Avnet, Inc. Aktie

Day 1 of our Global Technology Conference. Great to see everybody here. We're honored to have the team from Avnet. And from Avnet, we have CEO, Phil Gallagher. And those of you who've known Phil for over 43 years, he's been with Avnet and he's a real institution when it comes to distribution in this industry.

And we also have Ken Jacobson, who -- he's been with the company since 2013, and prior to that, he was with First Solar. So a lot of experience on that side as well. So we hope to have a great discussion.

Phil, I'm going to start with a very overall general question. Where do you think we are in this cycle? Is this cycle any different from prior cycles, which have been primarily driven by inventory? What do you think is driving this cycle? And where do you see this year trending?

Yes, tough to call exactly where we are in the cycle. First of all, thanks, Ruplu, for having us, and thanks for all those in the room and those listening. So where I want to start. So I think the difference, at least in my view, 43 years and seeing a handful of cycles. I always go back to '99, 2000, where it was heavy coms, heavy, the Ciscos, the Lucents, et cetera, Alcatels and the whole thing that had Y2K and the perfect storm came together, won't drop. And it was a pretty significant drop. And then flattened out and obviously it came back.

This one -- and then you had the most recent post-COVID, if you will. This just feels a lot different. You got, everybody knows the data center, what's happened to the data center and the hyperscalers, which that started several quarters, before we actually saw the impact of -- the positive impact, I should say. And now the expansion to the balance of the verticals being impacted. So you got the data center, you got the hyperscale, so we call that in compute driving up. Industrials are moving up into the right. We even saw some growth in automotive transportation. We both lumped in with transportation, anything with wheels, with golf carts, e-bikes, cranes, tractors, that's stronger.

Aerospace defense with what's going on in the world, not only strong in the Americas, that's going to continue to expand in Europe and even parts of Asia Pac. Consumers steady as she goes.

So it's really a diverse recovery across multiple verticals, or you can arguably say all the verticals and geographic as well. So Asia is now on our eighth quarter of year-on-year growth in Asia Pac with record numbers, that's through June, by the way, so we're not giving any guidance -- I mean, through March, that's not guidance in June.

Europe is showing oxygen, which is great news for our European brands, still saw some life here in the last several quarters in Europe. Still not where it needs to be, but definitely some rebound there in the industrial space as well, which is good news. And the Americas now has been on its third, probably fourth quarter of accelerated growth, in the 30-plus percent range.

So overall, it's not only diverse vertically, but it's diverse geographically. Then we have our Farnell business, which is now 3 quarters in a row of over 20-plus percent growth. And that's not just onboard components, semiconductors, interconnect electromechanical. They also have that MRO test and measurement, which is another indicator in the market. So what's happening in Tektronix and National Instruments and Keysight, and they're all doing extremely well. And that's another front-end, if you will, the cycle on testing and whatnot, what's happening in semiconductor.

So just feels better. And the data says it is better. And our job as CEO and CFO is to keep our eyes wide open and stay vigilant. As I like to say to the team, sip the champagne and enjoy it and get back to work because there's still a lot to get done.

Yes. No, that makes sense. So let's put some numbers on this, and talking about the components, electronic components business, can you talk about backlog? Can you talk about lead times and pricing and book-to-bill? Like what are some of the numbers that are giving you confidence that this is a sustainable recovery that you're seeing?

Well, you start with the backlog and the book-to-bill, you might have to come back to a couple of the others, like 4 or 5 tied in that, Ruplu. But the backlog is 50% to 80% higher than it was this time last year. And we look at the backlog daily. And we don't just look at the backlog, but we look at the adjustment of the backlog, and cancellation rates and whatnot. And that's still in manageable range. It's not -- there's nothing crazy happening there.

So the backlogs look solid. Of course, we continue to audit the backlog, and I guess, it's important for all of our customers and suppliers to know. The book-to-bills are still very positive, even when you net it out for memory inflation still positive. So the numbers, again, it supports, and we look at the backlog, I go about as far as 180 days. After that, it gets pretty great, but it looks really solid for the next at least 6 months, and I think it's going to continue to increase. And what was the other two you added on that?

Lead times and book-to-bill.

Yes. So the book-to-bill, I hit on, that's a positive in all regions across the verticals. And then lead times. So that's kind of a mixed bag. We know what's happening in memory, I don't think that's going to get -- we don't talk about supplier-specific, by the way, ever. But you guess, who the memory guys are. So that's going to continue to be tight.

I mean -- and I challenge it all the time. I challenge -- you've been around long enough, you live in apparently a state, like are you serious, really? Like when you go across the verticals and you go across the technologies, yes, I think memory is going to be super tight. And I'll just lump it after that. I think you're going to -- anything tied to power is going to continue to be tight. And anything tied to power, high-rail products, anything tied to the high-end capacitors and Mil/Aero are going to be tight. Certain parts of discrete is going out. Controllers going out and pricing going up.

So the pricing, there's -- many of you have the letters out there, have been sent from suppliers. So it's pretty public knowledge what's going on in memory, and that's -- we'll see how that continues. And then even one of your participants here, Steve came out with something yesterday, or they'll be putting out some price increases, and we've seen that from other suppliers, and the higher tech stuff, if you will, more of the hiring controllers and whatnot.

And, I think, the good news, I think, it's being managed better this time, we'll see as we get through it. We're not seeing price increases 4 or 5x in the same month. What we were seeing the last was kind of constant. So trying to give customers as much notification as we possibly can and just manage it through it one supplier at a time. Everybody handles it differently. And that's the good news and bad news of the job we do for the supply chain, right? We manage the complex, and we try to make that simple.

Phil, I want to ask you a couple of higher-level questions that we keep getting time and again from clients. One is like how do you see Avnet's strategic relevance over the next 5 years? There's always talk of vendors consolidating, them trying to go in-house or they're trying to go direct to the customers. So how do you see your relevance over the next 5 years? What value-add are you providing?

Yes, I think it's actually going up, Ruplu. When I talk to the Board and our team or people like you, I don't -- we can't control what supplier is going to buy what supplier, who's going to merge with who. We're not sitting in the boardrooms. We don't have control of that. But what we can control is the value we bring to the market, and from really inception through design, through manufacturing, and end of life. And our job is to continue to add value on all those different journeys within the supply chain, within the ecosystem. So demand creation, leaning in on that. Supply chain as a service, leaning in on that.

What's happening with manufacturing moving around the world, constantly lifting and shifting supply chains, it's really complex. So I actually think the relevance of what we do is going to keep going up. I mean, it's not going down, because the world is getting more complex. And I think there's a tariff. So let me talk about tariffs are doing, right? It's back to life. We help manage that, right? We take the complex and make it simple.

But the world is getting more and more complex with different regulations and compliance, and so I think the suppliers are going to continue to lean in on the channel. Most of them know that we're the most profitable means to go to market, okay, still so we handle -- they ship with us, and we handle the receivables. We pay them on time. We manage the inventory point we do. So I think it's going to go the other way. I think it's more positive than that. Actually, I'm really excited about the spot we're in right now. We're in the center of technology spike. And just think about where we are. We managed suppliers, we have the technology, again, not going to listen to them all. And then taking that downstream, to this mass customer base from the highest end on the defense, aero, to data centers and hyperscalers and everything in between. It's a pretty cool place to be.

Another higher-level question we keep getting is in terms of inventory management, right, are suppliers less willing to hold inventory now? Are they pushing more inventory into the channel? And on the other side, I'll also talk about customers, after COVID and what happened in automotive, are customers more willing to hold inventory? Or is it just in time? So how are you seeing inventory on both sides?

Probably a mixed bag. I'd say on the supplier side, I don't think a whole lot has changed. It's pretty fair and balanced. I mean sometimes you have to carry a little bit more inventory for a given supplier based on maybe their lead times or whatever might be happening in the market. But there's no extremism here where we're being asked to go carry x amount of inventory more than what we should have.

And by the way, where there is, we have a conversation, and when we go back and forth. I mean we just negotiate with what's fair and balance of what is it we really need. But we don't ever take inventory that don't have any demand or visibility to, right? I mean so we're not just going to put that inventory and we'll ship it back in 90 days. That is not happening.

But it's a give-and-take based with suppliers. Certain commodities, you got to carry more inventory. There are sometimes, in the past, this connection might have to carry more inventory to serve that market. It turns at a different level in the IPD space than it does in the semi space. So when talking about inventory in general, it's not as much how much inventories we have, it's are you getting returns on the inventory you do have. That's why, I had to return on working capital, return on capital employed. And we're getting good returns, that we want to put more inventory.

In inventory, I mean, sometimes inventory is seen as a bad thing. It's not. It's good inventory. That's a good thing. Distribution, we're supposed to have inventory on the shelf, just the right amount and with the right returns. Farnell though, on the other hand, runs a good inventory model. We've been breaking that out separation over the last several quarters for you guys to help better understand the days of inventory. They have to carry more, because on the core side, we carry a more -- it's not narrow, it's wide, but it's deeper inventory. Where Farnell is really broad because they're servicing the engineered once you get -- the one-stop shop. So yes, they have the broader inventory, but not as deep. So the inventories, the model is just a little different for the business units and it's different within commodities and might be a little different within -- the technology within the commodity. And then the -- we're the supplier within the commodity.

On the customer side, I think we're finally getting a little bit more visibility, which is good news. They were -- understandably so with what happened in the last go around. They -- just like a lot of us ended up with too much inventory, right? They had too much either finished goods with raw inventory on the shelf, they had to burn it off. I think actually demand -- demand is probably back a little bit earlier than we saw because they were eating up their own inventory. I think they're eating through that. We feel pretty good about the customer and inventory. We don't have visibility to every single inventory out there. But just based on the demand and the bookings we're seeing and the billings, it feels pretty good. And the customers have been pretty reasonable on that end. We'll see -- I think the key though is it just gets tighter and broader how the suppliers behave this time versus last time. I don't know if you hit bad or good, just how do we enforce NCNRs and things along those lines, as they build up capacity.

Got it. No, that makes sense. Let me ask Ken a couple of questions. So the one thing that's been impacting the industry is supplier price increases. Can you help us just walk through how that impacts your revenues and margins? And as prices have gone up for components, is there any danger of demand falling off in the second half of the calendar year or next year as -- do you see any signs of demand destruction in any end market?

So maybe I'll start. Phil mentioned memory a little bit, and maybe just to kind of level set. When we talk about Avnet's exposure, memory business, it's primarily focused on our key focus verticals. So industrial, aerospace, defense, right, transportation, some, but not necessarily data center type memory.

What we saw us in calendar 2025, that was roughly 5% to 7% of our business. And in the March quarter, it was roughly 10% to 15% of our business. And that's mostly because prices doubled, right? Not that we got more units, it was the pricing in memory doubled. Now I think that's an extreme amount of price increase. What we're seeing more broadly across our portfolio is selective price increases, maybe between 10% and 20%. And usually, there is some time to roll it out.

So our approach to price increases is, we need to pass those through, right? As a distributor, we can't absorb price increases, especially of that magnitude. And so we pass those along, and we do a good job trying to message our customers, give them time to adjust, if they want to pull some stuff in, and usually, that happens, right, depending on the size of the price increase, and then we'll kind of move forward at the new price. And I think we're seeing now as lead times go out a little bit, more pervasiveness of price increases. So again, not as significant as what we saw in memory, but starting to see more and more signs of at least selective price increases across certain parts of the customers' portfolio -- or sorry, suppliers' portfolio.

Now from our perspective, that these are built into the BOMs, and they have to usually pass those through, so whether it's an EMS customer, whether it's a transportation customer, then they would typically take that piece of the BOM and pass it along to the end customer. And so I think there are some anecdotes about certain consumer technologies where the price of memory is now making it noncompetitive, right, consumers aren't only going to pay a certain amount. But I think more broadly, we're not seeing pricing effect, just underlying demand. And again, we haven't seen pricing increases anywhere near where we saw post-COVID, those shortages, but lead times aren't extended the same. A lot of that price increase was because of input costs, right? You think about the cost of energy, you think about the cost of substrates, all those things that require to make a semiconductor, those are real, and they're still real today.

So we'll continue to monitor it and -- but I think the impact we saw this last quarter, we wouldn't expect to see similar levels of impact, although there will be some impact on pricing as we kind of move forward most likely.

Got it. I want to ask you a question on value-added services. I want you to talk about what type of value-added services Avnet provides. But I have a tendency to put 3 questions into one question, and I'm going to do that now, which is are you seeing any components? If I look out 6 months, are there any components that could be in short supply? We've heard of things like MLCCs that might become short. So does that enable you to do some other type of service such as like shortage market? Like is there some value-add that you can provide customers by trying to get parts? So talk to us about what you're seeing in the market in terms of which components are going into shortage or that are already have a shortage? And just overall, can you talk about your value-added services, supply chain services, demand creation?

Yes. So I think maybe I'll start off by we've been talking probably for the past year, if not 18 months, about customers needing to give us visibility. And one of the challenges we saw is, if we don't get the visibility from our customers and we're only looking at 3 months, then we can't provide the proper visibility to suppliers to figure out what to build. And so we've been harping over the past amount of time to start to get that visibility, and Phil mentioned the backlog. So now the good news is we have more visibility. And that's where I think supply chain capabilities overall help mitigate the impacts of parts getting tight.

If we're pipelining appropriately, if we've given suppliers the right forecast, we can minimize those disruptions, not only in our core business where we -- supply chain is our core competencies, but also on supply chain services, think about large OEMs that have complex supply chains that we can help manage those supply chains. And so things like buffer stock, vendor-managed inventory, all the different supply chain solutions we have, we can bring to bear as long as we have the visibility and know what the customers need.

I would say things are getting tighter. We've talked about lead times extending, but parts are generally still available. Memory is probably the most tight right now, but the other categories are starting to extend. I won't get into any specific categories, but I think the criticality here just becomes, if we don't know what the customers need, and they don't give us that visibility, it's hard for us to bring solutions to bear.

Now many times, some of these solutions come with a cost that they're going to have to pay for the value we provide, but we have kept customers up and running longer the customers that use our services versus others. And I think the suppliers are seeing that value provide as well and we're being referred to from the suppliers as well for that. So I do think we're going to continue to see things get tighter, especially as demand gets pulled through. Now some of that demand is being pulled through by the data center. But it's broad-based. We're seeing it pretty broad-based. And so that's just many more categories that need the components. And so again, that leads into pricing, that leads into shortages and things like that. And again, we want to make sure Farnell, who's seeding the market for new designs and revs continue to have the right product as well. So that's where inventory comes in, and you get into the shortage times, those who have the inventory end up benefiting. And then you have more premium pricing power.

Yes. I would jump on that one, Ruplu, as well. I mean the whole umbrella of value-added services, that was kind of 80s, 90-ish, we have value-added services. I don't think we do. I mean, when you think about it, we -- value equals benefit minus cost, right? So we're adding value to the marketplace, or not. And the customers thus far ultimately will define that value, minus cost, and making a profit. And you got the most complex value-added, or the simplest, let's say, so cables, connector assembly, prime program. We program ships for some of the largest OEMs in the world around the globe, and that's a services capability.

70-plus percent of what we ship out of every warehouse around the world, we're doing something to the product. Special handling, day code, special packaging, whatever it might be, including the services I just mentioned, we're touching that product, for sure more than once. I think sometimes there's this image that we have these large warehouses, we get big box and then we just take the ship small boxes. It's a lot more complex and invite anybody to any of our distribution centers around the world, I think you'd walk away, saying, "Oh my God, these guys are a lot more than what we thought."

I think it's been more complex. Of course, demand creation is value-added. Design services, we do total board solutions, supply chain solutions that started with consignments and implant stores in the '80s and '90s. Now it's as complex as you can get with all the way up to supply chain as a service for customers that couldn't sell distribution 5, 10 years ago, they're coming in now say, "Hey, we need help managing our supply chain around the world." And by the way, suppliers are coming in and saying, "Hey, why would we build this supply chain if we already have an Avnet as a partner and go do this for us?"

So we'll continue to drive that. And of course, we got integrated solutions where we do more data center work, and we've got the Farnell, which Ken just talked about, helps seed the market. So it all -- in this whole Power One comes together on the value-added services umbrella. As far as products and things getting tight, I think we talked about memory probably enough, yes, that market is super tight. I think the next one is going to be -- well, I'm not saying an order. I think HR is going to get tight, anything around power is going to get tight, anything around the data center, lead times are going to be going out. It's going to be more and more difficult.

