安富利 (AVT) 2016 Q4 法說會逐字稿

I would now like to turn the floor to Vince Keenan, Avnet's Vice President of Investor Relations.

Good morning and welcome to Avnet's fourth quarter and FY16 business and financial update. As we provide the highlights for our fourth quarter FY16, please note that in the accompanying remarks, we have excluded certain items, including intangible asset amortization expense, restructuring, integration and other items and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency, or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-US dollar base financial statements into US dollars. When we refer to organic sales we have adjusted the prior period to include the impact of acquisitions and other items. In addition, when addressing return on capital employed, return on working capital and working capital velocity, the definitions are included in our form 8-K filed today.

Before we get started with the presentation from Avnet Management, I would like to review Avnet's Safe Harbor statement. This call contain certain forward-looking statements which are statements addressing future financial and operating results of Avnet. There are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission.

In just a few moments, Bill Amelio, Avnet's interim CEO will provide Avnet's fourth quarter FY16 highlights. Following Bill, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide first quarter FY17 guidance. At the conclusion of Kevin's remarks, a Q&A will follow.

Also here today, to take any questions you may have related to Avnet's business operations is Gerry Fay, President of Electronics Marketing; and Patrick Zammit, President of Technology Solutions. With that, let me introduce Mr. Bill Amelio to discuss Avnet's fourth-quarter FY16 business highlights.

Thank you, Vince, and hello, everyone. Thanks for taking the time with us and your interest in Avnet. Having just concluded my first month, I would like to start by giving you an idea of what we have been concentrating on in the near-term.

One of my first priorities has been focusing on execution. We have not performed to your expectations or our own potential. I am working on starting a business management system that will emphasize accountability, address organizational barriers and allow us to use our collective operating groups and allow them to work more effectively, and we'll be instilling a greater sense of urgency within the organization.

As you know we participate in a rapidly changing technical marketplace, and it is imperative that we make steady progress towards our strategic initiatives. And when that progress stalls, we must quickly correct to ensure we have the right people and adequate resources to win in the marketplace. An additional area I intend to focus on is talent development.

We will build a stronger bench for the future. There many skilled and talented employees at Avnet with technical knowledge and a deep understanding of the markets that we compete in. My goal is to work with the Management team to position these future leaders in challenging roles where they can develop their leadership capabilities in high-growth markets that are critical to Avnet's future.

That leads me to my final near-term focus area, our review of our strategic initiatives and our go to market plan. As many of you know, I've been on the Avnet Board of Directors for two year so I am familiar with the key strategies to grow our business, including better systems, the Internet of Things, enhancing our digital experience with design chain through supply chain and finally investing in third platform technologies and capabilities and solutions.

These are the strategies I agree with, but we need to accelerate our progress toward long-term financial goals with our margin and returns. Growth is a key component of how we are going to get there. For the next couple of months I plan to visit Avnet locations around the globe and meet with the team and get a better understanding of the local markets and what it takes to succeed.

As part of that process I and the Leadership team will develop detailed plans that include growth strategies, resource allocation and the metrics we will use to measure our progress. Avnet possess unique strengths and technologies supply chain including sales effectiveness, efficient operations a most important a deep relationship with both our customers and our suppliers.

My goal is to leverage these strengths to deliver industry growth, consistent execution and steady progress towards our long-term financial goals. I will have more to share with you as these plans come together. Even with my short time here, there are two areas I'd like to highlight that demonstrate our commitment to investing in the future and to accelerate growth and expand margin.

At TS, Patrick and his team recently unveiled a solutions specialist approach worldwide. This is to drive growth in software driven technology. While much of our current business will fall in the data center solutions business, TS is creating new business units focus on cloud solution, security and networking, data analytics and mobility solutions.

These business units will have more than 450 dedicated solution specialists to help our partners capitalize on new opportunities in the third platform technologies that are driving change in how companies purchased and consumed IT resources. We are reallocating resources to align with market growth and deliver the solution and services that will define our future success.

At EM we recently announced a cash offer to acquire Premier Farnell, a leading catalog distributor with a market leading digital platform that engineers rely on all around the world. Although there are several steps required before we can complete the transaction, we are very excited about the possibilities. A combination of the two companies will offer and will give us great strength in the marketplace.

