mix.

Bill Amelio -- Chief Executive Officer

Yes, the mix will be definitely more heavily weighted in the west than the east in this coming quarter, so that's why we get a margin uplift associated with that.

Steven Fox -- Cross Research -- Analyst

And beyond that, Bill, do you have any sort of thoughts on trend line with mix?

Bill Amelio -- Chief Executive Officer

Well, I think it will follow the same seasonal pattern we've previously seen. So I think we'll continue to see robust growth in Asia. I mean, Asia has been fast growing every region.

Tom Liguori -- Chief Financial Officer

And then you've pointed out too, Steven, although we saw the book to bill start to slide through the quarter in December, we still shipped over $2 billion in Asia, which is a near record. So that was the highlight, but obviously the book to bill started to deteriorate.

Steven Fox -- Cross Research -- Analyst

Understood. Thank you.

Operator

Our next question comes from the line of Param Singh with Merrill Lynch. Please proceed with your question.

Param Singh -- Merrill Lynch -- Analyst

Hey, great. Thank you for taking my question. So firstly, going back to the Premier business here, I understand you're going to get some leverage here. But the operating margin you had a couple of quarters ago was 11.8.

What really gets you to kind of like a 15% margin that you've been targeting or thinking about? And then I have a follow up.

Bill Amelio -- Chief Executive Officer

If you recall, we put together our $245 million roadmap. One was backlog and integration, and a portion of that is what we're going to be doing between core Avnet business and Premier Farnell in areas such as legal, HR, finance and global information systems, etc. So we have room to make some more moves there. We also have a pretty solid strategy with low cost jurisdictions.

We're able to grow and use a low cost area versus growing in high cost areas. So those few things will essentially continue to improve our operating expense line.

Param Singh -- Merrill Lynch -- Analyst

Then how come, like it was down in the last couple of quarters. Any reason why for that?

Bill Amelio -- Chief Executive Officer

What was down again, Param?

Param Singh -- Merrill Lynch -- Analyst

The operating margin in Premier Farnell the last couple...

Bill Amelio -- Chief Executive Officer

Well, I just think you're seeing quarter to quarter mix. We've clearly got a path to get much higher. We just haven't told you exactly how high it's going to get. But we've got, it's definitely a few points ahead of us.

Param Singh -- Merrill Lynch -- Analyst

OK. And then as my follow up, what are you seeing in terms of demand between your IP&E and then your regular semis business, because it definitely looks like IP&E is helping revenues and margins at this point? And is there any difference in demand, because some of the bigger OEMs on the semi side are looking at much weaker trends.

Phil Gallagher -- Global President, Electronic Components

Yes, let me touch on them, Param, this is Phil, thanks. Well, it's called a mixed bag. I mean, our IP&E business, to your point, is absolutely growing at a nice clip, OK? We've got a great focus on that, we've got a separate division in Europe with Abacus that's really killing it. We've got a real focus in Asia and the Americas as well.

So we're seeing nice double-digit teens kind of growth year on year in the IP&E. You really get into the lead times, and that's really the leading indicator. And the lead times are really all over the map. Everyone is assuming the lead times in all caps are coming in due to some announcements for some large consumer companies, and frankly we're just not seeing that yet.

So some of the capacitors, they might be stabilizing but they're stabilizing at, Param, I'm looking at the sheet at 38 weeks, 42 weeks, 30-plus weeks. So it's not like all those products getting freed up. And all indications are, particularly in passives and some tax and resistors, the lead time is going to stay up there for a little while. It can always change.

Even discretes, discretes' actual lead times, you go back several quarters, we're in the 10 to 16 weeks or at the 24 to 25 weeks now, OK? Again, it's a mixed bag. Obviously memory, we know what's going on in memory. So our mix today is still about that 23% plus. IP&E balanced semiconductors in total.

Param Singh -- Merrill Lynch -- Analyst

Right. Thank you so much for all the color, guys.

Bill Amelio -- Chief Executive Officer

Hope that helps, mm-hmm.

Operator

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

Matt Sheerin -- Stifel Financial Corp -- Analyst

Yes, thanks. Just following up on the guidance by region. If you sort of do the math on sort of flattish to slightly up year-over-year growth in both North America and Europe, it looks like Asia is going to be down 20 to 25% sequentially. I guess the question there is, I understand the bookings, weak macro, but do you think there's going to be an inventory overhang? Because obviously, there's probably a lot of inventory from your customers, and their own demand is weak.