So we need customers to give us that visibility as much as possible. As far as services to help them find that, yes, we have third parties to help them go find that. We're not in that business directly. We're not in a great market, the broker business. We're authorized, but we will help them try to find products if we can, but we won't sell it to them. Let them go find it. We'll find it and help them go negotiate it.

That's helpful. We talked about Farnell a little bit. Strategically, do you see Farnell as a core part of Avnet? And is there value to be created if you spun that off? And maybe not now, but as margins improve. So tell us like, is a catalog business something that Avnet really needs to have?

Yes. I just -- if our Farnell team is listening, they'll probably panic now. But yes, no, we're not -- that's not on the radar screen at this point in time by any stretch of imagination. We love Farnell. And as I shared before in the prior peak to trough in the peak, Farnell was 6% of our business. And you'd say, oh, kind of yawn, but it was 20% of our operating income, okay? And that's a public number. So it means a lot to us. Yes, I like the people. Yes, I like the model, but I'm also capital, so we need to get the returns. And it's on track to -- it's on the right track right now.

But about a year ago, we started that with Rebecca taking that over just the Power One. And how do we better -- where I think we made some mistakes in the past, we isolated it 2 separate -- it's kind of a moat around it sitting over here, like, no, how do we bring it closer to the core, still keep it separate, I call it on the front end, but build out their digital capabilities, build e-commerce capabilities, 70-plus percent of all their line items go through e-commerce, 55% of the revenues. And we're actually doing joint calls together now with the Power One joint account calls because again, they're not just selling onboard components. I said this earlier. Yes, they got line card almost matches 85%, 90% of what Avnet core has. But they got test and measurement, MRO, lines like NI, Keysight, Tektronix and things that we don't have that every customer, every supplier is using. So it's a fragmented market as well, which is opportunity. So then back on the core side.

Farnell they got hundreds of thousands of customers, upwards of 1 million. They define a customer as an engineer on a fee card. So they get an order for a reference design, design kit, a high-end chip. We filter that and then get that lead over to the core team. If it's a signed BOM goes to that account manager, if it's not, it goes to central, if you will, telesales screening process to help further develop that lead. So yes, I think they're integral to each other, and we're leaning in on both and leveraging back office where we can. But it is a different model. I mean the way they pick and ship is different. I mean the whole -- that's why some people say, well, why don't just merge the warehouse because it's different. I mean it's a very, very different business model. We're pleased with the progress on the rebound here with Farnell, and we're looking to have them around for a long time.

And by the way, if they are listening, they still have work to do. So they're not back to where they need to get to. I'm sure, she's laughing on that.

This is a question maybe for both Ken and yourself. Ken, maybe talk about operating margin targets for both the core as well as for Farnell and how quickly you can achieve those. And then how variable is the cost structure now versus maybe pre-COVID? And are there opportunities to drive more automation and more productivity.

And Phil, for you, I guess, AI has been on the radar for many companies, how are you implementing AI within Avnet? And what are you doing on the portal side? And is there some advancements there?

Yes, from an operating margin perspective, our electronic components business, we're targeting a return to 4% plus here over the next few quarters. And then Farnell is 10% or above operating margin in the next, let's say, several quarters. And we think we're well on track and hopefully can beat those time line targets we gave this last quarter.

And we look at our overall, let's say, operations, our cost structure is much more efficient structurally sound than prior to COVID, right? We've been through some restructurings. And I think we really have our stronger company operationally than we were prior to COVID. And so what that means is as we grow, we can continue to create more operating leverage from the model, right? And our models want to scale, but also efficiency and expense. And we feel well positioned as we get into this next up cycle, if you will, we feel pretty good about where our expense base is at and that we can continue to drive operating leverage across all our regions, right?

One of the challenges we've had with our operating margin has been we've seen a lot of growth from Asia relative to the West, and Asia is roughly 50% of our business, but Asia is still expanding their operating margins, still generating a lot of operating income dollars and their expense efficiency has been pretty strong. So all of our businesses continue to make improvements in strides in recovering their operating margin. And so I feel pretty good about that trajectory. I'll let Phil talk about the internal efficiencies, AI.

So just to build on Ken's point, we're driving efficiency and productivity across the board. We need to increase drop-through. We got to improve our expense-to-net GP ratios. And as far as the operating margins themselves go and then drive, of course, EPS, the message to our Asia team isn't to shrink, okay? We want them to continue to grow. It's good growth. They're doing a great job. We just need the West to pick it back up, because it's just a math issue, just Asia is so big, and we don't want that to stop, we're getting good returns in Asia, but it does affect the percent, if you will, on the operating margin. So as Farnell and the West picks up, that should kind of balance that.

Well, AI, yes, I mean we're right smack in the middle of that. Obviously, on the -- I look at it in multiple ways. We sell into AI, right, directly into data centers and the hyperscalers. We -- our customers are the OEM customers, if you will, in the industrial sector, we're selling into them, and they're selling into the application data center and you have the EMS providers are big pieces.

So to me, it's almost an end to trying to figure out exactly how much of that business is going into the data centers, but it's obviously in the mid- to high billions from a vertical standpoint, if you could verticalize it. As far as AI as an application is using AI internally, they're driving productivity and efficiencies. We've got multiple applications already running in that space, customer service type sales, et cetera, quoting. And then leveraging it in the supply chain, how we better manage supply chains moving forward and demand creation, how do we better automate design cycles or design services with agents and e-commerce.

So we've got multifaceted angles that were attacking AI and leveraging AI internally as well as selling and leveraging it externally. And I think everyone needs to remember that once this -- as this infrastructure gets built in data centers, it's just going to increase our opportunity on the edge, right? More and more is going to end up on the edge, okay, with IoT, if you will and that line card we have is phenomenal. And that's just going to further increase smart buildings, smart elevators, smart everything, robotics, drones, et cetera, et cetera. So we're excited about it.

I always ask you this as the last question, I'm going to ask this again. What are people missing about the Avnet story? And what message do you want to leave investors with?

We're excited we're in the center of the technology supply chain. I think people would know the name, obviously, Avnet, but we're selling the highest technology suppliers to the highest technology customers, and right smack in the middle of it. And it's a complex world. And I would say complexity is our friend, okay? And our job is to help simplify and drive value into the marketplace.

Got it. All right. Great. Thank you so much for coming.

Thanks, Ruplu.

Thanks for the details. Appreciate it.

One second left. Thanks, Ruplu. Appreciate it.

Welcome to Avnet's Second Quarter Fiscal Year 2026 Earnings Call. I would now like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Avnet's Third Quarter Fiscal Year 2026 Earnings Conference Call. This morning, Avnet released financial results for the third quarter of fiscal year 2026 and the release is available on the Investor Relations section of Avnet's website, along with the slide presentation, which you may access at your convenience.

As a reminder, 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 a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC.

These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website.

Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Lisa, and thank you, everyone, for joining us on our third quarter fiscal year 2026 earnings call. This was an outstanding quarter for Avnet, one that reflects both strong execution by our teams around the world and improving market conditions. Over the past several quarters and really over the past couple of years, our team has been operating in a challenging market environment. Throughout that period, we remain focused on the things we can control, supporting our customers coordinating closely with our supplier partners, managing inventory and working capital discipline, investing in our people, digital capabilities and distribution centers with a long-term view.

This quarter's results and our June quarter guidance demonstrates that focus positioned us well coming into the beginning of the up cycle. We delivered financial results that came in well above our expectations including record sales in our electronic components business. As data center and AI demand proliferates throughout the market, we also saw broad-based demand across most of our core end markets. which translated into meaningful operating margin and EPS improvement. Before we give more color on the business, I wanted to take a moment to mention we're closely monitoring the current geopolitical environment and remain mindful of the potential broader macroeconomic impact. The conflict in the Middle East had no material impact on our Q3 results outside of some increases in freight expenses due to rising fuel costs. Now turning to our third quarter.

We achieved sales of $7.1 billion, driving a 3.5% operating margin in our electronic components business and a 5.2% operating margin in our Farnell business. We also reduced inventory days 77% below our near-term target of 80 days. Our double-digit year-on-year sales growth was led by another quarter of record revenues in Asia, along with better than typical seasonal growth in the Americas and Europe. From a demand perspective, market conditions continue to improve across the majority of the verticals we serve, which includes data center, industrial, aerospace and defense, transportation, consumer and networking. The third quarter was led by strong demand in industrial, networking and our data center end markets.

Year-over-year, we also saw broad-based improvement across most verticals led by the data center. Over the past 90 days, -- the lead time environment has shifted component lead time trends are increasing across many product categories. We have seen lead time extensions in over 50% of the product categories we track traversing semi doctors and interconnect passive electromechnical with stability being reflected in the balance. While lead time extensions continue in components supporting data center and AI builds, they are now spreading the broader set of products supporting diverse end market applications.

Customers are increasingly recognized as the challenges of a tightening supply environment and are turning to Avnet's proven expertise to help manage their component supply chains. Our backlog is growing and our book-to-bill ratios are well above parity in all regions. In the December quarter, we saw early indicators of certain component price increases. During the March quarter, we have seen price increases across a few suppliers and technologies, most predominantly related to memory. We expect to see additional price increases over the next several months, and majority of which are being driven by increases in the underlying input cost of components. Ken will give more color on the impact of pricing during the quarter in his comments.

Now with that, let me turn to highlights of our business. Our Electronic Components business delivered a record sales quarter, driven by growth across all regions and strong execution. Demand creation activity remained robust. Design wins continue to convert to sales and our interconnect passive and electromechanical or IP&E business outperformed, reflecting the benefits of our technical capabilities and our focus on the total solution selling. In Asia, sales reached another record high of $3.5 billion in a quarter that is usually impacted by the Lunar New Year holiday. This marks our seventh consecutive quarter of year-on-year sales growth in the region, which now represents almost 50% of our total sales.

Demand increased across all the geographies and verticals we serve, led by the data center, industrial and networking markets. In March, I would be able to spend some time in China. With our Asia leadership team, including visiting with local customers and suppliers. This trip reinforced my belief in the opportunities for growth we see in the region that our Asia team is capitalizing on. In EMEA, we're pleased to see continued rebound in the region with sales growth both sequentially and year-on-year for the second consecutive quarter. EMEA is experiencing growth across a number of verticals, including industrial, networking and early signs of the long-term opportunities we see in aerospace and defense.

Overall, I would say the market conditions in Europe are improving, although the demand environment is still mixed. We are seeing improvement in our strategic differentiators, including leading indicators in our embedded business, as customers and suppliers are looking for board and display level solutions. I was able to spend some time in Germany in late March, meeting with several of our IP&E suppliers and customers at our Avnet Apicus Technical Conference. The outlook and momentum I felt coming out of Europe was more encouraging than just even a few quarters ago.

In the Americas, sales grew both sequentially and year-over-year marking our third consecutive quarter of year-on-year growth. Most end markets showed sequential growth led by networking, while aerospace and defense, networking and industrial were the strongest end markets year-over-year. Our Americas region recently hosted an IP&E Summit, bringing together leaders from our top suppliers to reinforce our focus and commitment to accelerating growth in the IP space. Our IP business had a record quarter, growing 25% year-on-year.

We carry a world-class portfolio of IPD products and solutions and are benefiting from this multiplier effect as every active simulator chip requires surrounding IP components to function, think connectors, capacitors, passes, resistors and sensors, among other technologies. We continue to see success, driving conversations with customers about the full solutions we can provide with both our semiconductor and IP&E product offerings. Turning to our other value-added drivers of profitable growth. We continue to benefit from our field application engineers, complemented by our digital design capabilities and tools.

Our Demand Creation revenues increased sequentially by 16% and from a design opportunity standpoint, the leading indicators remain positive, which bodes well for future design wins and downstream revenue. Our supply chain services offerings continue to grow and expand with many OEMs and that are household names. We are seeing opportunities and wins across many of the same verticals, where we are experiencing strong growth in the core business. These include transportation, data center and networking, among others. We believe we have the opportunity and capabilities to be the leading supply chain services and solutions provider in electronic components industry.

Now turning to Farnell. We are seeing steady progress in Farnell's performance and recovery. Sales grew double digits year-on-year for the third consecutive quarter. Gross margins and operating margins expanded in line with expectations and the business remains on track with its return to double-digit operating margins over the next several quarters. Our [indiscernible] focus is gaining traction as we leverage Avnet's scale and relationships with pronounced capabilities and offerings. This unique combination differentiates Avnet and strengthens our value proposition to suppliers and customers.

Farnell's continued investment in its e-commerce platform, customer experience, and inventory proposition positions us well as demand accelerates. Throughout this cycle, we remain committed to investing in the future of Advent with a focus on the long-term opportunities we see for the demand of electronic components. Our bankability has never been more critical. The proliferation of electronic components continues at a rapid pace with emerging opportunities in drone technologies, robotics and edge AI as just a few examples of the future trends.

We have made substantial investments in our digital platforms and capabilities, supply chain and distribution center infrastructure and engineering resources. These investments are not just about near-term efficiency. There about future-proofing our company and ensuring we can support increasingly complex supplier and customer needs as technology and supply chains evolve. At the same time, we have stayed disciplined in managing expenses optimizing inventory and allocating capital. We have consistently said we will balance reinvestment in the business with returning capital to shareholders, all while prioritizing and maintaining a strong balance sheet and we have delivered on those commitments.

In closing, I'm extremely proud of what our team has accomplished, and I'm excited for the continued recovery in our business. These results reflect not only an improving market environment, but also the resilience, experience and dedication of our team. With the breadth of our supplier [ Loncar ], our diversified customer base and the strength of the end markets they serve, we are well positioned to deliver sustainable growth and improve returns into the future. We are thrilled by the momentum of the business and are confident in Avnet's ability to execute at a high level. So with that, I'll turn it over to Ken to dive deeper into our third quarter results. Ken?

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet. Our sales for the third quarter were approximately $7.1 billion, above the high end of our guidance range and up 34% year-over-year. On a sequential basis, sales were higher by 13%. Regionally, on a year-over-year basis, sales increased 39% in Asia, 31% in Europe and 27% in the Americas. During the third quarter, sales from Asia were 49% of total sales compared to approximately 47% of sales in the year ago quarter.

From an operating group perspective, electronic components had record sales during the quarter as sales increased 35% year-over-year and increased 13% sequentially. In constant currency, electronic component sales increased 31% year-over-year. Cornell sales increased 24% year-over-year and 6% sequentially. In constant currency, Farnell sales increased 18% year-over-year. As Phil mentioned, supply dynamics have been driving some price increases, especially in memory. And in the third quarter, we saw the impact of these pricing increases in our sales growth.

Approximately half of the sequential sales growth and approximately 1/4 of the year-over-year sales growth was attributable to higher memory pricing. For the third quarter, gross profit margin of 10.4% was down 68 basis points year-over-year and slightly lower sequentially. Electronic Components gross profit margin was flattish sequentially and down year-over-year, primarily due to a combination of higher percentage of sales coming from our Asia region as well as some differences in product and customer mix in the Western regions.

We reported higher gross profit dollars as a result of the previously mentioned price increases. Although the pass-through of these price increases has less of an impact on gross profit margin. As a reminder, when component prices increase, we communicate the changes to our customers and pass through the corresponding increases. From a Farnell perspective, gross profit margins were up 34 basis points year-over-year and were up 49 basis points sequentially, in part due to an expected improvement in product mix of on-the-board components. Turning to operating expenses. SG&A expenses were $519 million in the quarter, up $83 million year-over-year and $27 million sequentially.

The sequential increase in SG&A is primarily from a combination of higher sales volumes, including related incentive compensation expense as well as foreign currency. Foreign currency negatively impacted SG&A expenses by approximately $3 million sequentially and $22 million year-over-year. Excluding the impact of foreign currency, SG&A increased approximately 5% sequentially and 14% year-over-year. As a percentage of gross profit dollars, SG&A expenses were lower sequentially at 70% compared to 74% last quarter. As our business grows, we expect to continue to maintain our disciplined expense management and drive efficiencies in our business while still making investments in the future.

We expect our SG&A expenses as a percentage of gross profit dollars to be in the mid-60s percentage-wise over the next year. For the third quarter, we reported adjusted operating income of $221 million and the total Avnet adjusted operating margin was 3.1%, an increase of nearly 40 basis points from last quarter. This represents the third consecutive quarter of adjusted operating income margin expansion. Adjusted operating income also grew more than 2x sales compared to last quarter. By operating group, Electronic Components operating income was $235 million and EC operating margin was 3.5%.