By combining Premier Farnell's innovative online services with EM's world-class design and supply-chain services, we will create a customer service experience unparalleled in this industry while engaging with engineers earlier in the design cycle.

As I want to reiterate Avnet has a lot of strengths embodied by talented employees who help our Partners grow across the breadth of technology markets that we serve in. My goal is to leverage these strengths to deliver topline growth, higher return and consistent cash flow and to create long-term shareholder value for our investors.

Now I'd like to turn it over to the commentary to Kevin to provide more color on our financial performance. Kevin?

Thank you, Bill and hello, everyone. I would like to start with some commentary on EM. Sequential growth was below seasonal at EM this quarter driven by a continued decline in high-volume supply-chain engagements in Asia and roughly $100 million revenue miss in our Americas region related to our ERP implementation which we commented on in our early July fiscal Q4 earnings pre-announcement.

Primarily as a result of these two factors, revenue declined 2.5% sequentially as compared with our normal seasonal range of flat to up 4%. These two issues also impacted EM's year-over-year compares as revenue of $3.9 billion declined 8.7% from the year ago quarter driven by double-digit declines in our Americas and Asia regions.

In our EMEA region delivered the 13th consecutive quarter of year-over-year growth as revenue increased 3.9% in reported dollars and 2.2% in constant currency. Gross profit margin was essentially flat with the year ago quarter and declined sequentially driven by a decrease in the Americas regions due to inefficiencies in our integration center during the ERP implementation.

Operating income declined 24.4% year-over-year due to a $155 million -- primarily due to a decline in the Americas region due to lower gross profit dollars and higher expenses related to the ERP implantation. Operating income margin declined 58 basis point sequentially and 82 basis points year-over-year primarily due to a decline in our Americas region.

In addition to the higher level of expense driven by the ERP implementation, EM Americas also added additional inventory to support the Business and ensure we meet customer deliverables as we continue to resolve the remaining issues. The increase in inventory, along with the reduction in accounts payable driven by our fiscal close of July 2 ending after the calendar quarter, drove a 9.6% sequential increase in working capital. Working capital increased 17.1% year-over-year with roughly half the increase related to inventory while the other half was due to a decline in accounts payable.

Before I turn to TS, I would like to provide some additional commentary on the EM Americas ERP implementation that has a significant negative impact on our fiscal fourth quarter. As you know, we have deployed multiple ERP systems in the past without this level of disruption. The deployment in the Americas region was certainly one of the more challenging in that it addressed our distribution business, our embedded business and the complex supply chain services we provide to both customers and suppliers.

While there were significant issues in April our pick, pack and ship business is operating at normal levels and our supply-chain business has a few remaining issues that will be resolved shortly. Most of our time and energy is focused on our embedded business where we are working to resolve the remaining technical and operational issues.

We are meeting customer deliverables and do not expect any impact to revenue, but the higher level of expense will continue through the September quarter. And we expect the additional expense to temper off as we work through our December quarter. While we are not pleased with what happened and the resulting impact to our customers, suppliers and employees, I would highlight that our entire EM Americas teams has stepped up to ensure minimal customer impact as we work through this project.

Now, turning to TS. TS revenue came in at the higher end of our expectations led by the Americas region which grew 11.4% from the March quarter. As a result revenue increased 7.2% sequentially as compared with the typical seasonal range of up 4% to up 7%.

Revenue of $2.3 billion declined 7.6% year-over-year organically in constant currency with Asia, the Americas and the EMEA region declining 17.8%, 8% and 3% respectively. Year-over-year growth in services, software and networking was offset by declines in servers and legacy storage. Gross profit margin increased year-over-year driven by improvements in the Asia and the Americas regions.

Operating income dollars declined 8.8% year-over-year due to the decline in revenue and operating income margin declined 3 basis points as improvements in Asia and EMEA were offset by a decline in the Americas region. Working capital decreased 13.8% year-over-year or 10.4% excluding acquisitions and the impact of changes in foreign currency exchange rates, and return on working capital increased 66 basis points from the prior year quarter.