So yes, I think, Bill, you talked earlier about really not knowing whether Asia is going to bottom this quarter or not. What's your thoughts there? And will we start to see pricing pressure because of some of that inventory issue?

Bill Amelio -- Chief Executive Officer

Well, we're managing working capital very, very diligently, even though it went up a couple of days. This quarter we expect that to come back down again, so we are in fact all over this subject, and I'm not concerned with us having a glut of inventory over in Asia. We will get a move.

Tom Liguori -- Chief Financial Officer

Yes, Matt. I'll add that, so we indicated Asia. What we really track first is the cancellations and adjustments in backlog. And what we saw in Asia came to fruition as we saw in our book to bill come down, OK? And we'll continue to manage that.

In the west, and again we look at cancellation rates maniacally, we're not seeing major adjustments in number of days or dollars of cancellations or adjustments from our customers. As we do, to Bill's point, we move on that immediately. And our suppliers work with us on that as well.

Matt Sheerin -- Stifel Financial Corp -- Analyst

Yes, no, I guess the question also was, so as customers, particularly Asia, sit on more inventory, don't you think they're going to go through a correction that might hurt you again going into the June quarter?

Tom Liguori -- Chief Financial Officer

Well, we don't have insights all over our customers, Matt. What we track is the MRP. Again, 50% of our business is coming in from an MRP and some kind of schedule forecast sharing. So we will see it in that, OK? And again, right now, you're not seeing that in any real fashion, let alone a dramatic one.

But I'm sure there's some excess inventory out there. I'm sure there is.

Matt Sheerin -- Stifel Financial Corp -- Analyst

Yup, OK, fair enough. And then as you look to the June quarter, and I appreciate that you haven't given any guidance there but you are looking at continuing to improve operating margins; but if you look at kind of the seasonal, if you're just seasonal in revenue in the June quarter, you'll still probably be down year over year. So the question is will you still be able to grow your operating margin year over year with some of the initiatives that you've been doing? Or is that going to be tougher?

Tom Liguori -- Chief Financial Officer

First of all, I think you'll continue to see improved mix. You'll definitely see it in March. The expectation, you'd see it in June as well, Matt. And both of those help with our consolidated gross profit percentage and with the operating margin.

o we think internally of the upper 3% range operating margins for the second half of the year. Now what's also helping that is we went through the IT and distribution changes we're making, and those will layer in over quarters. But in March, we'll be down $3 million plus or so, probably a similar amount in June. So right now we don't know where, sorry, to Bill's point, Asia will land; but trajectory, so our operating margin percentage should be increasing through the second half of the year.

Matt Sheerin -- Stifel Financial Corp -- Analyst

OK, great. All right. Thank you.

Tom Liguori -- Chief Financial Officer

Thanks, Matt.

Operator

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

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good afternoon. Thanks very much for taking my questions. First question is on the European region. Certainly heard the comments about overall book developing positive in Europe.

So maybe you can dig in a little bit more into the European region. I think some of the semiconductor and conductor companies have started to see a slowdown in Europe and auto and industrial, and I think even FedEx have seen some weaker European trends. So any more color on what you guys are seeing in Europe would be helpful so we can kind of think about what of that is being relative to some of the other parts of the supply chain there.

Phil Gallagher -- Global President, Electronic Components

Yes, Mark, this is Phil. Let me tackle that one. I spoke to the regional presidents this morning as a matter of fact. So yes, the book to bill, OK, as it came through Q2 in Europe was just around one to one, was just over one, well, not 1.1.

1.01 to 1 OK? So we still see it positive in Europe across the board. Now is it where it was book to bill ratios from a year ago? 1.25? No. So we've definitely seen a bit of a correction in Europe, so I don't think we're not not saying that. However, with that in mind, we're still seeing consistent performance from our team in Europe.

Germany, we're reading the same headline as you are. For us, we're seeing that still strong. Yes, automotive in total units might be down, but electronic content's going up, and that's, on a relative basis, a newer segment for distribution for Avnet. So we're still seeing nice growth out of the transportation market.

The industrials are still steady, OK? Again, as we see it today, that's the forecast we put out for the March quarter for the West, including Europe. And we're just giving you what we're what we're seeing today.