And the nearly 40 basis point sequential increase in EC operating margin was led by the business recovery in Europe. This is EC's second consecutive quarter of operating margin expansion and is the highest EC operating margin since the first quarter of fiscal 2025. We continue to gain momentum in EC with the recovery of both Europe and the Americas, we currently expect our EC operating margin to reach our 4% near-term goal within the next fiscal year. For new operating income was $24 million, and their operating income margin was 5.2%. And which was up 55 basis points from last quarter, reaching its highest level in 3 years.

This is Farnell's sixth consecutive quarter of operating margin expansion. Similar to our EC business, we see momentum in Farnell and expect to continue driving operating margin expansion with the near-term goal of getting back to double-digit operating margin by the second half of calendar 2017. Turning to expenses below operating income. Third quarter interest expense was $63 million, and our adjusted effective income tax rate was 23%, both consistent with expectations. -- adjusted diluted earnings per share of $1.48 exceeded the high end of our guidance for the quarter. Adjusted diluted earnings per share grew more than 3x sales compared to last quarter.

Turning to the balance sheet and liquidity. During the quarter, working capital increased by $145 million sequentially, primarily due to an increase in accounts receivable driven by the growth in sales. Working capital days decreased 11 days quarter-over-quarter to 76 days. From an inventory perspective, Inventory increased by $168 million or 3% sequentially. The increase in inventories was primarily driven by an increase in certain memory products to support supply chain services engagements and from an overall increase in inventory received at the end of the quarter. inventory net of accounts payable decreased by $115 million compared to last quarter. We ended the quarter with 77 days of inventory, achieving our near-term target of below 80 days earlier than anticipated. Our EC business had 70 days of inventory and our Farnell business had just over 200 days of inventory.

As a value-added distributor in the center of the technology supply chain, inventory is a critical enabler for our business. We remain focused on making the necessary inventory investments to position ourselves appropriately to capture the numerous opportunities we see in the markets we serve. We continue to prioritize servicing our customers' and suppliers' inventory needs through an overall pipeline of inventory and through a variety of supply chain programs to meet expected customer demand. Our return on working capital improved over 300 basis points sequentially from both higher operating income and the reduction in working capital days. Continuing to expand our return on working capital is a focus across all of our businesses. We expect to achieve our near-term goal for return on working capital of 16% by the second half of fiscal 2027.

In the third quarter, we used $54 million of cash flow for operations to support $800 million of sequential sales growth. We anticipate a use of cash flow from operations in the fourth quarter to continue supporting the sales growth, primarily in the form of accounts receivable. Cash used for capital expenditures was $17 million during the quarter. In line with our stated priorities, we ended the third quarter with a gross leverage of 3.6x and down from 3.9x in the second quarter with approximately $1.7 billion of available committed borrowing capacity. We believe we are on track to reduce our leverage to our previously stated target of approximately 3x by the end of the calendar year. Returning excess cash to shareholders remains a core priority of our capital allocation program.

In the third quarter, we paid our quarterly dividend of $0.35 per share or $29 million bringing our year-to-date shareholder return to $224 million, including both our dividend and share repurchases. Once our leverage returns to our target levels, we expect to use a portion of free cash flow to repurchase shares. We have $226 million remaining on our existing share repurchase authorization. Turning to guidance. For the fourth quarter of fiscal 2026, we're guiding sales in the range of $7.3 billion to $7.6 billion and diluted earnings per share in the range of $1.70 to $1.80. Our fourth quarter guidance assumes current market conditions persist and implies a sequential sales increase of approximately 5% at the midpoint. The sales guidance implies sales growth across all electronic components regions. This guidance also assumes similar interest expense compared to the third quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis. This was a strong quarter with solid execution and continued recovery in the West.

We are proud of our team for continuing to demonstrate the value we bring to our customers and suppliers. There is always opportunity for improvement, and our goal continues to be to ensure that we remain well positioned to meet our current customer needs while taking advantage of the positive market conditions we are seeing today and are expecting in the future. With that, I will turn it over to the operator to open it up for questions. Operator?

[Operator Instructions]. Our first question comes from the line of Melissa Fairbanks with Raymond James.

I must have hit star one early enough for a change. Congratulations on a great quarter. Glad to see the continued progress in everything. So I know you mentioned you've seen some pricing increases from some suppliers. Obviously, memory was a very significant piece of that. But is there any way of contemplating how much of your revenue growth outside of memory has been driven by higher ASPs, even if it's just for some of the higher value components, not just the price hikes or like absolute that volume growth, have you quantified volume growth recently?

Melissa, thanks for the comments. This is Bill. Not -- not -- I mean, the memory -- we just wanted to be fully transparent on that because it's frankly so public right now. I know you have a question on that. a lot of them are sort I think more of the price increase will start to come into play this quarter as April 1. So we didn't have a whole lot to calculate as far as a percentage of growth based on ASPs and the balance of the technologies. And if there were ASP increase, they already would have been in the run rate from the prior quarter. You know what I mean. So effectively, it was the bulk was memory. It might change for here in the June quarter.

Melissa, I would just add, I think as we go forward with other price increases, we don't expect those to be anywhere near the magnitude we saw in memory and it won't be everything.

Okay. Yes. Hard to replicate that level of price increases. Maybe digging in a little bit further, you mentioned that you've had incredibly strong growth across industrial networking and data center. Are you able to quantify how much those markets contribute to overall components revenue?

Yes. So roughly, you said industrial at somewhere 50%, 60%, probably? [indiscernible]So industrial is in the 30-plus percent right there. We've been that way. Historically, it's coming back pretty strong, actually, year-on-year. So that's roughly the numbers.

Okay. Perfect. Can I squeeze in one more?

Yes.

You mentioned longer lead times are spreading across more of the portfolio. I know IP&E has had some tightness for quite some time and then some of the memory or storage stuff. But just wondering if there are any areas where you're seeing stock outs yet or maybe even double ordering the [ cabo ] phrase?

Well, let me work backwards on that. On the double ordering more -- our suppliers will see more of that more because they could see similar orders from the same customers to multiple channels. tougher for us to see that. We'll see inflated demand or inflated forecast from the customers, right? So we'll -- and we do -- we are pretty disciplined around that if somebody is using 100 pieces a month for years and all of a sudden at 500 pieces per month like, okay, what happened, right? This is an example.

So we are doing our dentist to track that and call that out as much as we can from an analytics standpoint. As far as lead times go and stock outs, no, it's mostly memory right now. However, we are, for sure, seeing lead times, you already mentioned the IP. They've gone out a bit not to stock out levels by any stretch, but they've been leaking out a bit by discrete a tad, analog is about flat to up a tad, but it's been up storage -- storage is going to up and that's going to be tied to memory more than likely, right? lead times about memory to want to push out the storage. So yes, that's about the picture right now.

Okay. Perfect. I appreciate all the detail. I know you have the data. I just had to write that or ask the right questions. Thanks, Guys.

our next question comes from the line of William Stein with True Securities.

Great to see another strong quarter, and I hope you're right that we're sort of in the beginning of this upturn. Phil, you mentioned strength in AI data centers driving demand. Can you remind us what your exposure is to that end market? Is that simply traditional component distribution where the ODMs are using the channel? Or is there some sort of supply chain services associated with that? Any characterization of that exposure or sizing, for example, would be helpful.

Yes. Thanks, Will. Thanks for the comments. Yes. So I think we estimated a couple of quarters ago is somewhere in the 5% to 7% range, probably increased a little bit closer to 10% to 15% that we have exposure. And to be clear to your question, to go directly into the data center. And that would be, I don't know what you call it traditional anymore, but it's definitely tied to supply chain, it's more in the core and traditional product lines. And we don't -- as you know, we don't carry video. So it's not that and the bulk of that is selling into directly the hyperscalers and data centers is more an ag and within agent Taiwan.

That's what we try to track is and work in track is what other verticals are being impacted with the expansion of data center, right? Industrial and others are also seeing a lift, and that's our sweet spot, right? So the -- it's directly to the data center we're tracking is the number I gave you. And then you got the, I call it the n-minus-one factor, right? What is the -- the industrial segment is I'd like to mention customers names you can imagine in power, power management, heating, cooling, HVAC, et cetera. They're also increasing -- and we're trying to determine how much is tied to the data center.

But I hope that answers -- and yes, we are expanding our supply chain as a service opportunities as well, but that's not as much in that number that I gave you, every more services revenue.

One other, if I can. I was a little surprised to see components grow faster than Farnell in the quarter. I think based on your comments, it sounds like that's more memory driven, maybe there's less of that in Farnell. But I would just expect that at this point in the cycle when things are -- you're just starting to hear about lead times stretch prices increasing shortages starting to show themselves that perhaps Farnell starts to be a more prominent part of the business.

Is that -- is that on the comm in your opinion? Or anything you can talk about the sort of performance differential between these two because Farnell has quite a bit of gearing on the margin side.

Yes. No, thanks, Will. I think part of it is they've had now 3 quarters of double-digit year-on-year growth. So they've kind of gotten a lift ahead of some of the core balance of the quarter outside of Asia outside of Asia. The other thing is they have a lesser percentage of their business is on board components, right? So their percentages are lower because of the MRO test and measurements. A big part of their business. So it's not all apples-to-apples, like everything we have. They're not 90% on board to or 90% sevelectorn IP like we are in the core.

So I think that's the biggest delta difference. And then the other one is their strongest region typically the largest region is in Europe. And as we said in the script, although we're encouraged with what we're seeing in Europe ones, for sure, oxygen in Europe, and that's great news for us. It's still a little bit more spotty than what we see in other regions. So what we need is for Farnell to accelerate its growth in Europe as well. And that -- you're absolutely right. that will help the margin mix too. And they don't have as much memory. Yes, they don't -- the volumes of memory and the core is much higher. So that would also impact I hope that answers it.

It mostly does. Maybe just let me tack on maybe half question. Is this perhaps related to inventory work down that's still perhaps we're done with that for the most part, but is there still more of that that's going to really make the difference in the Farnell business customers truly depleting so that they have to come reorder?

Yes. I think I sure hope so. I think most of that's behind us. There's still probably somewhat visibility to everybody's inventory and the end customers. But I think for the most part, that is behind us. And we did see -- I mean, it's. We have seen revenue per line item is increasing, the lightens themselves are increasing. So the signs I mean, we're actually pretty pleased with where the progress we're making in for now. There's still work to do, and I know that seems on this call right now. So they know that we have our long-term marching orders there, and we're just going to continue to work towards those goals.

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

Maybe a few if I could. I think you said 50% of the sequential increase in revenue this quarter was related to pricing. Any help on how that contributed to this increase in EBIT on a sequential basis?

Yes, Joe, I think how I'd characterize it as we kind of try to get at in the script as we pass on prices, right, it does -- we maintain the same gross margin, but get incremental gross profit dollars. So I think it contributed to the overall drop-through in operating leverage. Now again, I think a lot of what we saw outside of the guidance and where the lot of the beat was, was in Asia. So continue to see that trend in Asia being strong, which now is close to 50% of our UC business. So -- but it helped the operating margin leverage like the other sales. But didn't have a meaningful impact on the gross margin.

Right. And I guess like on the EBIT dollar increase sequentially, fair to say that it was more than 50%.

I would say it was probably around the same as the sales growth in terms of the percent that coming from there.

Yes. Okay. And then I guess, as we think about just like what's embedded in the guidance, I think you said earlier, right, we've seen a round of price increases across maybe more of the broad analog mixed-signal space that kind of started taking place in April. So how do we think about that contemplate, I guess, in the 5% sequential growth for the June quarter?

Yes, I would say I think it's in there, at least what we know. But again, it's less pronounced than what we saw last quarter, right?

So I think it's already kind of in the Q3 run rate for the memory pricing and then some of the other things are just a much smaller percentage. And again, it's not everything. And the timing is kind of throughout the quarter versus everything at the beginning of the quarter. So think about, yes, it might be double-digit increases in price, but it's to 0, let's say, on average right? If it's a like 100.

Yes. Yes. Okay. And then maybe just last 9 on the inventory, can you just kind of update us how you feel about your inventory positioning across just kind of the broader line card and where you see that going over the coming quarters?

Yes, I think we feel generally good. And again, I think Phil commented on the book-to-bill and the backlog, right, which is one of our challenges we've had over the past several quarters is trying to get that visibility so we can make sure our suppliers are building the right parts that are needed. So I think we feel good. There's still opportunity we have to some things that are in excess and some things that are aged right, continue to turn that and move that and convert did good inventory. But again, we're going to keep investing in inventory we want to make sure we're prepared and we've got enough to support the needs of the customers and the overall demand but we're happy with the progress on the inventory days, and we'll continue to work that where we have opportunities and continue to reinvest, especially in the IP side of things.

Farnell still has some continued investment to make as well. So they're improving their inventory days as well, but there's still some things we want to make sure they're prepared as well. So again, I think you see it here continuing to kind of work down as we continue to grow, but still opportunities for some investment and some overall efficiency there.

Yes, Joe, I'll just add to that. I mean it's our life point, right? So inventory sometimes gets a bad word. It's we don't want to aging. We don't want too much of anything that we don't need, but we're constantly balancing that. And it's critical to obviously our suppliers that we've got the appropriate inventory and as importantly as lead times go out, that we're pipelining and part of that message is to our customers to continue to give us, as we talked in the script, more visibility longer term. And that's starting to happen, still not across the board, but that's starting to happen as well. So right now, we feel good with our inventory position. We'll continue to improve it.

That means both the hopefully turning it but adding the appropriate inventory from SKU standpoint and to that point, Farnell, we've actually added -- and this is key back to Will's question even from an NPI or new product introduction, but we've added over almost 60,000 SKUs later another 70,000 additional SKUs just this year, and a lot of that is in the IP&E space, but as well across the board and semiconductor. So may we have a good handle on right now, and we feel pretty good about the position with inventory overall.

Our next question comes from the line of Ruplu Bhattacharya with Bank of America.

So you beat guidance for fiscal 2Q, you're guiding above seasonal for fiscal 4Q. Based on the visibility that you have -- do you think that you can maintain above seasonal growth for the second half of calendar '26?

Well, we don't typically -- as you know, we don't typically guide out that far, right? But again -- and I really remain vigilant on this route. So we're just managing the bookings, managing the backlog and Yes, it looks positive at this point in time that we'll continue to see some growth as we get through the year. Summer is always tough to judge, right, with the holidays and whatnot. But we're not seeing anything that would really negate at this at this point in time. I think it's the important one.

Okay. Maybe I can ask a follow-up to Ken on margins and specifically on incremental margins, revenues leaked quite a bit. You came above the high end of guidance. Were you -- was this the incremental margin that you were expecting in the core business? And how should we think about that as we move forward? And has your expectation for Farnell margins changed? Initially, you had guided on the Farnell side, 50 to 100 bps of improvement every quarter. I think on the call, you said that you'll get -- you're targeting double-digit operating margin now by sometime in the second half. I think you said of calendar '27. How should we think about that incremental margin on that side of the business?

Yes, I'll start with the last one first about Farnell Ruplu. And I would say, I think we're tracking pretty well. We saw a nice uptick in gross margin because the on-the-board component mix as expected. I think Phil mentioned here is that Europe really comes back, and we've had a couple of quarters of growth there now, but it's not the same as what we're seeing in Asia, for sure, or even in the Americas. In terms of the growth in Europe, both at Farnell and for the core business.

So I think as that continues to recover, which we're monitoring, you'll get some more uplift there. So we feel good about the progress and the guidance implies improvement in that range. We were expecting in terms of the fourth quarter. I think for the quarter itself, going back to the last comment, a lot of that beat came from Asia, right? We expect it to be down a little bit because of the Lunar New Year, and it was up. And so that's impacting the overall operating margin. But I think, in general, we had good progress on operating margin expansion in and let's say, the guidance implies further improvement there. So we're tracking pretty well and have a few quarters in a row now.

And then the combination of the two helps the Avnet Inc. operating margin expand. So it's still a few quarters away from kind of where our near-term milestones are, but I think we're making good progress and feel good about that. And then obviously, the broader leverage and operating income dollars is much growing much faster than the sales, which is what we'd expect.

Okay. Let me just ask a clarification on that. So on Farnell margins, where do you think that can get to by the end of this calendar year so that we set our expectations. And then on -- maybe my last question would be, you talked a lot about memory. How much is memory as a percent of revenue or as part of the product line? Like how big is that in terms of your product line or in terms of revenues?