Despite the significant declines that TS experienced in certain legacy data center technologies in FY16, we are seeing significant growth in newer technologies including flash storage and convert systems. For the full fiscal year, TS revenue declined a 8.8%, and gross profit margin increased 47 basis points as a result of portfolio actions and product mix. When combined with expense reductions in the Western regions, operating margins increased 21 basis points to 3.3% nearing our long-range target of 3.4% to 3.9%.

Now, turning to cash flow from operations. In the June quarter, we used approximately $73 million of cash as working capital increased 4.4% sequentially and net income declined due to the ERP implementation. For the full fiscal year, our cash flow from operations was $224 million as compared with $584 million in FY15.

The decline from FY15 is primarily due to an increase in working capital as that EM America's regions built inventory to support the ERP implementation and our accounts payable declined as our fiscal quarter ended after the calendar quarter. We do expect EM inventory to decline as we work through the remaining issues in our ERP deployment and contribute to stronger cash flow from operations in the September quarter.

During the fiscal year we returned $466 million to shareholders via our disciplined share repurchase program and dividends. Entering FY17, we still have approximately $175 million remaining under the current share repurchase authorization. We ended the quarter with over $1 billion in cash and have approximately $1.2 billion of available liquidity under our credit facility and accounts receivable securitization program.

With our strong balance sheet and dedicated financing already committed for the Premier Farnell acquisition, we are confident we can complete the transaction and still have adequate funding to secure future growth. Now, turning to our outlook, looking forward to Avnet's first quarter FY17, we expect EM sales to be in the range of $3.9 billion to $4.2 billion and TS sales to be in the range of $1.9 billion to $2.2 billion.

Therefore, Avnet's consolidated sales are expected to be in the range of $5.8 billion to $6.4 billion. Based on this revenue forecast, we expect adjusted diluted earnings per share to be in the range of $0.84 to $0.94 per share. This guidance does not include any acquisitions, the amortization of intangibles, any potential restructuring, integration and other expenses and certain income tax adjustments.

The guidance assumes 130 million average diluted shares outstanding and an effective tax rate in the range of 26% to 30%. In addition, the above guidance assumes an average US dollar to euro currency exchange rate of $1.11 to the euro consistent with the first quarter of FY16.

In alignment with Avnet's goal to build a global Embedded Solutions business, which we commented on at our last Investor Day, we transferred a portion of our embedded computing solutions business to EM Americas from TS Americas at the beginning of FY17. As a result of this transfer approximately $450 million of annual revenue that had previously been reported in TS will be included within EM beginning in FY17.

The above guidance for the first quarter of FY17 takes into account the transfer from TS to EM of approximately $100 million of revenue. When adjusted for this transfer and the impact of foreign currency, the midpoint of guidance for EM would represent sequential growth of plus 1% as compared with the normal seasonal range of down 2% to plus 2%. And TS sequential growth would be down 5% as compared with the normal range of down 10% to down 5%.

As you are aware, on July 28, we announced an offer for Premier Farnell, a UK listed Company. That transaction is subject to the UK takeover code that places a number of restrictions on what we are allowed to say in relation to financial details of the transaction including synergies, forward projections and timing.

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

(Operator Instructions)

William Stein, SunTrust.

Great, thanks for taking my questions. First, Bill, I would like to hear your view as it relates to the use of cash flow generally and specifically as it relates to M&A and maybe more specifically should we view the Premier Farnell acquisition as sort of symbolic of what you think the direction of the Company should move, should go to as far as use of cash?

That was a really packed question. Congratulations. That was really great. I think the Company has a great capital allocation strategy. We've had it in place for a long time. I think the way we think about use of cash is if we find a better use of cash than investing in ourselves then it has to really demonstrate to us it's got significant value.

That's why we have continued to buy back our stock, and we plan to continue to do that in the future. However where there is an opportunity that's transformative as we found in Premier Farnell, that's a great opportunity for us to transform the trajectory of the Company. So we see that as not just a one plus one equals two but one plus one equals 4.

We think there's also an ability for us to ensure that we take advantage of that acquisition and get more successful with that moving forward. Additionally I would say that we'll continue with our dividend strategy. We have a solid process in place. It's been well thought out, and I think that's important to our value for our shareholders.