Mark Delaney -- Goldman Sachs -- Analyst

That's helpful. So my second question is on the topic of tariffs. I know it's a tough issue to understand exactly all the ramifications it may be having on distributors, semiconductors, but any color you guys can give us about how customers may be responding? Do you think any of your customers maybe pulled orders in to the end of 2018 to try and get ahead of potential tariff increases? I know Avnet was passing on some of the higher cost to the extent certain suppliers were raising their prices to you. Any update on your ability to be effective with those price increases?

Bill Amelio -- Chief Executive Officer

Sure, I'll make some comments about that. We had an extensive plan in place that mitigate any profit leakage associated with tariffs. And essentially, what we were able to accomplish here is ship direct from Hong Kong or ship through a warehouse that we've put in Guadalajara to customers that were outside the United States that we had previously shipped into the United States and out of the United States. Regions like Canada, Latin America and South America.

So that's helped us out. We've also worked with suppliers to resource out of China into other second source areas that they had, whether it would be in Malaysia, Philippines or Thailand and Vietnam to be able to, so it's going to the United States, move them in those particular facilities versus coming directly out of China and then use China for other regions in the world. We additionally worked with suppliers on importer record, because they're the important records. The tariffs that we pass on to the customer would be less.

So as you see, it's a pretty complicated arrangement that we've put in place. We have plenty of people working on it. At this juncture, we've been doing extremely well being able to pass that on, and we have not seen any indications that we're going to have any issues collecting because we've made it very clear that that's not a tariff that we are going to absorb inside the company.

Mark Delaney -- Goldman Sachs -- Analyst

Yes, that's helpful. My last one is on the Softweb Solutions acquisition. I think it was immediately accretive to try and understand what the EPS impact is for next quarter. I think it's $0.05 to $0.10 by fiscal '21 of accretion.

What sort of linearity should we be thinking about as that ramps up to higher levels of earnings contribution? Thanks very much.

Tom Liguori -- Chief Financial Officer

Hi Mark, this is Tom. I would say it's somewhat linear, but really the financial benefit of Softweb is what it does to accelerate our IOT capabilities. So while there's a financial benefit, and this is in the press release, of $0.05 to $0.10, that's from the company we acquired itself. The benefit to us at Avnet is that it accelerates the other projects that, some of which Bill had mentioned earlier in the script, to get those revenues faster.

Because we believe those IOT revenues are higher operating margins. What we see is high teens, 20% operating margin. So that's really the financial benefit to us with Softweb, why we made the acquisition.

Bill Amelio -- Chief Executive Officer

So building on that, as Tom suggested, so not only are we participating in device revenue and margin, we're also participating in the gateway, the network, the cloud, the analytics, the applications, and we're setting up a platform with Softweb that will allow us to be able to handle even third-party applications and content providers. So we think we're setting up something that really just puts us in a great position to get recurring revenue at higher margins.

Mark Delaney -- Goldman Sachs -- Analyst

Thank you.

Operator

Our next question comes from the line of William Stein with Suntrust. Please proceed with your question.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking my questions, guys. There's been some discussion in some of the earlier questions comparing sort of your outlook to some of the semi companies. I just want to make sure I understand one thing about the timing.

I think last quarter, you more or less sounded all clear with regard to demand trends while semis were already seeing weakening demand signs. And I think there was a question as to whether you might see things one quarter later. Fair to say now in retrospect that's essentially what happened. And with regard to when it stabilizes, we should sort of look to the semis just to give us an indication as to when that happens for them, that happens probably a quarter later for you.

Is that a fair way to think about sort of how the cycle is going to influence your business? Or is there something about that, that's unfair?

Bill Amelio -- Chief Executive Officer

Well, what I would correct you there, I believe, if looked at this transcript and we actually said Asia was softening the last quarter. We didn't give any indication of what it meant book to bill, but we said we were definitely starting to see trends that our book to bills were coming down from [Inaudible] levels that Phil had mentioned previously. So I think that's the only difference in the dialogue that you just gave us.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Ok, that's a good clarification. A couple others if I can. Bill, in the past you've talked about trying to finesse the transition of customers from the Premier Farnell platform where your company enjoys a richer margin level and sort of core Avnet, where it's not as rich and trying to make that less of a sort step function decline in margins as volumes ramp. Any progress on that, or is that a much more further out in the future sort of operating feature that you'll introduce?