A few different questions there. So I think we said 50 to 100 basis points a quarter for the Farnell improvement. So if you take that by 3 quarters left in the calendar year, you get $150 to $300 million, right? So I think that's not changing. And then from a memory perspective, obviously, with where pricing has gone, it's become a bigger percentage. So think about roughly in the low double-digit range. And that's primarily a core business kind of comment. EC, Farnell has much -- would be a much smaller concentration.

And there are no further questions at this time. I will now turn it back to Phil Gallagher for closing remarks.

Okay. Thank you, and thanks for everyone attending the call, and I appreciate all the callbacks and the questions. So again, thanks for attending today's call. We look forward to speaking to everybody at our upcoming conferences and our fourth quarter and fiscal year 2026 earnings report in August. Okay. Thanks a lot.

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

I think we're live. So for our track today, we are rounding out the day with Avnet. First, I should introduce myself. I'm Melissa Fairbanks. I am the analog semi and IT supply chain analyst here at Raymond James. Welcome to the conference. We are really excited to have Ken Jacobson, CFO from Avnet with us today. We also have hiding in the audience, Lisa Mueller, who handles IR for the company. And it's been a pretty full day. Full room looks like, full day of meetings. So that's good. It's been an interesting time in analog semis and distribution, certainly recently.

So Ken, if you would like to do just kind of a brief introduction of who Avnet is, I don't know if you need to do a safe harbor statement. And maybe give us kind of like some background on the company just to get us started.

Yes. Well, thanks, Melissa, for having us out here, and thanks, everyone, for your interest in Avnet. Avnet is a global value-added distributor. We connect the world's top technology manufacturers, primarily semiconductor and interconnected passive and electromechanical manufacturers to customers that use electronic components in everything they design and create.

Our 2 areas of expertise at the center of the technology supply chain is design chain and design support, helping customers choose the right electronic components to make into their design and then supply chain. We've talked about a lot of supply chain since COVID times and the shortages and we're experts in supply chain. We've got global scale. We do business in over 140 countries worldwide, so we can help customers design or have supply chains anywhere in the world where they need it. And as of the last few years, the supply chain capabilities are becoming more and more important to making sure you can sustain your operations and have a resilient company.

Okay. Maybe go over the 2 separate businesses. You do have 2 separate reporting -- your reporting structure is 2 separate businesses. Talk about the difference between the components business and then Farnell.

Yes. So our first segment, Electronic Components business is what we refer to as a broadline distributor. So we've got a broad line card, and we're supporting primarily high-volume customers that are already in production. And so we're typical customers are the procurement groups of manufacturers, and that business is global, represented in Asia, which is roughly 50% of our business last quarter. The Americas is roughly 20%, and then Europe is roughly 30%. And so that business effectively supports production volumes, and we help customers design and support supply chains throughout the world.

Our second segment is what we call the high service business called Farnell. That's one of speed and convenience, where you have design engineers and R&D activities going on that need small quantities, they need it overnight to finish their design and product. And with that, we yield a higher margin. So as the EC or Electronic Components business runs around 10% to 12% gross margin. The Farnell business runs closer to 30% gross margin, so definitely a premium there.

The mix makes a difference for sure. So I would like to kind of go over current trends because you guys do tend to follow the leader in terms of the semiconductor supply chain. Maybe go over some of what you're seeing by the geographic mix. Asia typically leads us out of a correction followed by North America and then Europe. That would be very helpful to kind of review that.

Sure. Maybe the first thing to point out is we're very diverse. So we've got a very robust line card, but no single supplier technology represents over 10% of our business and no customer represents over 4% or so of our business. So have a really good breadth of the market. Our key focus areas in terms of end markets would be industrial, transportation, aerospace and defense, networking and communication as well as some in the data center and consumer side.

Really, this cycle, I would say the recovery starting in Asia, we've got 6 quarters in a row of recovery and growth in Asia. And that business now is at record revenue levels as of this last quarter. Now a little bit of that is driven by the data center and the AI phenomenon, but it's more broadly in terms of the recovery. And when we look at our Asia business, it's led by Taiwan roughly 40% of the business. And so a lot of strength in Taiwan. And then next biggest market would be China, followed by Southeast Asia and then Japan.

And so what we've seen is broad-based recovery and the growth rates accelerating. Some of that is replenishment from the customer base because they've bled down inventories, but a lot of it is really the increase in broader demand. And so feeling really good about that. But just for color, our Asia business was 40% of our total business just 5 quarters ago, and now it's 50% because of that growth. While in the West, we just got back to growth in Europe this last quarter. Europe has been the slowest region. It's our most profitable region in terms of gross margin percentage as well as operating margin. That business is heavy in industrial for us, followed by transportation and then networking, comms. So we saw pretty significant declines. We're about 35% plus off peak revenue levels in Europe but got back to growth, roughly 1% year-over-year growth is last quarter and seeing traction there.

And then the Americas is kind of somewhere in between -- had a couple of quarters in a row of growth, a little bit more robust in Europe but still closer to where Europe is at compared to Asia. And so what gives us some amount of confidence, but I would say, very encouraging signs that through all the regions, we're seeing robust book-to-bill ratios. We're seeing our backlog replenish over the past 4 quarters. We've been encouraging customers that give us visibility the more visibility we get, the more forecast we get, we can provide that information to our supplier partners. So they know what to load the fabs in making their semiconductor choices. So a lot of it's based on our visibility, we give them demand outlook.

So we're seeing really good signs there in terms of backlog building back up again and getting some of the visibility we had pre-COVID. I would also point to, we called out this last quarter, a lot more mismatches. And so we're seeing the last few quarters, customers ordering within lead times. And what that means to us is customers have depleted some of their excess inventories and they're ready to buy product now, they're ready to replenish. But when they order within lead times, you're not necessarily able to get that product unless we have inventory on the shelves. And so what we saw this last quarter is now more signs of suppliers delivering product outside of lead times. If a stated lead time is 12 weeks, maybe the supplier is delivering in 15 or 16 weeks. And so that mismatch is creating an imbalance between supply and demand, which is good for us, but challenging for our customers if they want to make sure they keep their lines running.

And so we continue to encourage customers to give us visibility, let us help with our supply chain capability as a pipeline product for you, so you can keep your lines running and avoid having shortages in certain areas.

Okay. Great. I'm sure that does help with the visibility longer term. Do you feel as though your customers, even the broad-based customers in Europe are now moving more toward real consumption rather than under shipping demand? I know for many quarters, the suppliers themselves were undershipping what true demand was. And so we didn't have a very good representation of what actual consumption was. Do you get a sense that this is still just shipping to consumption rather than inventory builds. I don't want to use the word stockpiling because that's a bad word. But just curious what you're kind of seeing from your customers there?

Yes. And maybe I'll start with our own inventory. I mean, I think it's important we're a distributor. So inventory is kind of the lifeblood of our business. And so we got to make sure we have the right inventory, and we've had our own challenges working down our inventory levels or getting rid of some of the areas of excess so we can invest in the areas of need. But clearly, in an environment where there's more demand with the short interval orders within lead times and then deliveries outside of lead times, if you're well positioned on inventory, you can capture more of the market.

I would say the customers, in particular, Europe, but I think as a general statement, are in pretty good shape. I think it took a little longer to consume those excess inventory levels. But I would say, if anything, they're probably too leaned out on inventory. I think that's a broad statement. There's always some pockets of customers depending on your end market or vertical that might have some areas of excess. I think in general, we feel the customer inventories are healthy. And -- but we need to make sure we're getting the visibility to make sure they don't come up short.

So what you're seeing right now is probably true demand. I think there's areas where things are getting tighter. And what you tend to see is customer behavior of wanting to order more to think if I order more than maybe I get in line or I get premium access, right? And I think we're trying to encourage responsibility is making sure that what you're ordering is what you really need for your near term so we can help spread those products that are high in demand across multiple customers.

So one of the questions that I get quite frequently, there's a little bit of a misunderstanding. And I think some of it was driven during COVID, during the supply chain crisis when we saw kind of an explosion in your revenue levels and then also the margin profile is how does pricing impact your margins? And rising costs that we're seeing on the component level, particularly I'm thinking, of course, in memory and storage. Are you able to just pass that through to your own customers? Or is there some kind of elasticity there?

Yes. I would say when we hit the peak of the shortages, we were seeing broad-based price increases, maybe even multiple times a year. And so at our peak, I'll use rough numbers, but we were maybe growing 30% in a given year, and we would attribute roughly 25% of that growth or 7.5% to pricing increases. And a typical scenario be a supplier announces a price increase, we tell our customers, there's a price increase coming, you might have some consumption of stuff you have on the shelves to be able to get in front of the price increase and then going forward, you're buying at the new price. And so on average, what we would do is pass those through. So we wouldn't make any more gross margin percentage necessarily, but we would still enjoy more gross profit dollars because of that growth. And so that helps us with our scale.

If we had 30% growth, 7.5% of that or 25% coming from that growth, then we would create additional leverage in the model. And so we think that's likely to be the scenario going forward again, when there's opportunity when we have product on the shelves, we have opportunity to get a little bit more margin. It's okay to get paid the value we provide but at the same time, we understand if a customer is getting a 20% price increase, that's a lot to digest, right, but we still should be enjoying our same gross margin percentage in part because we're giving you terms on that, we're holding inventory at the higher price, right? So there is more value we are providing to.

But I think what I would say, though, is the caution everyone is -- we are not anywhere near what we're seeing in that environment with broad-based price increase. I think we're hearing some anecdotes on increases, memory comes to mind as things have been announced, although some of those increases haven't taken effect. There's other price increases that we're aware of have been announced that are surrounding certain technologies or certain customer bases, but I would not say anything is broad-based. We're still early innings, but the indicators seem to be there if some pricing moves. A lot of that's driven by the input costs. You mentioned that before is we're seeing precious metals, gold, things with gold and okay, connectors with gold, hey, there's a price increase. [ Handle ] them on the passives. So there are true input costs that are rising that are leading to some of these talked about price increases.

I think when we get into periods of growth during the up cycle, typically, you kind of addressed a little bit of the working capital investment that you need to make in order to support that. I'm curious on the OpEx line, like your own internal costs. It seems as though we've got a little bit better leverage in the operating model than maybe in past "normal cycles" excluding the supply chain crisis. How much has automation, deploying AI within your own internal processes or internal efficiencies allowed you to capitalize on some of those -- like drive a little bit more leverage in the operating model as we get to return to growth?

I think we are focused. We brought in a Chief Digital Officer a little over a year ago with a lot of expertise, not only in e-commerce but also digital tools and solutions. And so we think about our to kind of value propositions of design chain and supply chain, there's a lot we can do with technology, 2/3 of our business is comprised of people and people costs. And so although in the warehouse, there's physical movement, you can always optimize there. I think as we look at our technical resources, we've got 2,000 technical engineers across the globe to help customers in design options, we can definitely use technology and digital tools and capabilities to help them be more efficient in supporting our customers in our design chain.

And then the same thing is supply chain, customer service, all those kind of things, there's a lot we can use technology and the data we have to make better decisions and to support our customers better. So I'd still say we're early innings in terms of some of those use cases and capabilities, but we have a road map, we feel pretty good about that there is value to provide. And again, some of it's cost reduction, some of it's efficiency for the team, but it all should yield our ability to grow and not add a bunch of expense so we can drop more through to the bottom line. And I think we are -- feel well positioned with our OpEx right now to be able to have a couple of years of nice growth without having to add a lot of costs.

Okay. Great. That kind of leads us into a natural discussion about the margin targets. At your last investor meeting, which was a few years ago, you had set a target margin of getting operating margins above 5% sustainably. We were able to exceed that during the supply chain crisis. But I'm just curious, what are some of the market conditions or maybe product mix that we need to see in order to get that margin target sustainably?

I think...

Or above?

Yes. I think the targets necessarily haven't changed. Our EC business was above 5% for a few quarters. And our floor this time around is roughly 3%. So if you think about the last cycle coming out of it, we hit as low as 1.5% of that business. So I would say kind of the step-up in revenues and scale has allowed us to now have a new bottom of potentially 3% there, and we're on our way back to growth. I mean, I think again, growth in the West with the higher margins, the recovery of the West, I would almost say -- is going to help a lot because that's our higher-margin regions. But scale does matter in our business. And again, we can control the cost. So I think continuing to drive those initiatives to grow the business faster than the market. Focus on the value we provide to get a little bit more gross margin. Those are all levers that will help us.

We didn't talk about Farnell much outside of the...

Oh, I was getting there.

So that will help a lot, too. Farnell business runs at 30 points of margin versus our EC business. So we've got some, I think, good tailwinds coming our way, and I think we're well positioned not only with our customers, but also with our supplier partners. But just this last quarter, we improved operating margin in the EC business by roughly 30 basis points. Our guidance for the March quarter implies another 30 basis point uplift so we're starting to see the traction as we start to recover in the West.

Okay. Great. I think I would like to talk about Farnell, talk about how there are synergies between that and the components business in terms of maybe serving as a funnel for longer-term opportunities. But certainly, that margin profile brings some opportunities for you as well. Discuss what's been going on there. I know that we had some disruption coming out of the supply chain crisis, maybe some inefficiencies and what you've been doing over the past year, 1.5 years, almost 2 years now in order to get the margin profile back up to where you want it.

Yes. Our Farnell business I think gives us a differentiator between our competition, that high service business. And again, the margins are very attractive. But I think what we're continuing to do is get our Farnell business closer to our core business. And I'll give you a couple of examples of that. Think about our core business, roughly 30% of that business is done through EMS contract manufacturing, and there's a long tail of the EMS customers as well as the big guys. And we're really underpenetrated in that customer base with Farnell. Although we've got great relationships in the core and Avnet's got -- there's not a lot of business not only for on-the-board components, but also the test and measurement, the maintenance and repair, all the things that an engineer would need to design products. And so we think there's more opportunity really just to continue to cross-sell with our existing customer base with Farnell.

I think on the flip side, early identification for high-volume customers coming through Farnell. Farnell has got a much bigger customer base than our core business in the hundreds of thousands through their e-commerce platform, so continuing to identify leads and marketing leads and early in the process to shift those over to Avnet to be able to keep that business is good. And then going back to the Chief Digital Officer, one of the things we're focused on, we believe, within our control for the Farnell revenues is really just the e-commerce penetration. We're getting lots of website hits, lots of eyeballs coming to not only the Farnell, but also the Avnet properties. How do we convert more and capitalize more on making sure we're getting those converted to sales? And there's some things we can do in terms of the e-commerce proposition, some of the functionality of the site to help drive that conversion rate better, which then is additional growth for Farnell.

Is the mix of the product or the components meaningfully different between EC and the Farnell business?

I think in general, the types of products that are sold by Farnell, at least for on the board components are the same as the core business, although Farnell tends to focus on more SKUs in terms of if a supplier has a portfolio, let's say, of 10,000 SKUs, Farnell may support 9,000 of those SKUs, whereas the core business maybe only a couple of thousand as an example.

Farnell, part of their value proposition is seeding the market with new product introductions and making sure we've got a broad selection of parts. So when an engineer goes, they can get anything they need from Farnell. There's a differentiator in Farnell's business in terms of they sell single board computers, test and measurement, maintenance and repair products that the core business really doesn't support and that's all for the benefit of here's everything an engineer needs at their design workbench to test their products. But from an on-the-board component perspective, we're very aligned in terms of line card and what we have there.

And just for a little bit more color. When we talk about onboard component, that means a semiconductor or all the IP&E parts that are around the board. And so that's what we refer to as more of the Electronic Components, and that carries a higher margin for Farnell. So what you're seeing in Farnell's growth in some of those other areas, but the on-the-board components have been a little bit depressed and primarily because Farnell is mostly Europe but also heavy Americas business. And so as that market begins to recover, you'll start to see some tailwinds in Farnell's gross margin because of more sales of semiconductors and IP&E products. So that margin has stabilized and is a pretty good margin.

Great. You mentioned engineering and services a couple of times at different points in the discussion. Maybe if you could talk about how value-added services within either business are going to be accretive to margin longer term and kind of categorize what all you're able to provide for your customers?