Finally when you think about M&A, our strategy will be the following. When you look at the Company, and you look and you say the marketplace is changing very rapidly, you've got to think through as that change happens what do we need to do as a Company to pivot? In some cases we can do it organically. In other cases there might be a property out there that will allow us to make that pivot a lot faster. Every acquisition doesn't fit perfectly but a lot of them do fit really, really well, and those are the ones like Premier Farnell who we would like to take and have as part of our Company. With that said I'll turn it over to the next question. Thank you.

Sure. Can I get a follow-up? I would love to hear about whether there is there is anything that you might consider divesting or walking away from in particular the supply chain engagements in Asia which I believe have been a drag on performance and certainly a drag on margins. Any change in the Company's outlook as to that business?

I'm not in a position today to make an announcement on any divestitures as you can imagine, but rest assured I'm looking through all of our strategic initiatives today, all the place where we leak profit, and we will make the necessary change in order for us to shore up the Company and become best in class operator there is in this distribution space.

Will, it is Gerry. I will comment on the high volume supply-chain engagement. As you know we have always said our high volume supply-chain engagement was opportunistic for us, and when it no longer made sense we would walk away from it. So we started to disengage with the majority of it last quarter, and it will be negligible for us this quarter.

Some of our most recent wins like Broadcom have gotten us to re-look at our portfolio, and we made the decision to move resources supporting our high volume supply-chain engagements to more accretive opportunities for us.

Thank you very much.

Shawn Harrison, Longbow.

If I may follow up on that prior answer to Will's question, is there a way to, if you would be able to characterize how much revenue that business brought in both last quarter as well as last fiscal year? Because if I look at the guidance 1% is better than seasonal, but it's coming off a much worse than seasonal quarter. So is that all the supply-chain [disengagement], or are there other factors at work so I guess it's a two-part question.

Yes, Sean, it is Gerry. Our high volume supply-chain engagements were down 5% sequentially and 38% year-over-year. So you think about it in those terms if you looked at what percentage of our business that was previously, obviously it has become a lot smaller piece of the Business.

So again I would think of it in terms when we looked at our portfolio we decided that given the returns and the limited velocity that that engagement has today versus when we first took it and looking at some of the other opportunities we have with supplier consolidation we thought it was time for us to move away from that. We still have a little bit of it, but we've moved away from the majority of it.

Very fair and I'm going to try a stab at Premier and see what you guys can answer; two-parter question. The financing, I know there's a bridge loan in place, but is there a way you can comment on how much cash Avnet would like to use to finance that transaction? Obviously it would impact the accretion.

And second, they do have a more industrial-esque distribution business. Just your thinking on how that fits Avnet long-term?

Sean, I'll take the first part. Currently we plan to finance with consideration with debt and cash on hand primarily located in our foreign subsidiaries with offshore cash we would use to fund the transaction we view that as an efficient cash use for us. Can't really get into specifics in terms of how much we will be using of offshore cash, but as the transaction gets closer I will be able to provide more commentary on that.

Similarly on your second question we are not yet in the position given the current rules that are in place to be able to discuss that but as the transaction unfolds we will be able to tell you a lot more about what our plans are.

Okay is there way to tell me how much offshore cash Avnet has currently?

Approximately $600 million.

Okay. Thanks so much.

Do you want me, Sean, this is Gerry I will answer the second part of your question. If you look at Premier Farnell's annual report, 86% of their business comes from the element 14 which is the piece that we are most interested in. That's their high-value distribution business.

And if you look at what they've done over the last year it really refocused on that business so they sold off Akron Brass for a little over GBP250 million, so they really refocused there. So from an industrial peace it's a small percentage I think of their overall business today.

Very helpful. Thanks so much.

Lou Miscioscia CSLA.

Yes, if you could maybe just comment a little more detail about the acquisition? It seems that last year for them was rather turbulent. Their gross margins were down. They had Management changes.

I guess I'm just trying to understand that they might have some attractive pieces, but are you more or less stepping into a turnaround situation for them here? Or just what your thoughts are? Maybe also just going through a little more detail why you think this is transformational for you all?