Bill Amelio -- Chief Executive Officer

No, we've seen tens of thousands of leads passed between Premier Farnell and deployments for [Inaudible] Premier Farnell. In fact, what we got surprised about it was how many more actually got passed from the core back to Premier Farnell because they were, what I'd say, difficult businesses for us to manage because they were with small customers but they wanted to be part of the Avnet family and they were actually moved into Premier Farnell, which could help service them much better. And in fact, we've got higher margins for it as well. So yes, we're absolutely seeing this as part of the process that makes this whole ecosystem come alive.

William Stein -- SunTrust Robinson Humphrey -- Analyst

One other, if I can. Can you remind us of the targets you said at the Analyst Day and your relative confidence in those now we're a couple of quarters after that, how you feel about achieving those now?

Bill Amelio -- Chief Executive Officer

Well, we had a scorecard up that Tom showed in his presentation, so I'd point you to that. And I'd say we're really confident that we're going to get those all green. Right now we have a couple that are in the yellow, but we're going to get them green, and we're going to keep working hard to make that happen.

William Stein -- SunTrust Robinson Humphrey -- Analyst

OK, thanks, guys. Appreciate it.

Operator

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

Joe Quatrochi -- Wells Fargo -- Analyst

Yes, thanks for taking the question. I want to kind of double click on the weakness you're seeing in Asia. I know last quarter you talked about weakness in China. I was wondering is it still mainly China, or has that spread to other countries within there? I know your business in Taiwan is actually quite large as well.

Bill Amelio -- Chief Executive Officer

Yes, we would say it's mostly China, but it's definitely spread across more countries in Asia. But China is definitely the most affected.

Joe Quatrochi -- Wells Fargo -- Analyst

OK. And then as a follow up, how do we think about, Tom, your OPEX structure from a variable versus fixed kind of standpoint? So rather, if we were to see the market kind of continue to slow down, how do we think about your ability to accelerate some of those cost down efforts that you're implementing?

Tom Liguori -- Chief Financial Officer

It's part of the benefits of our model. We have a plan on the $245 million. And if revenue softens, we would accelerate.

Bill Amelio -- Chief Executive Officer

If you remember, if you go to that chart that has the $245 million on it, you'd see one of the bars there that's the growth bar. Essentially, that's the variable cost that we would take out if we weren't growing. But we'd still go focus and take out the cost that's associated with those other four buckets of cost takeout.

Joe Quatrochi -- Wells Fargo -- Analyst

OK, thank you.

Operator

Our final question comes from the line of Jim Suva with Citi. Please proceed with your question.

Tim Young -- Citi -- Analyst

Hey, this is Tim Young calling on behalf of Jim Suva. Thanks for taking the question. Maybe a follow-up question on the channel inventory. Your December quarter you mentioned it came down on a quarter-over-quarter basis.

But in the past two years, your December inventory is normally sequentially up. So do you feel comfortable with your current inventory level, or do you think that right now, like maybe going forward you need to work down inventory?

Bill Amelio -- Chief Executive Officer

Well, our strategy is go to 70 days over the long haul. So clearly, we've got to go work on each element of working capital, whether it's accounts receivable, accounts payable, and of course inventory. So yes.

Tim Young -- Citi -- Analyst

OK, and then a quick follow up. On the seasonality to March quarter, your guidance is a little bit lower than the normal seasonality. Do you think June quarter will get back to the normal seasonality? Or you don't have the visibility right now? Thanks.

Bill Amelio -- Chief Executive Officer

Well, March quarter is heavily influenced by the book to bill in Asia. So as a fair question, I think if you took Asia out, we're probably tracking well with the seasonality.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session, as well as today's call. We thank you for your participation. You may now disconnect your lines at this time. Have a wonderful day.

Duration: 51 minutes

Call Participants:

Ina McGuinness -- Investor Relations

Bill Amelio -- Chief Executive Officer

Tom Liguori -- Chief Financial Officer

Adam Tindle -- Raymond James -- Analyst

Shawn Harrison -- Longbow Research -- Analyst

Steven Fox -- Cross Research -- Analyst

Phil Gallagher -- Global President, Electronic Components

Param Singh -- Merrill Lynch -- Analyst

Matt Sheerin -- Stifel Financial Corp -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

William Stein -- SunTrust Robinson Humphrey -- Analyst

Joe Quatrochi -- Wells Fargo -- Analyst

Tim Young -- Citi -- Analyst

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