Yes. I think from a -- I'll start with supply chain service, I think we're seeing more and more opportunity for customers coming to Avnet to support their supply chain needs. And a unique opportunity we're seeing, and we saw some of it coming out of the pandemic, and it's really the large OEMs that have complex supply chains, and they buy lots of parts. They have lots of partners that help with them with their manufacturing, but they don't actually have warehouses. They don't have even legal entity footprints to secure product where they need it. And so they'd bring someone like Avnet in to help provide supply chain services that could be procurement services. It could be warehouse and logistics, it could be buffer stock, and it could be kind of just-in-time delivery to their network of manufacturing partners.

So we're seeing a lot more opportunity with the supply chain disruptions that come in and provide services. That's part of the available market or the TAM right now, but Avnet really hasn't played a part. Those are usually the direct customers of the supplier base. We're seeing more opportunities there to provide supply chain services and then we can take some of those solutions and provide it to our mass market customers and provide them more supply chain opportunities. So we like that. It's a higher gross margin. It's not really a top line mover but higher gross margin. And then our design capabilities, the more parts we can help customers select then we typically get a better cost from our manufacturing partners. And so there's a little bit higher gross margin there. So there's a few different things that we have in the portfolio to help drive gross margins.

The last thing I'll talk about is Embedded and Embedded Solutions. We're seeing more and more customers eliminate time to market through choosing embedded boards and solutions, and we've got an embedded board in solutions business in -- based out of Europe that helps customers design custom boards or we have standard boards. And so we see that as a win-win-win where the suppliers can wrap more of their technologies within a single board. We can enjoy a higher margin because we own the design and then our customers get a quicker and cheaper overall solution. So we're seeing that business be a little depressed with what's going on in Europe because it's a heavy industrial health care base, but we're seeing some of that start to come back and the prospects over the next few years with the embedded space are good.

Great. Great. How much does trade and tariff navigation play into either your value-added services or even just the broader business. You touched on your locations in Asia, locations in Europe. You've got a pretty wide geographic footprint of just availability of warehouses, the distribution centers, even engineers globally. And so with a lot of the uncertainty in trade and tariffs, has this presented an opportunity for Avnet?

I mean I would say any supply chain disruptions, tariff included present opportunity, and I would maybe start with the positives before we get into some of the negatives. We have been able to adapt and pivot with some of these changes. And again, because we have operations in 140 different countries, we can move your supply chain where you need it. And you saw it back when -- there was a focus on China and China plus one. So we're seeing a lot of beneficiary here in Southeast Asia, markets like Malaysia, Vietnam, India. We're also seeing more nearshoring. Guadalajara, for example, is big for us. We're seeing a lot more companies move to Mexico. Although there was just disruption a couple of weeks ago in some of that, and we had to shut down the [ ware ]. So I do think you never know where your supply chain disruption is going to come. So our global scale and footprint and trying to invest ahead of the curve of where that next support spot will be important.

And for the tariffs here, specifically in the U.S., we've been able to pivot our distribution center in Phoenix, Arizona is a free trade zone. So it allows us to mitigate tariff impacts until we know exactly where the product is going. And then Mexico has been another beneficiary there. So we try our best to mitigate where possible. But unfortunately, if you're going to be manufacturing here in the U.S. and use a product to produce in China, you're going to have to pay a tariff. And so we have to pass it through. We've been pretty transparent to our customers. It's been a lot of work for the team, the operations team for all the changes and you're kind of reacting to news reports real time. I think we've got at least some kind of process down.

That would be the negative.

And again, we've talked about price increase in the past, and I would say customers sometimes are easier to absorb a 20% pricing coming from supplier versus a 2% tariff pass-through. But we worked through it, and I think we're in a pretty good spot now, although we'll continue to monitor the situation. And just for more context, perhaps, our business overall, less than 2% of our revenues are from tariff billings -- from an Americas standpoint sorry, globally, it's less than 1%. So it's pretty insignificant in terms of the overall impact. So it's -- but that unlike the other pass-throughs, that's really truly a pass-through where we're -- whatever tariff we charge, we're charging the customer that as a moment of tax.

Okay. We've just got a few minutes left, so I want to open it up to see if there are any questions in the audience. Before I move on, I would be remiss we have the CFO sitting here. I need to ask them about capital allocation and some of your investment priorities. Typically, with the cyclical recovery, we touched on this a little bit earlier, requires a significant working capital investment to support the growth. But maybe talk about where your balance sheet is today, your current inventory levels. It seems as though we're supporting better revenue growth without driving that big spike in working capital investment.

Yes. From an inventory perspective, I would say we have at least the right amount of dollars. There's still some opportunity. We've been over the past several quarters kind of beneath the surface, although the balance sheet number might be one number, beneath the surface, there's been lots of changes in the composition of the inventory and getting some of the aged and excess inventory out and investing in inventory that's going to turn faster and that's needed. And there's still some work to do there, but I feel really good about the fact that we don't have to necessarily invest a lot of inventory dollars to continue to grow the business.

Now we're going to need to invest in the right kinds of inventory and make sure we've got the right products on the shelf.

But as lead times potentially extend as more demand from customers come within lead times, right? I think we're going to start turning the inventory faster. So from an enterprise perspective, we dipped below 90 days of inventory this last quarter. I think we got to 86 days. When you separate our businesses, the electronic components business should be running under 70 days of inventory. So still some runway to go there. But this last quarter, they were above -- or sorry, below 80 days in the EC business, and that's just a quicker turning. We're looking for 4 to 6 turns a year, so closer to 6.

And then from the Farnell business, they do need to have more inventory. The proposition is one of inventory and having that breadth of SKUs. And so they're going to run closer to 200 days is our target for them. This last quarter, they were 220s. And so some room to go there in Farnell. But again, as they start to grow, they'll have more scale and start turning some products faster. So we feel good about the fact that we're not going to need a lot of cash necessarily to invest in inventory, although we'll continue to get the right kinds of inventory on the shelves. Where we're still going to need some working capital depending on the growth rates will be on the receivable side. Part of the value we provide to our customers is terms. And so as we grow, we'll have more in accounts receivable, but the cash conversion cycle overall should shorten in this next go around, at least for the foreseeable future here as we continue to grow.

I think from a broader capital allocation standpoint, we want to return excess cash to shareholders. We've got a dividend that we've grown every year since we've implemented it. We've historically been aggressive on buybacks. Although right now, we're a little more focused on getting our leverage back into the 3-ish range. We're running just above 4. So we feel much more comfortable in the 3-ish range to be able to have the capital we need to invest in the business. But I think from our standpoint, we'll get that taken care of in the next few quarters and then get back to returning excess cash flow to shareholders. And again, CapEx is generally pretty sustainable between $100 million and $150 million a year.

Okay. All right. Maybe in the last few seconds, any closing remarks, anything that we didn't address today?

I do think that Avnet is really well positioned to get back into a growth cycle. We feel we're in a really good neighborhood in terms of the just the proliferation of electronics and everything we do continues to expand. So we see lots of opportunity with content, exciting areas like robotics, drones. There's lots of applications that we see just a continued amount of content growing. So we feel pretty good about the neighborhood we're in, and we're well positioned to capitalize on growth and return margins to historical levels.

Excellent. I would agree. Thank you very much, Ken. Appreciate it.

Thanks, Melissa. Thanks, everyone.

Thanks, everyone.

Welcome to Avnet's Second Quarter Fiscal Year 2026 Earnings Call. I would now like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Avnet's Second Quarter Fiscal Year 2026 Earnings Conference Call. This morning, Avnet released financial results for the second quarter of fiscal year 2026, and the release is available on the Investor Relations section of Avnet's website, along with a slide presentation which you may access at your convenience.

As a reminder, 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 a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation.

Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website.

Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Lisa, and thank you, everyone, for joining us on our second quarter fiscal year 2026 earnings call. I'm pleased to share that we delivered another quarter of financial results that exceeded the high end of our sales and EPS guidance.

In the second quarter, we achieved sales of $6.3 billion, driving a 3.2% operating margin in our Electronic Components business and a 4.7% operating margin in our Farnell business. We also generated over $200 million of cash flow from operations in the quarter and reduced inventory dollars and days as projected. Our double-digit year-on-year sales growth was led by record revenues in Asia along with better than typical seasonal growth in the Americas, Europe and Farnell.

I want to thank our team for delivering this performance while remaining focused on the areas we can control. In the quarter, we made solid strides in expanding operating margins, optimizing inventory and generating cash flow while continuing to make necessary investments to best support future growth. From a demand perspective, sales increased sequentially in most of the verticals we serve and not surprisingly, were led by strong demand in compute and aerospace and defense. Year-over-year, we also saw a broad-based improvement across most verticals.

Now turning to today's market. Demand signals continue to reset globally, resulting in lead times trending higher across most product categories. This trend is still largely driven by the data center, artificial intelligence, but is also broadening as projected growth rates at all segments we track continue to improve. We're also seeing an increasing number of customer orders being placed within lead times, along with higher instances of deliveries beyond lead times. These factors are driving a mismatch, if you will, between customer request dates and supplier delivery dates. This creates opportunity for us to deliver our supply chain value to our customers by addressing those misalignments.

The pricing environment remained stable during the quarter, but we have seen spot price increases with a few suppliers and commodities. The supply dynamics suggest there may be upward pricing pressure across many technologies going forward. We exited the quarter with robust book-to-bills in every region, led by Asia and EMEA. As momentum builds, we are coordinating closely with customers to effectively validate and manage our backlog while continuing to encourage customers to provide us extended visibility that we can share with our supplier partners. The more visibility we can give to our supplier partners, the more supply chain expertise we can bring to bear to solve for the complexities in the market.

With that, let me turn to our highlights for our businesses. At the top line, our Electronic Components business drove year-over-year growth and sequential sales growth across all regions. In Asia, sales reached a record high of over $3 billion. This marks our sixth consecutive quarter of year-on-year sales growth in the region. Demand increased across most of the verticals and geographies we serve for both the year-on-year and sequential compares.

In EMEA, we're seeing clear signs of recovery, with sales growing both sequentially and year-on-year. Most end markets showed year-on-year growth, including industrial, while compute, consumer and transportation were the strongest end markets quarter-over-quarter. We are encouraged with the improving outlook in the region, especially given the continued market uncertainty. I'm confident that EMEA's new leader, [ Gille Petron ], will continue to drive profitable growth in the region.

In the Americas, sales grew both sequentially and year-over-year, marking our second consecutive quarter of year-on-year growth. Most end markets showed sequential growth led by Aerospace and Defense, while Industrial, Communications and Compute were the strongest end markets year-over-year. Our EC team is focused on several growth and margin expansion opportunities, including demand creation supply chain services, embedded solution and our Interconnect Passive and Electromechanical business or IP&E.

Demand creation revenues increased sequentially by 7% as our field application engineers continue to drive the funnel for converting design wins into revenues. Our design registrations and wins also increased sequentially, which is a positive indicator for future revenues. We continue to develop and invest in both digital tools and hardware solutions that will allow our design engineers to better support our customers' design requirements. We are also pleased with the growth in our IP&E business, which had double-digit growth year-on-year. As a reminder, IP&E products carry higher gross margins, and there are many cross-selling opportunities with IP&E components that are complementary to our semiconductor business, including through our demand creation efforts.

Now turning to Farnell. Sales grew sequentially and year-on-year. Farnell's continued improvement reflects recovery across all 3 regions. We believe this is a sign engineers are working on developing new products, which we view as another indicator of the upturn in demand for electronic components. Operating margins improved sequentially, in line with our expectations. We also continue to gain traction growing Farnell sales on the board components through our [ Power of One ] initiatives, which leverages the best of Avnet core and Farnell digital platforms.

Although we are seeing improvement in sales of higher margin on board components, Farnell continues to have a higher relative sales mix of test and measurement, maintenance and repair and single-board computers. As the recovery of demand for the onboard components continues, especially in Europe, we expect Farnell's gross and operating margins to continue to improve.

So here at the center of technology supply chain, as we look forward, there are many reasons why I'm optimistic about Avnet's future and our position in the marketplace. We have a diverse and high-quality supplier line card and customer base. We have a seasoned and stable leadership team and employee base. We're the only global distributor that also adds a high-service distribution business. We have the right resources and more importantly, capacity in place with our sales teams, our engineers and our technical capabilities. And from an operating expense standpoint, we believe we are well positioned for future growth. To our model will create operating leverage over the next couple of years as we return to growth across the world. We're also well positioned with inventory, but continue to drive down areas of excess while we invest in areas of need.

To conclude, we are pleased with the momentum we're seeing moving into the new calendar year. For those of you who attended CES this year, there was a lot of excitement at the show. We had the opportunity to meet with leadership of many of our supplier partners and customers and we continue to be encouraged that 2026 will be a year of growth and margin expansion and improved returns for Avnet.

With that, I'll turn it over to Ken to dive deeper into our second quarter results. Ken?

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our second quarter earnings call.

Our sales for the second quarter were approximately $6.3 billion, above the high end of our guidance range and up 12% year-over-year. On a sequential basis, sales were higher by 7%. Regionally, on a year-over-year basis, sales increased 17% in Asia, 8% in Europe, and 5% in the Americas. During the second quarter, sales from Asia grew to over 50% of total sales compared to approximately 48% of sales last quarter.

From an operating group perspective, Electronic Component sales increased 11% year-over-year and increased 7% sequentially. In constant currency, Electronic Component sales increased 9% year-over-year. Farnell sales increased 24% year-over-year and 7% sequentially, and constant currency, Farnell sales increased 20% year-over-year.

For the second quarter, gross margin of 10.5% was flattish year-over-year and up slightly sequentially. EC gross margins are still being impacted by the Asia region growing faster than the West. From a regional perspective, EC gross margins were stable by a region with gross margin improvement in Europe compared to last quarter. From a Farnell perspective, gross margins were up over 100 basis points year-over-year and were down 25 basis points sequentially.

As Phil mentioned, we anticipate improvement in Farnell gross margins as we see more growth in on-the-board components relative to other product categories. As a reminder, Farnell's Europe region has the highest regional mix of on-the-board components and has been the slowest to recover. Gross margins for the product category level for Farnell continue to be stable.

Turning to operating expenses. SG&A expenses were $492 million in the quarter, up $55 million year-over-year and $27 million sequentially. The sequential increase in SG&A cost is primarily from a combination of higher sales volumes and increases in stock-based compensation expense. As a percentage of gross profit dollars, SG&A expenses were lower sequentially at 74% compared to 76% last quarter. We anticipate that our operating expense to gross profit ratio will continue to improve as we grow our gross profit dollars.

For the second quarter, we reported adjusted operating income of $172 million and the total Avnet adjusted operating margin was 2.7%. By operating group, Electronic Components operating income was $187 million and EC operating margin was 3.2%. The sequential increase in EC operating margin was primarily due to EC operating income growing more than 2x greater than sales, driven primarily by the growth in the Americas and Europe. Farnell operating income was $20 million and operating income margin was 4.7%. Operating income margin was up nearly 40 basis points from last quarter. This is the highest operating margin Farnell had since fiscal 2023.

Turning to expenses below operating income. Second quarter interest expense was $61 million, and our adjusted effective income tax rate was 23%, both consistent with expectations. Adjusted diluted earnings per share of $1.05 exceeded the high end of our guidance for the quarter. Adjusted diluted earnings per share grew nearly 4x sales compared to last quarter.

Turning to the balance sheet and liquidity. During the quarter, working capital decreased by $42 million sequentially. Working capital days decreased 7 days quarter-over-quarter to 88 days. From an inventory perspective, we reduced inventory by $126 million or 2.3% sequentially. At the end of the quarter, our EC business received approximately $150 million of high demand inventory related to memory and storage products which partially offset some of the broader inventory reductions that took place across EC this quarter. Substantially, all of the membrane storage products received at the end of the quarter has already been shipped to customers in January. We ended the quarter with 86 days of inventory as we continue to make progress on reducing total Avnet inventory days to below 80.

As a reminder, the inventory turns models are different between the EC business and Farnell. Our EC business typically runs between 4 to 6 turns per year, whereas Farnell typically runs between 1.5 to 2 turns per year. Farnell's high service value proposition requires a breadth of on-the-board test and measurement and maintenance and repair product inventories. For further context on these inventory model differences at the end of the second quarter, our EC business had less than 80 days of inventory and our Farnell business had less than 230 days of inventory. Even with the overall inventory improvement, our team remains focused on reducing inventory levels were elevated while still making inventory investments where needed.

Our return on working capital improved over 100 basis points compared to last quarter through a combination of operating income growth and the reduction in working capital days. We remain focused on continuing to improve our return on working capital which will also drive improvements in our overall return on invested capital.