So first of all if the thing we are most attracted to is their ability to service design engineers. If you look at their online community, they have over 300,000 registered engineering users, and if you look at what they do for engineers from ideation to prototyping they have been very successful in that space.

Again as you saw based on some of the moves that they've made getting out of non-core businesses and focusing back on the core, we think that's a huge opportunity for us to help an engineer today move from ideation and prototyping where they would have then had to try to find a high-volume distributor to be able to help them get to market, by coupling our value proposition and finalizing designs with engineers and be able to help with customer design anywhere and build anywhere in the world, we think putting these two pieces together, accelerates both of our strategies and allows us to provide a differentiated opportunity for both design chain and supply-chain customers in our space.

We think by putting what Premier Farnell brings to the table and what Avnet brings to the table a differentiation that doesn't exist in our industry today.

And I would add if you hadn't noticed the catalog growth has been pretty substantial over the years, and it's something that we wanted to capture for a long time. But the problem is the fact that we are is scale Company we do lots of volume and we do it extremely well. One of the things that is great about Premier Farnell is their ability to have the small lot [B&A]. That brings a real advantage to our Company that they can handle, as Gerry pointed out, those engineer's needs and wants early in the cycle, and as they grow we will be able to transition them over to Avnet seamlessly. I think that synergy is just a terrific position between the two companies.

Great. Switching over to the TS business I guess you put a new manager in there, gosh it was a year and a half ago, and results haven't really turned around there and maybe as some had hoped or expected. Bill, I realize how new you are to all this but any initial thoughts with the main problem is? Is it product? I know you mentioned on this call that you have added in over 400 specialists. Is it the delivery? Just anything you could help their explain that and just where we are in the transformation of that would be helpful.

Sure. If you go back in history the TS business once upon a time sold into the first platform which was mainframes and then the second platform which is the data center, today is the lion's share of where our revenues come from. There was a clear-cut turn in the road the happened several years ago well before Patrick took over, and that was the fact that the sale went from a hardware led sale to a software led sale, and I think you are very familiar with that. So what Patrick is put in place with the specialized positioning strategy is to go after that software sale a lot more effectively so I think that pivot that we're making is going to help the TS business become a lot more effective in the future.

This is Patrick, and so just one more remark. In fact are starting to see the benefits of this strategy which we have presented to you in June, last year. We started one year ago already to refocus our energy on the next generation technologies on the second platform and on the sub platform.

And one of the reasons for the results this quarter is that clearly we are seeing the weight of software and services in our mix continuously increasing. In fact also driving -- that's starting to bear fruit and of course with the [SBU] concept we -- the intent is to accelerate that trend.

Just one more remark. We've tested in fact this concept in the US with cloud and in Europe with security and networking. After seeing very positive results we decided to now globalize the approach around both four new business units. We are including the focus by the way on the data center which continues to be really the core of our business. Also the data center we are embracing all the new software defined data center technologies, and here again it's going to be more software driven than hardware driven going forward.

So you said that's all been implemented and now it's really just waiting for those strategic changes to take effect?

Absolutely.

Okay, thank you. Good luck.

Jim Suva, Citi.

Thank you very much for all the details thus far. You mentioned that you are implementing things such as talent Management as well as feedback and things like that. I guess a question is is what milestones should we as external analysts look at for evaluating your progress? And the second point is when to you think organic growth will start to be positive?

You can imagine with respect to organic growth we're in a very uncertain time with respect to election year, that causes all sorts of fear, doubt and uncertainties in the system. The market forces play a lot on what (technical difficulty) potential future growth.

With that said within our control is to get ourselves in the most efficient and effective as we possibly can and to win as big a share as we possibly can with our customers, because we are actually achieving better than everybody else in the industry. So that is with the game plan is as far as to get us more successful.

What you'll be able to watch for is in fact as we progress to get the evolved FAP issue behind us and be able to reduce our inventory levels to get our working capital velocity a lot more quicker, and to see some of the key growth areas that we will be reporting on to demonstrate that we are in fact growing at the rate and pace that we expect.

Okay. You mentioned the election-year market year forces. Your competitors out there faced similar things also. Do you feel like you're maintaining share? The numbers look like you're losing share, and the election-year market forces really aren't the cause, that it's truly within your own execution?

100% agree with that. We have over the course of the last several quarters, we've lost a bit of ground, and we are in place to regain ground. One of the metrics you look at is our ability to close that gap rapidly.

Okay, thank you so much for the detail.

Steven Fox, Cross Research.

Thanks, good morning. Just a follow-up on that question a little bit more, and this is my take away from your prepared remarks, Bill. It sounds like a lot of what your focus on is going to be more topline than actually operational and I know you mentioned things like sense of urgency, et cetera. So maybe if you could just sort of qualify your biggest priorities out-of-the-box, whether it's evaluating staying in businesses, et cetera, that would probably be helpful for all of us, and then I had a follow-up.

Sure, as you can imagine any company has lots of strategic initiatives, but clearly one of them has to be able to find where is the profit generating sources in the Company and double down on those, what are the areas where we are leaking profit and either fix them or exit those businesses. So that's clearly part of the strategy.

I'm sorry I gave the impression that we're not working on the operations. We clearly are working on the operations, and there's a lot to build on. We have a solid supply chain recognized by our customers to be, if not best in class, close to best in class. Is that good enough? No, I actually think we can do better in our supply chain.

Regarding the design chain that Gerry mentioned, that's a great way for us to capture higher margins. We have some very talented FAEs and in fact the strategy with Premier Farnell actually doubles down on that thought process because now we'll be able to capture more of that design chain win with the capabilities that will be built into the web. And our whole digital transformation is another area where we will double down on the fact that we want to have the right tools in place in order for us to be able to capture that kind of design chain value earlier instead of later.

That's very helpful and then just a quick follow-up on the embedded business. Can you just sort of describe overall, how big that business is and your expectations for going forward?

Sure, go ahead.

I will start and Gerry will jump in. It's roughly a $2 billion business. In the past quarter Gerry has put a focus [later] on the embedded business across the world because we think that's an important growth factor for us and we believe that will drive future returns for us. I'll let Gerry comment more about some of the specifics in the embedded business. Gerry?

Yes so if you look at, this is Gerry, if you look at what we're doing in the embedded business part of the transition as we actually in EM we're servicing that business on behalf of Patrick's business/ So the whole idea of bringing it over the fact that we do have a dedicated global leader on that business and the idea was to make sure it was all under one tent so we could drive the growth.

If you look at we're going to project this year that the growth is going to be somewhere in the mid-to high single-digit growth in our embedded business which is one of our highest growth opportunities. That's why we're doubling down there because we see growth in that portion of our business that's higher than overall market growth.

Thanks very much. That's very helpful.

Brian Alexander, Raymond James.

Thanks. Could you guys just talk about or maybe Bill talk about the search for the permanent CEO and when the Board will make that decision? And Bill should we assume that you are the front runner for that role, or how exhaustive is the search?

Well I would assume I am the front runner, but with that in mind the fact is -- look I've had some of the most exciting times I've had in a long time in the last four weeks of being able to be associated with a really world-class team. I think we're in a great market, I think this is a great opportunity. So I'm very interested in it, and the Board of course has a fiduciary responsibility to make sure we do an incredible search and make sure we leave no stone unturned. I expect the search to be done relatively rapidly, and I'm hopeful for good news sometime in the future.

So just a follow-up on that, talk about how you would plan to drive more consistent execution and greater accountability which you talked about earlier. What would you do differently? How might you change the incentive structure to accomplish your goals? What's going to change? And I have one more follow-up.

This company, as I mentioned, has fantastic strength and starred history. What does that made it successful was the ability to be able to handle the local leads by having the Management team decentralized to handle those leads rapidly. But as you can imagine, as the Company grows bigger and bigger one of the things we need to make sure to take advantage of is scale. And there's plenty of opportunities across the Company where we're not taking as effective use of our scale as we can. And the fact if you look at our business Management systems we effectively run the Company in the regions and with 25 P&Ls across the organization.

As you will see as time goes on, [the clock moves] very rapidly we will put a business management system at the center so that we will have monthly [optional] reviews where we will go through pretty big detail what is working, what isn't working, where profit generators are, where the profit leakers are and we'll make decisions in order to improve in those areas.