In the second quarter, we generated $208 million of cash flow from operations. Cash used for capital expenditure was $15 million. In line with our commitment to lower leverage in order to maintain a strong balance sheet, we paid down an incremental amount of debt from the prior quarter, and we ended the second quarter with a gross leverage of 3.9x with approximately $1.7 billion of available committed borrowing capacity. We still anticipate reducing our leverage to approximately 3x over the next year.

We continue to deploy cash in a manner that generates the greatest long-term return on investments for our shareholders. In the second quarter, we paid our quarterly dividend of $0.35 per share or $28 million.

Turning to guidance. For the third quarter of fiscal 2026, we are guiding sales in the range of $6.2 billion to $6.5 billion and diluted earnings per share in the range of $1.20 to $1.30. Our third quarter guidance assumes current market conditions persist and implies a sequential sales increase of approximately 1% of the midpoint. The sales guidance implies sales growth in the Americas and EMEA and a less than seasonal sales decline in Asia due to the Lunar New Year. Our third quarter guidance also implies further recovery in our higher-margin Western regions, which accelerates the operating leverage in our business model. This guidance also assumes similar interest expense compared to the second quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis.

In closing, I want to thank our team for delivering a solid quarter of improved financial results with our third quarter guidance giving us further confidence in the overall recovery of our business. 2026 should provide several opportunities for Avnet to help our customers and suppliers adapt to continually changing market conditions and will serve us well as we continue to create value for our stakeholders.

With that, I will turn it over to operator to open it up for questions. Operator?

[Operator Instructions] Our first question is from William Stein with Truist Securities.

I guess I'd like to squeeze in two, if I can. First, could you talk to us about the linearity of orders during the quarter anything unusual or noteworthy there? I think typically, new orders tend to fade as you go into December, maybe have that wrong, but whether it's right or wrong, maybe comment on that trend. And the also the duration of your backlog as it stands now, do you have a bit more visibility? Are you seeing customers place it longer at a longer sort of time to request.

Yes. Thanks, Will. I appreciate you joining the call. So I guess that was the 2 questions, right? So I'll go first and Ken wants to add something. On linearity, the December quarter is always an interesting one, right, because your billings continued through the quarter, but your bookings do tail off on the end of the second half of December, let's say, give or take a few days.

So yes, it's definitely a stronger booking in this case, October, November, pretty good through December until that midway then that bookings start to trail off. But the buildings continue because even if there are shutdowns through the holiday, manufacturing starts up when they get back, so you do build out some a bit more on bookings. But even that said the book-to-bills were positive on top of a pretty good billing quarter. So that was good news as far.

And the other point, which really ties to your -- the longer term view we're getting is the drop in orders inside the lead time for customers is increasing. Our expedites are increasing. And what that tells us, and we don't know absolute well that inventories are depleting with lead times not going out until recent, right, customers want pipeline and get given us enough visibility and then when they go to the manufacture, both coming in with drop, and we call them drop in inside like kind of a cold book ship bill inside the 90 days.

So that's -- again, a positive sign, which then leads to your last question or the second part of the question is the visibility. It's improving. Will, the suppliers and a lot of the [indiscernible], they're banging us for backlog. They want to know what to build, and we're banging the customers for more visibility into the future longer-term bookings, if you will, or forecast. And we're starting to see that increase, still probably not at the level we would like to see it. But yes, we're starting to get a bit more visibility into the future, which customers on the call and we'll see a lot of them next week here in Arizona, that's the message still. We still want that visibility and pipeline. So we can pipeline appropriately for them. But it's improving, not where it needs to be quite yet.

Our next question is from Joe Quatrochi with Wells Fargo.

I was wondering if you could go back to just kind of understand maybe the pricing commentary that you talked about in terms of are there any end markets or end products that you can talk about that you're seeing the price inflation on more than others?

Yes. Thanks, Joe. I think we said there's upward pricing pressures. And so I think it's going to continue. I think before we get into increased pricing, I mean, the good news is in this cycle, one of the positives, and it's been a long cycle. Pricing has kind of held up ASPs overall -- have held up. But as lead times start to trend higher across other product categories that you can anticipate some of it's already happening for sure, in memory, storage controllers, certain capacitors in the IP&E space. We're starting to see some pricing inflation.

A lot of that's driven, obviously, by the activity around data center increase in the hyperscalers, but it's really a lot of our industrial customers are increasing demand based on their exposure to the data center [indiscernible] means. So overall, it's not across the board over -- pretty much from Q2 is stable, but we're starting to see some increases, and I think that will continue as we move forward.

And Joe, maybe just a point of clarity, we've seen the increases announced and we know they're coming, right, but the actual quarterly results didn't have a lot of impact from actual price increases in the quarter. So just to kind of clarify the timing of some of those things.

Okay. That's helpful. And then just, I guess, as I'm thinking about just the guidance on the revenue. You talked about Americas and EMEA up and then Asia maybe a bit better than seasonal in terms of like the rate of decline. How do I think about just like Americas and EMEA relative to seasonality, like what's your expectation for the March quarter?

Yes. So the March quarter, I'll let Ken jump in. Typically, Joe, the West bounces back in the March quarter over December. And a lot of that -- it's a math equation with just more days and what not, but last year, it was an anomaly. You might recall over to West did not increase over December quarter. That was kind of the first time that I saw that ever, I think.

So this year, it's back to more typical seasonality where the West will be up, which is positive and that's our higher-margin regions, as you know. And Asia, it's going to have a typically -- well, maybe not a Lunar New Year, Chinese New Year is going to have an impact, but not as significant as we've seen in the past, right? So that's also a positive. So a regional mix shift is in our favor this quarter as we get into March, which is good news.

But Ken, you want to add that?

Yes. I think steady high single-digit is how I think about it in terms of the growth in the West, which is kind of as expected, so maybe slightly higher seasonality, but I still think the West is ramping and the bookings continue to improve.

And I guess what I'd point to in the guidance is because the revenues are up slightly, normally, what you'd see is Asia down even double digits and the West up. And so that mix shift usually created a nice gross profit margin boost. So we're not seeing that because of where Asia is at in terms of low single-digit down. But we are seeing the operating margin expansion from that seasonal mix shift, right? We're seeing good operating income growth from the West, think about high teens. And so we're happy about the operating margin expansion implied in the guidance even though gross margin is still being impacted by mix.

Our next question is from Ruplu Bhattacharya with Bank of America.

Maybe I'll ask a follow-up question on the guidance for the March quarter. Last couple of years, I mean, the March quarter has been sequentially down. I mean, this year, given the regional mix you're guiding to slightly up. And from the guidance -- I mean, from what I can tell, it looks like the core business margins can be up year-on-year depending upon how Farnell does and how the overall mix is.

But can I ask, do you think going forward, I mean, your core business margins can grow on a year-over-year basis for the remaining quarters of this year? And do you think the seasonality in the March quarter being different than the past couple of years impacts the seasonality going forward for the rest of the quarter? So how are you thinking about as you go through the year, do you think you'll see more than seasonal growth either in revenues or year-over-year growth in margins?

So Ruplu, let me take the last part first. And I think there's no reason to believe seasonality would change and how we think about seasonality is simply just the number of shipping days. And if you had a traditional under New Year with, let's say, 10 -- 7 to 10 days, depending on the country of shutdowns, you have less shipping days to ship the product. I think what's offsetting that is just the fact that bookings are up and business is booming there in Asia.

And I think similar to the West, it's just a matter of shipping days. And so I think as we look forward into a more, let's say, normal mid- to high single-digit growth environment, I think you will still see those normal swings within seasonality.

I guess to answer your question about operating margin, I think, yes, from an operating margin standpoint, we do expect continued momentum, especially as the West recovers, right? The West is really our operating leverage horses in terms of profitability. And so although Asia that record revenues, which we're happy for and it's really good signals over there, we're still roughly 20% to 25% off the top line in the Americas and probably 30% to 35% of the top line in Europe relative to their historical peak levels. And so that's a lot of gross profit dollars that need to kind of come back.

So I think as the West recovers, you'll start to see operating margin expansion. And I think to answer your question more specifically, it kind of depends on how quickly the West continues to recover. But I think this last quarter, in terms of December quarter and the March guidance is good progress in terms of getting those EC margins back, which is really being led by the West.

Yes. Ruplu, Ken covered it well, just to add. We don't guide out side, as you know, outside of the 90 days. So -- but as we look at the on right now as I talk to you, as I look at the backlog in the 1 to 30, 31 to 90, 91 to 180 et cetera, and 180 and above days, it's encouraging. That's the word I'm using with the team. It's very -- the signs are all very encouraging. But as you know, we don't guide out beyond the quarter. But we are encouraged and optimistic about the next several quarters.

Okay. That's helpful. Can I ask a follow-up question on the pricing comment you made. Can you remind us how -- like if suppliers are raising prices, how does that impact Avnet's revenues and margins in the near term as well as in the more medium term?

And Phil, I missed this -- I might have missed this, but did you specify which product categories or areas you're seeing spot price increases?

Yes. Thanks, Ruplu. So pricing, it really affects the average selling price, right? So we've cut a lot of our business is under contract and some of it's not. Where it's not and it's, let's call it, spot buys, if you will, customers coming in time-place utility, yes, we can increase margins there, the price and the margins, particularly the products tough to get. We're not rate in tolling or anything, but just to kind of get a little bit of a fair margin on that, which is positive for us.

In the contracted customers, it's the price gets passed on so it doesn't have as much effect on the margin percent, but it does -- it can affect the revenue dollars and margin dollars. That makes sense. And similar to what we saw in the last tightness in the market and we don't -- and the customers -- we can absorb it, that's for sure. But we're definitely starting to see that particularly in certain areas, memory storage takes memory, so anything around memory storage, we'll start seeing some more in the controllers, some of the high-end products in networking and are selected parts like intent on capacitors, things on those lines, we're starting to see some price increases.

So some are modest right now. Others are a little bit -- a little bit more than the modest pace, particularly in the memory space.

Okay. If I can sneak one more in. As Europe is recovering, right? I think you said for Farnell, maybe 50 basis points improvement every quarter. But as the region itself improves, do you think that can accelerate and you can see a faster recovery in Farnell margins how -- just help us level set our expectations for where this can go from a margin standpoint by the end of the year?

Yes. Thanks, Ruplu. Yes. So specific to Farnell, typically their largest region and most profitable is Europe. Okay. And that's not been the case here the last several quarters based on Europe softness still doing well. But actually, the Americas, which is a higher -- I think we also pointed out a higher mix in the Americas of test and measurement, which is really good business, just runs at a different margin level than the onboard components being semiconductors and the IP&E.

So any additional lift in Europe will further drive the drop-through if Farnell could possibly accelerate that you're right, that 50 bps points of margin, and we're looking to see them improve on quarter-on-quarter. And that is -- the message to the leadership team at Farnell on this call, we need to see them and expect them to continue to show incremental improvement in operating margin and a lot of that can be accelerated, to your point, with higher revenues in the right mix. And although we may not be projecting that, certainly, we would really like to see them accelerate that beyond 50 to 100 bps. So that's our commitment at this point in time.

While they continue to manage their expense line, right? So there's still other things they're doing -- we're all doing. We're always doing it as a company. And for now, specifically as well, driving out more efficiencies, taking out costs where we need to take out costs while making investments where we need to make investments, i.e., in digital e-commerce, AI, et cetera. So I hope that answers your question. But we do see it as a continued tailwind for us as we move forward, and we will look to accelerate, get into that double-digit operating margin.

Gentlemen, there are no more questions at this time. I would like to turn the conference back over to Phil Gallagher for closing remarks.

Okay. Thank you very much, and I want to thank everyone for attending today's earnings call. We look forward to speaking to you at upcoming conferences and at our third quarter fiscal year 2026 earnings report in April.

Okay. Have a great day. 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.

All right. Everyone, it's so nice to be back up on stage, and I'm so pleased to welcome Avnet with us this afternoon. I'm joined by Phil Gallagher, CEO and Ken Jacobson, CFO, and we're going to have a very enlightening discussion, so hold on to your seats, guys. We're going to start off as an introduction and just take a few minutes for Phil and Ken to describe to us what Avnet is and what Avnet does.

Thank you, and welcome, everybody. I appreciate you being here online, and I appreciate your interest in Avnet. So I'll try to give you a little elevator speech here on what Avnet is. We're a one of the largest publicly held companies that a lot of people don't know anything about. We're a Fortune 180 company. We're listed on NASDAQ, obviously.

Our corporate Phoenix, Arizona, but we were founded in New York post World War I in military surplus coming back from the war. So we've been around since 1921, roughly $24 billion to $25 billion in revenue globally. 45% to 50% of our business is done in Asia Pac. Europe is our second largest region, 30%, 35% and Americas is in the 20%, 25% range.

We're in the semiconductor business. So 80% of our business is semiconductors. We're a distributor. So we manage supply chains from design chain to supply chain as we like to call it. So a lot of our top suppliers are here at this conference actually. And around 20% of our business is IP&E, we call interconnect, passive, electromechanical.

We have roughly 250 product lines on our line card. We service customers in obviously, all geos and very diversified portfolio of verticals. Our largest vertical is industrial, roughly 30%, 35% of our business. The next would be transportation, let's call it, 12% to 15% of our business. In the Americas, defense and aerospace is about 20%, 25% of our business, and that will be a growth market here in Europe with all that's going on and it's been announced of recent.

We have roughly 15,000 employees globally. We're in 43 countries around the world, and we ship into 145 countries globally. So that's kind of a little snapshot of who we are or what we are and what we do. But I'd like to just say that we're in the center of technology supply chain. We manage and work with all of our supplier partners to deliver from design to supply chain solutions down to our customers.

And I guess I should mention that we have -- have that core roughly 100,000 customers in total, including individual customers, we have 450,000 to 500,000 customers around the world. It's a very diversified portfolio. I guess last comment. No one supplier is more than 10% of our revenue. It's very widespread, and no one customer is more than 4% of our revenue. And the customers we service are all pretty much household names that you would know anybody that has any kind of electronic components in it, semiconductors, connectors, capacitors, resistors, odds are we're selling and servicing those customers.

Impressive and global. Global. Great. So can you discuss areas where you believe that AVT has a competitive advantage of capabilities, geographic footprint, line cards, business units. There's historically been a view that competition and electronic component distribution is driven strictly by price. But can you both please describe why this isn't necessarily the case?

Yes, I'll start and turn it over to Ken for a couple of comments. Well, I know this is going to sound soft, but our people and our culture. I mean we have a very strong culture. The -- when you're in distribution, it is a people business. It's a relationship business. It's a business built on trust over long periods of time, and we've had a very stable executive team. I've actually been with the company for 43 years. I've been CEO for over 5. Ken, 13 years, I go right on down the line. Its culture is -- it does matter. It does make a difference. Our global footprint, as I just talked about, is absolutely a differentiator.

We can help customers move their design chain or their supply chains anywhere in the world. So a lot of things we help design in might happen here in Europe or in the U.S. ends up being manufactured in Southeast Asia or China or wherever it might go, Guadalajara, et cetera. So our global footprint, our line card, you mentioned line card, we have some of the top lines in the world.

I mentioned on semis here, Microchips here, Broadcom, AMD, I could go on NXP, Advanced Energy, who's also here, are all part of our line card. So our line card is an absolute differentiator. And then our diversification of portfolio, as I just talked about is we believe, a big differentiator for us as well. And lastly, I'll turn it over to Ken is the whole digital. We've invested a tremendous amount and continue to in digital future-proofing, if you will, our company because more and more engineers looking for design solutions, they're going to start online.

The number roughly is about 68% engineers to they go online first to look for design solutions, then they'll go and contact our field application engineers, of which we have double lead engineers, 2,000 roughly around the world. Then we have a division that's based here in the U.K., actually at leads called Farnell. And that's our e-commerce front -- I'll call it our front end, and they're servicing customers for new products introduction. 72% of their business is done online of their line items and over 50% of their revenues.

.

Not much left. But I think the other thing is the strength of our balance sheet, along with our size, ample capacity to support customers needs right, because part of what we do provide is working capital solutions and things like that as we talk about supporting our customers globally.

Great. That's very, very helpful, especially the touch on the culture, you can't discount how important that is. I agree with that. And we're perhaps at the end of a prolonged down cycle. And looking back and then looking ahead, first, what was different about this cycle? And then what's your strategic focus as a company as you emerge from it?