Okay. One more for Kevin on the ERP issues, we know what the revenue impact was for the June quarter, sounds like it won't be an issue for revenue in the September quarter but could you talk about what the margin impact was for EM in the June quarter and how that will play out in September, how much of a drag this will be in September and beyond? Thanks.

Sure. Give me a second, Brian. I think if you were to look at it from a gross profit level it clearly was a headwind of close to 30 to 40 bps as we went through obviously more in the April, the month of April and then as we look forward, really we're taking near-term more of just an operating expense headwind for us, and I would range that between $5 million to $10 million in the September quarter.

So it's a $5 million to $10 million quarterly OpEx drag. Revenue and gross margin should be normalized, and beyond September would you still expect there to be a lingering OpEx impact in December?

And Brian what I commented on in the script would be -- we expect it to temper off as we work through the December quarter, and I'll clearly provide an update on our September call. The other thing I would talk to is obviously we saw the growth in inventory as we worked through this quarter and that's another key focus area for our team is to continue to lead that investment down as well.

Okay. All right. Thank you.

Ananda Baruah, Brean Capital.

Two if I could. The first is understanding there is a number of things you guys are working on across the organization. On the last earnings call you spoke to some fairly specific areas from a revenue perspective programs, let's call them initiatives, that you guys were going to focus on. And then GTDC you talked to a little bit more as well. I would love to sort of at this point get a quick update on where you are with those and if you've added any more? So maybe what are the key ones kind of going forward through both the businesses? You've spoken to one or two of them on this call but just want to make sure that we are clear on all of them. And I guess where are you in those? And I would just love to get a sense of how long we expect this to take place, and I have a follow-up. Thanks.

Okay I'll have each of the Business areas give their update on the growth initiatives starting with Patrick. Patrick?

So growth initiatives for TS, 80% is to support converged infrastructure, flash based storage and anything which has to do with software defined data center. And then on the sub platform we declared that our focus would be on cloud, would be on mobility, would be on big data analytics and then security to support both the data center and all those new technologies.

So that is what we declared during the Analyst Day last year, and basically nothing has changed. We are maniacally now executing on growing those technologies, and by the way I can share with you that with one exception we are growing at least double digits on all those initiatives. So it is going very well.

Again the SBU should accelerate that trend, and the fact that is going to be software driven means that the specialization is going to facilitate the implementation of the acceleration of the implementation of the strategies and the recruitment of the specialized partners and in some cases vendors so that we can improve our value proposition. Basically we feel very good about the progress we are making still.

Our legacy business, the weight of our legacy business is very high, so that is the reason you don't see yet all the benefits from the top line and margin standpoint, but we are very confident on the progress we are making.

This is Gerry I will talk about EM. So our Evergreen strategies around design chain and supply chain, we continue to make investments there. As we said earlier, Premier Farnell is going to help us engage more deeply with design engineers plus the digital design tools that we put into place starting in the Americas and how we're [rolling out] around the world are helping us increase both our registrations and our design wins. If you look at our funnel for FY16, registrations were up 11% and our design wins are up 5% so our investments there are paying off.

If you look at what we are doing around digitally transforming our business, both our organic efforts which are helping customers dictate the experience they have with Avnet, both online and off-line, coupled with Premier Farnell we think will be a game changer for us. I've already talk about our embedded strategy and the growth opportunities we see there. And there's also a focus as Patrick and I both talked about at our Investor Day a focus on IoT so at EM we continue to look to grow the three building block technologies, and those will grow faster than the market again for us this year.

So we think we are executing well against our strategies and as we get past our ERP issues it will start to show up in our results.

That's helpful, guys. And then the follow-up for me so I guess maybe as we get to the December quarter, but as you get ERP kind of ramped up and operational as you would like, should we also think of it as the revenue amplifier, number one? And then secondarily regardless of what the timing is -- I know you guys have a lot of things you are working on, but what would be the reason that you couldn't when you get back to normalized kind of run rate that you couldn't actually begin to grow stronger than typical seasonal since your seeing it, sub seasonal on the way down? So I would love two, thanks.

I think it's a great point because if you look at our quarter this quarter even with our EFP issues we are going to be in our normal seasonal range. So if you project that past, getting past our ERP issues and getting the benefit from the ERP system around pricing and inventory management, things like that, that should only accelerate our performance. We have not backed off on the budget we've committed to the Corporation for the fiscal year.