Yes. So as I said, I've been around for 4 decades or so, and I've seen a lot of cycles. And the one that always sticks in my mind for those who have been around for a couple of years is the '99, 2000, 2001, we had the Y2K, the perfect storm. The whole tech bubble exactly. And that was a precipitous drop. It just boom. It just kind of happened overnight, then it stayed flat for a while, then boom came back up. This one is different.

And I think it's different for a lot of -- it's more global one. Our businesses are a lot more global than they were. You got the whole geopolitical situation around the world going on, which is continuing to add to some uncertainty, if nothing else. And inventory. So inventory became a real issue. Inventory is not a bad thing, but there's way too much of it out there for a whole myriad of reasons. But it just -- it has been prolonged and the recovery is like -- in the one-on-ones, I was just like, "Hey you calling the recovery." I'm not calling anything. There's no way. I've been wrong like 6 times in the last couple of years.

But I am encouraged. I'm really, really encouraged about the bookings, the book-to-bills, the backlog increasing, our e-commerce activities going way up, the Farnell that I just talked about. I know the things we're focused on. I mean, coming out of this, look, you control the things you can. okay? And everyone wants to get fancy, dance, we got to focus on execution.

We've got to -- I'll let Ken talk about asset management. We've got to focus on our asset management, focus on our inventory. Inventory for our suppliers that are here is not a bad thing. Now too much inventory for too long, it's not wine, okay? So you got to move it sooner or later, but it's not a bad thing. It's actually going to help set us up for what I think is an encouraging and optimistic view as we get into 2026. But it's about execution, okay? Focus on the execution. Now let you...

Yes. I'd say one of the things that did surprise us about this cycle is one of the strengths of our business model is the countercyclical balance sheet. As we grow, we tend to consume cash to invest in inventory and accounts receivable working capital. But as we go down in business, which we've had over the last 1.5 years, we typically generate a lot of cash, right, which we can do different things with buyback shares, reinvest in the business.

And I think with the inventory situation as it is, the inventories trended a little higher than we normally would have expected. There's still some opportunity for our pockets of excess to unlock that cash. But I guess the good news is coming into what we would perceive it to be an upturn here coming. We're not calling it, but I think there's a lot of positive signs. We're well positioned, not only from a working capital standpoint, but also from a resources in terms of our technical capabilities or our engineers our sales force, right?

We're well positioned there. So as we begin to recover, we're not going to have to invest a lot of expense into the model. So a lot of operating leverage should be created over the next couple of years.

And through this cycle, we've managed expenses well. Yes, where you got to reduce, you got to reduce, but we did a much more rightful shot go versus a broad just 10% out because we wanted to be positioned for the market recovery. But one area when you reduce expenses, you always got to make investments. But in our IT infrastructure, in our supply chain services we just talked about and talk about digital.

I know we get the AI here, I'm sure in a minute, whether you like it or not, but the digital implementation of tools, okay, for -- by the way, internal tools for our people, how do we connect better with our suppliers from an API just digitally. So we're partnering with suppliers in a more automated fashion and with our customers on a global basis. So they are the things we're focused on to drive more efficiency, productivity, scalability, those are the things we need to continue to drive.

And we keep on talking about recovery. So with recovery comes demand, right? So what are you seeing on a regional basis? And what end markets and verticals are strong and which are weak? I know you mentioned Asia being stronger than other regions and growing faster. So what are the drivers for that performance? And how will you continue to sustain this -- these drivers in future?

So this is where I get the word encouraged. I'm careful, maybe encourage, optimistic, there's stabilization, these -- but if you start with Asia, a quick tour around the world, Asia Pac, we've had 5 quarters of year-on-year growth and a record -- pretty much a record quarter this quarter in December with, on top of that, positive book-to-bills. So the backlog is strong as we go into March.

But we've already talked going into March. So we think there will be a Lunar New Year, whether it's a Lunar New Year every year. But post-COVID, the typical seasonality, it kind of got out of whack. This year, we expect March to be a little softer in Asia, which is fine.

Europe, has been the toughest region, right? And for a lot of reasons that many of you in the audience know or online know, but we're starting to see positive signs this quarter in Europe as well, which is great news as our most profitable region. So with Asia going up, which is a little bit less margin and Europe coming down, it's created a geo mix, which we think is going to start to correct this quarter and next quarter. And in Europe, also positive book-to-bills, which is good and backlog growing.

Same thing in Americas. Americas probably led Europe a little bit. But again, good billings. September quarter in Americas was our first quarter of year-on-year growth since 2023, right? So good signs in the Americas, again, good book-to-bill. And as I mentioned, Farnell. Farnell is kind of a canary in a coal mine because it's so broad, okay, and servicing, I said, 400,000 engineers around the world, their activity is up.

Let's dive into Farnell a little bit. So talk to us a little bit more about that and how it differentiates Avnet in general.

Yes. So Farnell, again, they grew September quarter 15% year-on-year. And I fall on the sword. They had -- Farnell at one time was roughly 6% of our revenues. And you kind of go, well, okay, that's not too exciting. But they're 20, 2-0, 20% of our operating income. So it's really critical to Avnet's success. And in the downturn, let's just say they got a little too top heavy. And in the downturn, they had a lot of negative leverage, got down to almost, let's call it, 1% operating margin, which is not acceptable.

So we made a tremendous amount of structural changes there, including leadership. It's now led by Rebecca Obregon, who's changed over about 80% of the leadership there. And we're on the recovery. Why is it important? Farnell is kind of our digital e-commerce front end. So we call it the Power of One. You got Avnet Core, which is our -- the core business. That's the $22 billion machine, if you will.

And then you have Farnell is about $1.6 billion, okay? But they service all the engineers out there. And there's not a customer that we're doing business with in the core that Farnell is not doing business with in some way, shape or form. They pretty much mirror our line card, okay? So when they sell a leading-edge product, a high-technology product, that becomes a sales lead for the core team to go follow up. Because again, Farnell is more online. They have some salespeople, but not near as much as the core. And the other thing that's nice about Farnell is they carry from a diversification standpoint, they have test and measurement. So clients like National Instruments, Keysight, Tektronix, et cetera. So that's a nice diversification to the portfolio. So we report them separately, and we think we have some runway. We know we have some runway in getting them into the double-digit operating margin.

I just think the path to recovery there is a multitude of things. I think there's some more when it comes to OpEx and really some low-hanging fruit that we have in terms of our e-commerce proposition and conversion rates, but it also gets back to some being the market recovery, which for us as the market recovers within Farnell, which is primarily a Europe-based business.

You sell more on the board components, semiconductors and IP&E, but that comes with a higher gross margin. So if you think about Farnell's business model, it's 2.5x the gross margin that Avnet core has. So it's very attractive and can create a lot of operating leverage as they continue to grow. So the good thing is the gross margin is stable, but there's some more runway there as the mix improves to more on-the-board components.

So it would not be 2025 without talking about AI. So I'll let you be the witness here. Tell me a little bit about how you're using AI in the business, how it's a differentiator, you go for it.

Yes. So -- so it's almost been a tale of 2 cities when you talk about the market, right? You got the hyperscalers, the data center, AI kind of over here, everybody knows who those guys are. They're just going gangbusters and you got the balance of the semiconductor market, which has been just a little bit different.

But AI for us, we actually -- there's 3 major opportunities in selling and driving revenue, let's call it. Then we'll get into some applications. But what we sell -- we do sell directly into some of the hyperscalers, mostly in Asia. And we called out on the last earnings call that's roughly 7% of our revenue. So not overly top heavy, but nice growth. And I think just a bunch of you. So we are selling into it. And then you have a lot of our customers. Again, our #1 segment vertical for customers is industrial. So anybody in -- if you think about this, anybody in power, power management, they're customers of ours. A lot of their growth is coming from -- they're all selling into data centers and selling into the hyperscalers. So we got that piece, which is a great -- including the EMS providers, one major one that's here at the conference as a matter of fact, it's a big part of their business, and they're having great success.

Well, they're big customers of ours. So as they service it, we're servicing them, that's a benefit. And then the third, the real benefit, I think, is going to come for us anyway is the enablement that AI is going to drive into the edge, okay, edge computing, okay, into sensors. I mean just think about smart buildings, I mean, smart medical, the rings people like.

I can't get wait to get a ring for Christmas. It's on my list.

My daughter is still -- but everything is kind of going that way. And this is going to just time that by 10, the enablement. And that's all of our -- and I can't start naming suppliers, because I miss one and then I'll get in trouble. But we have the best line card out there for microcontrollers and microcontrollers are on the edge.

So I look at those 3 vectors. So it's a great opportunity for us. As far as POCs or proof of concepts and applications, we've got a bunch of them going. I just heard the previous presenter, it's all about the data. So the data is not right, you're going to have problems on the edge in AI. So we've got a bunch of proof of concepts going.

We actually have already implemented some of our supply chain areas. It's a great opportunity for us. We take in thousands literally of customers' forecast and MRPs on a daily, weekly, monthly basis via EDI, API, they can still fax it to us if they want. Then we got all the supplier data coming in. How can we make better use and intelligence and turn data into actionable information is one opportunity.

We have major call centers, multiple around the world. And the #1 call we get is where is my parts? Like where are my parts, expedites. AI is an application there that we can start using. So I would just caution, and I'm not saying that everybody doesn't know already is you just got to have a discipline, because the applications are endless, and it could also cost you a lot of money and not get you any ROI. So I think we have the right pace. We're right where we need to be from the application. I just need to pick and choose carefully. Anything you want to add on that?

Yes. I mean I just think there's -- how do we make it easier for our customers to do business with us as well as how do we provide our technical resources more capacity through the use of AI. So I think there's lots of internal applications we can use in addition to some of the business we're doing actually selling parts into the AI phenomenon .

Engineering Solutions. -- for example, a lot of it can be done, maybe not finished, but started there. It's exciting. It's crazy. I mean, it's scary, crazy, fun, exciting. Go ahead, I'm on the back line. It's going to get scary. It is going to be interesting.

You've lived through all the cycles. I think you're well equipped to handle this one, too. So let's take a second to see if there's any questions in the audience.

Yes, there you go. Sure. .

And we'll have to give it one second just so we can make sure it gets recorded on the webcast. The microphone is coming.

Just given your exposure to industrial markets, can you talk about -- from our side, we look -- we've seen the large investments by different Chinese companies in lagging edge technology. Can you help us understand like how to parse that in terms of the impact on your sort of -- on your markets of these investments? And how does it impact your suppliers? How does it impact your customers? Are you making any changes to adjust for this other supply that's become available? Because as you say, this isn't a cycle like any other cycle, and that factor is obviously one of the factors.

Was it a Chinese semiconductor manufacturing about?

Just when we look at how much CapEx has gone into China and how much of that is for lagging edge semis. And given that industrials tend to use more of lagging edge semis and some of your other markets, it's like from our side, it's very difficult to sort of try and figure out like how that plays out over time? How much of it has played out? Just anything you can sort of...

Yes, that's a great question. And that's happening. There's no doubt that the Chinese investments, and I'm sure some of the semiconductor guys that are here can probably answer that even better than I can, the amount of capacity that they're putting in, you're right, on the lagging edge technologies, where a lot of the investment in the last x number of years have been leading edge, okay, which is going to -- which for sure, we see this, particularly in the industrial market, you're tying to industrial, medical, defense, aero, they don't do -- I can bring my phone.

They're not respinning designs and manufacturing something new every 6 months, 18 months, they're 5 years, 10 years, 15 years. So China is doing, it's going to be interesting to see how that plays, not just for China, but for the rest of the world.

Right now, their exposure to the rest of the world from my vantage point, is minimal, like in chips, if you will. But is that going to change over time? And that's not for me to answer. I would think it would, but over time, not anytime soon, but it will over time. But yes, this is going to be an issue, and it's going to be -- I think it's going to become a long pole and intent down the road for the industrial, medical, defense, aerospace that have these long 10-, 15-, 20-year manufacturing cycles.

They need that lagging edge technology. Now for us, I guess, selfishly, it's an opportunity for us because we manage supply chains. So how can we help our customers, whether it be buffering or what have you or end of life with products to help them support their manufacturing needs over a longer period of time.

So I think it's going to be interesting to see how this all plays out, but there's no doubt that China is going to be a player. I mean they are a player. And maybe through different things that we've done in the West, we've accelerated their progress, okay? But they're definitely for real, and they're definitely investing quite a bit in that capacity.

[Indiscernible].

Yes, that's -- you're right. It's definitely -- I think it's a secular movement as well. And we'll just have to see how the balance of manufacturers respond to that, too, right? And I think I got some of my peers here from our suppliers. Competition makes us better, right? So we just got to talk a couple of analysts about that, a couple of shareholders. I mean, so they're not going to stop it, but how can we compete with that.

I'd also point out that the capacity is still coming online. It's not fully ramped. I still think it's going to be several years before all of that investment really becomes -- the utilization goes up, so we'll continue to monitor.

It's a very good question.

Any other questions? All right. I think we're going to move on to Ken and some financial questions specifically. So obviously, for either of you, everyone to jump in. But can you remind us of the countercyclical nature of your balance sheet, touch on working capital management, the company's needs to support components growth? And then what are your thoughts on working capital requirements over the next few quarters and of course, free cash flow? .

I think we talked about a little bit about the business model is, one, when things are tough, we tend to spin off a lot of cash, right, which we can then reinvest in the business and buy back shares and be opportunistic with. But when we're growing, typically, you had to invest in working capital, primarily inventory and then accounts receivable to support customers' needs.

And where I'd say we're at right now is inventory is higher than we'd like it to be. There's some pockets of excess we still need to work down. And so -- we think in the near term, we'll get into the 80s in inventory days and then eventually a 7 in front of it. But I think as we look at the prospects going into next quarter and then the rest of our fiscal year, we feel good about our overall working capital position that there's not going to have to be a lot of investment to support growth in the near term.

And then when it comes to other uses of cash, we will have some light CapEx to invest in some of the digital tools and capabilities that Phil has mentioned. But for the most part, the free cash flow we generate we'll have opportunity to buy back more shares, although in the current state of where we're at with the balance sheet, our leverage is a little high. So we're going to focus on reducing leverage to a more appropriate level just to maintain the strong balance sheet -- but at less than $50 a share, we feel the shares are highly attractive.

And we also have a dividend that's been increasing quarterly, so we support the dividend every quarter on top of buybacks.

So we have 2 minutes left. I'd love to end on talking a little bit about your most recent earnings call, and I know you gave some financial outlook and just some general outlook on 2026, what's ahead and what you're excited about? Let's end on a positive note .

Maybe I'll take the guidance and you can take the what we're excited about. I think our guidance for the December quarter was encouraging is the word I would use. And why I say that is because although the growth was only roughly 2% quarter-over-quarter, the EPS guidance is roughly 12% increase, right? And so what that means is you're starting to see a little bit of uptick not only in Farnell, but also in the Americas, which is our higher-margin regions, and you can start to see the operating leverage come back.

So we're encouraged about the guidance in terms of -- we're starting to see that return to growth in both Farnell and the Americas. We think Europe is closely behind there. And so as we usually get into our March quarter, which is our seasonally strong quarter for not only Europe and the Americas, but also Farnell, we would expect to see overall gross margin uptick, which then creates even more operating leverage, all things being equal. Phil, what do you think about 2026?

Yes. We don't give guidance for the year. If I can give you a feel, and I think I already did. We're really feeling very good about the current quarter. We're feeling good about the book-to-bills. We're overusing the word probably encouraging for obvious reasons. So just said there's so many still uncertainties out there. You don't know what could happen tomorrow. I mean you didn't mention tariffs. Thank you. But a tariff change, a geopolitical situation, it's pretty tenuous out there.

That aside, we feel very positive about the outlook. And to Ken's point, we're positioned well. We manage our expenses down well. We didn't overdo it, because we wanted to be sure we were ready for the upturn. So we get asked questions, how much you have to invest back in, there's an upturn. Not much, variable comp, which is commissions, warehouse logistics, more labor. We don't -- that's it. So the beauty of our model is when the top line comes, it drops to the bottom pretty quick. So I'm feeling really positive about where we're at and the position we're in the market.

Awesome. Well, I'm excited. I hope this was a good conversation for you all. And I really, really appreciate you joining us here at NASDAQ for the conference. .

Thanks so much. We appreciate it.

Thank you.

Welcome to the Avnet First Quarter Fiscal Year 2026 Earnings Call.