Got it. Thanks. That's helpful. Thanks a lot, guys.

Matt Sheerin, Stifel.

Yes, thanks. Most of the questions have been asked and answered. But just following up on the last question regarding your seasonal guide for the September quarter for EM which did seem a little bit better considering the headwinds you have both on the ERP side but also your decision to walk away from the supply chain engagements which is obviously seasonally stronger in the September quarter.

So are you just feeling better about the demand environment in general? Is there some products that didn't get shipped because of the ERP implementation issues that will ship this quarter that makes up for that? Just trying to figure out what you're seeing in the markets in general?

Let me start with Avnet specifics than I will talk a little about what we are seeing in the market, Matt. If you think about our ERP issues April was not a very good month for us. Things started to improve in May, and then June was fairly typical.

When you look at the guide, seasonality wise we had a very poor April, so that's part of it. If you look at our book-to-bill, book-to-bill for us is fairly strong at this point. We ended the quarter at 1.09 and it has continued at 1.08 with all regions above parity at this point. So we are seeing that the market is a little stronger than we have seen typically. I think those two things combined coming out of our ERP issues with the fact that the market, I would say sentiment seems a little stronger. I think bodes well for us to hit our budget and our seasonality this quarter.

And as we look out to the December quarter, should we adjust assumptions on seasonality for Asia due to some of the shifts in the supply chain strategy?

No. We don't normally talk about out quarters, but what I would tell you is you have to take into account there's ins and there's outs. We had some wins with some of our biggest suppliers that are coming in so I think what we're just going to have to look at is how those play out and we will keep you updated on any changes to our seasonality going forward.

Okay and just lastly on the TS business, it sounds like you're putting the right pieces in place for growth to gain back market share. One thing you haven't talked about is any voids in terms of your vendor line card particularly on software and security side. Are their plans to add some vendors to the line card to beef up some of those initiatives?

Yes so the answer is yes, absolutely. Again if you think about those four new special SBUs their role is -- they have several roles. The first one is to come up with a differentiated value proposition because again it is a software sell so the [key to required] will be different. The solutions required will be different and so with this specialization approach again that's going to accelerate us being able to define and deliver [both] solutions to the market.

The second priority is going to be to recruit Partners so new Partners who specialize in those areas but also enable our existing Partners who are building practices in those areas. And the third is to complement our existing line card where needed so that we come up with the best value proposition and line card in the market. So these are the three objectives, so the answer is yes, and again the SBU is the enabler to make it happen. And by the way.

Okay, thanks.

And the vendors are identified. We don't want to add too many vendors. We strongly believe in limited line card as having the right vendors on the line card. So it's identified and we started by the way working on it.

Okay, thank you.

Sherri Scribner, Deutsche Bank.

Hi, thank you. I just wanted to ask looking at the margins in the EM business they are below 4% this quarter I assume related to the ERP transition. Should we assume that margins for EM are again below 4% in the September quarter given you still have some transitions that are happening, just trying to understand how that margin trends? Thanks.

Hi, Sherri, it is Kevin. I would expect the EM margins to improve sequentially neighborhood of 30 to 40 basis points and again it's due to the sequential improvement in the Americas to the point that you highlighted earlier coming off the weaker April and then the ERP running more smoothly as we work through the September quarter.

Okay and then thinking about the TS margins, that suggests they're down pretty significantly year-over-year. Is that primarily because we had the extra week last year, or how should we think about margins in TS? Thanks.

Sherri, that is the right way to be thinking about it. The extra week had more of an impact on the TS business, so right way to think about it.

So I just had one thing if you normalize it, so if you normalize our quarter last year, remove the extra week and you remove the embedded business which has been transferred to EM. In fact we are forecasting to have flat operating margins year-on-year.

Thank you.

Thank you. Gentlemen, there are no further questions at this time.

Thank you for participating in our earnings call today. Our fourth-quarter FY16 earnings Press Release and related [CFO] commentary can be accessed in downloadable PDF format at our website, www.ir.avnet.com under the Quarterly Results section. Thank you.

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