I would now like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Avnet's First Quarter Fiscal Year 2026 Earnings Conference Call. This morning, Avnet released financial results for the first quarter of fiscal year 2026, and the release is available on the Investor Relations section of Avnet's website, along with a slide presentation which you may access at your convenience.

As a reminder, 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 a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation.

Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO.

With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Lisa, and thank you, everyone, for joining us on our first quarter fiscal year 2026 earnings call. We are off to a solid start in the new fiscal year. In the first quarter, we achieved sales of $5.9 billion, above guidance, and adjusted EPS of $0.84, near the high end of guidance. Our performance was led by strength in Asia and Farnell, which both had double-digit year-on-year growth. Sales in our Americas region grew year-on-year for the first time since fiscal 2023. While sales in our EMEA region were flat with the year ago quarter, they did grow better than seasonal on a sequential basis, as did all of our regions.

From a demand perspective, in the quarter, we saw strength in certain key vertical segments, most notably transportation, compute and communication. Overall, [ cellular ] lead times and pricing continue to be stable for most technologies. That said, we do see extended lead times and price increases in memory storage and certain interconnect products, particularly those supporting data center and AI build-outs.

On the IP&E side, lead times also continue to be stable. Our book-to-bill ratio improved globally, led by Asia and the Americas, and all regions were above parity. Our backlog is growing, and we continue to see customers placing orders within lead times, which is a sign of strengthening market. Cancellations have remained at normal levels. In the quarter, we had a modest increase in inventory to support sales growth in Asia and certain supply chain opportunities, although we did see improvement in days of inventory on hand. We remain focused on balancing these growth opportunities with reductions in the near term and optimizing the inventory we have on hand.

Now turning to our Electronic Components results. At the top line, our Electronic Components sales increased on a sequential and year-on-year basis due to a generally improving demand environment led by Asia and the Americas. In Asia, sales grew sequentially and year-on-year and now represent just over half of EC sales. This marks our fifth consecutive quarter of year-on-year sales growth in the region driven by strength across the communication and transportation end markets.

The Americas are showing signs of recovery, with sales growing both sequentially and year-on-year. Sales were strongest in the industrial and communications end markets, followed by transportation and consumer. In EMEA, sales were basically flat year-on-year and higher sequentially, which is better than seasonal for the region.

[Audio Gap]

end markets showed year-over-year growth, while compute grew both sequentially and year-on-year. We are optimistic about continued modest improvement in Q2.

We continue to see healthy design win activity and momentum in demand creation. We recorded solid increases in demand creation revenues and gross profit dollars for the quarter. We are also pleased with progress on our IP&E product sales. As we mentioned in the past, IP&E is one of our higher-margin businesses. Sales have been steady with improving margins and doing particularly well in Asia.

Now turning to Farnell. Farnell delivered sequential and year-on-year growth and experienced similar sales trends to EC, with strength in Asia and the Americas. Operating margin remained stable sequentially due mostly to increased sales of the [ oil core ] components, offset by higher sales of [ single-board ] computers and [ test and measurements ], which tend to be a bit lower in margin.

The team continues to execute on their strategy, including enhancing digital capabilities and leveraging Avnet's core ecosystem for new and additional opportunities. While there is still plenty of work to do, we are pleased with Farnell's progress, especially given its improved performance, while the macro environment in Europe, its largest region, has yet to fully recover.

To conclude, we are encouraged by the increasing number of positive signs in our business. We feel good about the recovery in Asia Pac and progress in the Americas. Conditions in EMEA are stabilizing and modestly improving. While geopolitical and market uncertainties remain, we believe our strong [ supplier ] line card and diverse customer base and the strength of the end markets they serve position us well as the market recovers.

During the quarter, I spent some time with the leadership teams from several of our supplier partners, both in the U.S. and Europe. Most recently attended the Electronic Components Industry Association, ECIA, Conference in Chicago. Consistent with our views, our supplier partners are also seeing several positive signs, including lead times extending in certain technology and discussions on actual or potential price increases. Maintaining and strengthening our supply relationships through these challenging times has helped us navigate the market, which also translate into increased value for our end customers.

It is times like these that I'm especially thankful for our dedicated and experienced team across our whole organization who have led us through this prolonged market cycle. I want to thank them for their efforts that continue to reinforce Avnet's position at the center of the technology supply chain, helping our customers and suppliers navigate complexity and unlock new opportunities.

With that, I'll turn it over to Ken to dive deeper into our first quarter results. Ken?

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our first quarter earnings call. Our sales for the first quarter were approximately $5.9 billion, above the high end of guidance of our range, and up 5% both year-over-year and sequentially. Regionally, on a year-over-year basis, sales increased 10% in Asia and 3% in the Americas. Sales in EMEA were flat year-over-year and were down 6% in constant currency.

From an operating group perspective, Electronic Component sales increased 5% year-over-year and sequentially. Farnell sales increased 50% year-over-year and 3% sequentially. For the first quarter, gross margin of 10.4% was 42 basis points lower year-over-year and 15 basis points lower sequentially. The year-over-year decline is primarily driven by declines in the Western regions, partially offset by improvements in Farnell. The sequential decline in gross margin is primarily driven by a decline in Europe, partially offset by improvements in the Americas, Asia and Farnell. The sequential gross margin declines in EMEA were primarily driven by a less favorable product and customer mix compared to last quarter.

The regional mix shift to Asia also had a negative effect on EC gross margin year-over-year and sequentially. Sales from the Asia region represented 49% of first quarter sales in fiscal 2026 compared to 47% in the year ago quarter and 48% last quarter. Farnell gross margin increased both sequentially and year-over-year, in part due to improved product mix of on-the-board components.

Turning to operating expenses. SG&A expenses were $464 million in the quarter, up $26 million year-over-year and up $13 million sequentially. Foreign currency negatively impacted operating expenses by approximately $5 million sequentially and $11 million year-over-year. The expected increase in sequential SG&A expenses was primarily driven by the additional sales volume and from higher salary expenses due to employee raises that took effect in the first quarter of fiscal 2026. As a percentage of gross profit dollars, SG&A expenses were flat sequentially at 76%.

Overall, first quarter operating expenses were as anticipated. As we move through fiscal 2026, we expect expenses to be well controlled, but would expect modest increases with sales growth as the market recovery unfolds. For the first quarter, we reported adjusted operating income of $151 million, and our adjusted operating margin was 2.6%. By operating group, Electronic Components operating income was $159 million, and EC operating margin was 2.9%. The sequential decline in EC operating margin of 11 basis points was primarily due to higher SG&A expenses. Farnell operating income was $17 million, and operating income margin was 4.3%. Operating income margin was up approximately 375 basis points year-over-year and flat sequentially.

Turning to expenses below operating income. First quarter interest expense of $60 million decreased by $5 million year-over-year and was up $1 million sequentially. Our adjusted effective income tax rate was 23% in the quarter, as expected. Adjusted diluted earnings per share of $0.84 was at the high end of our expectations for the quarter.

Turning to the balance sheet and liquidity. During the quarter, working capital increased $160 million sequentially, primarily driven by $176 million increase in receivables. The increase in inventories of $185 million was offset by a corresponding $201 million increase in accounts payable. Excluding the impact of currency, working capital increased by $198 million sequentially. Working capital days decreased 4 days quarter-over-quarter to 95 days. Inventory days decreased by 3 days sequentially to 92 days. Our return on working capital increased 36 basis points sequentially from higher operating income. The increase in inventories and corresponding increase in accounts payable was primarily driven by increases in the Americas to support supply chain services engagements and increases in Asia to support overall growth. Overall, the quality and aging of our inventory continues to improve.

We remain focused on reducing inventory levels where elevated, noting that we also want to ensure Electronic Components and Farnell businesses have the right inventory in our distribution centers to position ourselves appropriately as the market recovers and as lead times extend for certain products. Our increase in working capital led to an increase in debt of $323 million. We used $145 million of cash for operations in the quarter, primarily due to the increase in receivables to support the growth in Asia revenues. From a cash flow perspective, increases in inventory were offset by increases in accounts payable.

With regards to our capital allocation, we have a consistent, disciplined approach. We continue to deploy cash in a manner that generates what we believe will have the greatest long-term return on investment for our shareholders, prioritizing reinvestments in the business and returning excess cash to shareholders. During the quarter, cash used for CapEx was $25 million, within our expected quarterly levels. We ended the quarter with a gross leverage of 4.0x, and we had approximately $1.7 billion of available committed borrowing capacity.

We will continue to prioritize lowering our leverage to appropriate and historical levels in order to maintain a strong balance sheet, which we continue to believe is an important aspect of having a sustainable and profitable distribution business. We anticipate reducing our leverage to approximately 3.0x over the next year. We increased our quarterly dividend by approximately 6% to $0.35 per share. We have increased our dividend in each of the last 12 fiscal years. We have more than doubled our dividend in the past 10 fiscal years, which is an average annual dividend increase of more than 10%.

In the quarter, we repurchased approximately 2.6 million shares totaling $138 million, including $100 million of shares repurchased in connection with our convertible debt issuance. We repurchased 3% of outstanding shares in the first quarter and have repurchased 8% of outstanding shares over the past 4 quarters. Book value per share decreased to approximately $57 a share.

Turning to guidance. For the second quarter of fiscal 2026, we're guiding sales in the range of $5.85 billion to $6.15 billion and diluted earnings per share in the range of $0.90 to $1. Our second quarter guidance considers the uncertainty that continues to impact the market and implies a sequential sales increase of 2% at the midpoint. This guidance assumes sequential sales growth in the Americas and Asia, with flattish sales in Europe. This guidance also assumes similar interest expense compared to the first quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis.

In closing, our team continues to execute well against the areas we can control, and we still have opportunities for improvement. Given today's rapidly changing market conditions, our team continues to demonstrate the value we bring to our customers and suppliers. We remain confident our approach through this market downturn will benefit our stakeholders in the long term.

With that, I will turn it over to the operator to open up for questions. Operator?

[Operator Instructions] And our first question is from William Stein with Truist Securities.

First, I wanted to ask, Phil, you mentioned revenue in the data center, I think, AI application category. I suspect your exposure there is still relatively small compared to the overall sales. Can you just bring us up to speed on that metric, please?

Sure can. Thanks, Will. I appreciate the question. Yes, so it is relatively small. So our exposure to the hyperscalers is on a grand scheme, I don't know, maybe in Asia, 7% of our business, give or take, Will, of Asia Pac, where most of that's happening right now for us. But the reason I bring it up is it's well beyond the GPUs and even the FPGAs. The opportunities we're seeing in storage, connectivity, power, cooling, connectors, that's where we're seeing the opportunity for us right now.

And really, I think the big value for where we sit in the technology supply chain is as it's going to enable, let's say, the really downstream opportunities going to be massive in particularly in our [ MCU/NPU ] area. You're going to get the applications out on the edge, and that's where our customers, that's a sweet spot for us, whether it be predictive maintenance, smart wearables, smart agriculture, smart security, surveillance, et cetera.

So we're talking about AI. We're playing in it today. We're selling into the data center, into the hyperscalers. But today, our customers are also selling into the hyperscalers. So as we're calling on anybody in power, power management, et cetera, and you're seeing some guys announced in the EMS provider space, some nice growth here, well, we're going to participate in that as well, right? So I hope that answers the question. We're excited about it.

Yes. So it sounds like 7% of your Asia sales. As a follow-up on a different topic, inventory days in the quarter were flattish. I think you called out down a couple of days sequentially, but my model is roughly flattish. It's not a huge difference anyway. But we expected this number to be down more meaningfully. Maybe I just got a little bit ahead of myself, but that drove cash flows negative in the quarter. And you talked about investing for future growth and other things. Maybe I'm just hoping you can help set expectations going forward a bit here. Should we expect this relatively higher number of inventory days to persist for longer term, maybe even perpetually? Or should we expect inventory days to come down over time?

I'll let Ken answer that.

I think, first, I think you kind of calculated end of quarter inventory, we used an average inventory. So there's a little bit difference in terms of how we measure the inventory days. But I think we're continuing to see a trend of declines in the EC business. We're down roughly 10 days year-over-year. Inventory went up a little bit, partially in Asia. And that's -- we don't have all the right inventory to service where the growth is, right? So you're investing in certain inventory, but there's still opportunities, including in Asia, where we need to get inventory down, which will help the days as well.

And then for the supply chain services, we're actually seeing that business come back a little bit. It was down in FY '25, and we're seeing that come back a little bit. And again, some of that is going to turn this quarter. So there's still opportunity to go after inventory where it's in excess and to kind of drive the inventory down a little bit at the same time as the sales grow, that they should improve. So I think the expectations are still there. It was a little higher than we had anticipated coming into the end of the quarter. But there's nothing of concern or anything in terms of a longer-term trend that we would see because of what happened towards the end of the quarter.

I'll add to that, Will. The quality of the inventory is good, okay? The aging and the quality is good. So we have no concerns there. And our longer-term goal, we'll get back into the 80s. So we know we want to continue bring it down a little bit while still making investments, right? We still need to do that. Inventory is not a bad thing in distribution, it's actually a good thing. And to get the days down into the 80s as we continue to drive the top line up.

Just one follow-up to that quantification. 80 is like, in a year, in 3 years? Any sort of trajectory you can give us would be helpful.

I think when we talk about 8 in front of it, I think, by next quarter, exited the quarter at roughly 91, 92 days, we think will be with an 8 in front of it next quarter and then kind of gradual trajection down.

Our next question is from Joe Quatrochi with Wells Fargo.

You called out EMEA being better than seasonal in the September quarter and then thinking that it could be flattish for December. I can appreciate the seasonality is a little bit difficult to kind of call right now, but like, how do we think about, I guess, the demand profile of that for the December quarter and kind of your visibility relative to seasonality in EMEA?

Yes. So I'll go first. Thanks, Joe. Positive. I mean -- but modest. I think we used the word modest. December quarter is usually not a growth quarter sequentially in Asia Pac, to your question on seasonality. This quarter, we're expecting modest growth. And why is that? Well, we believe Europe is about hitting the bottom. It's been a tough several years in Europe, as you know. But we're seeing the bookings positive now for a couple of quarters, backlog is building. So based on that, we think we'll see some modest growth in September to December in Europe.

Got it. And then just trying to think about now that the total business has returned to year-over-year growth. How should we think about just incremental margins for the business? Appreciating obviously, the geographic mix matters, but Americas turning to year-over-year growth, I think, is a positive.

Yes, Joe, I think it's a positive in terms of that will start to give some more operating leverage there and kind of start to expand the operating margins. How we look at it is the guidance implies flat gross margin year-over-year, which we think is good. There's still some things we want to do in terms of mix, but as well as -- EMEA had gross margin down this quarter, but I think flat year-over-year, at least as holding our own in gross margin.

But I think in the next quarter, we should see a seasonal mix shift, right? So part of it depends on what [ dilute ] new year looks like for Asia. But just seasonal growth in the West should have a nice impact to gross margin, which should then have some operating margin impact, all things being equal. So not ready to talk about third quarter yet, but book-to-bills are healthy right now.

Maybe just 1 last follow-up. In the prepared remarks, you talked about suppliers seeing potential for price increases. Just wondering if you could maybe provide any more color on that front? And just any additional details?

Yes, again, too specific, Joe. It's in certain technologies because lead times overall are, overall, pretty unchanged. I mean, you have some modest increase in lead times. But for sure, some of the, let's call it, the [ interact ] and maybe the power type of products going into the data center and hyperscalers starting to see a little inflation. And for sure, with memory, right? With HBM taking off, there's definitely some lead time issues in memory. I believe we'll start seeing price increases there as well. And then some selective higher-end technology suppliers have been calling out potential increases as well, which is caught in the higher-end [ MCU ] space.

And the only other thing I'd say, Joe, is that input costs are still high. So it's -- overall, ASPs are holding up pretty well.

Our next question is from Ruplu Bhattacharya with Bank of America.

I want to ask a couple of more questions on margins. So if I look at core segment margins, they were down 10 bps sequentially on $250 million higher sales sequentially. And look, from the guide, it looks like the trends are the same with Asia growing and America is growing as well, whereas Europe is flat. So Ken, when we think about core business margins, I mean, how should we think about that over the next couple of quarters? And what needs to happen for the margins there in the core business to get above 4%? And do you think that can happen in fiscal '26? And then I have a follow-up.

Yes. Ruplu, I'm not sure that I would want to call fiscal '26 core margins. I guess it's possible depending on where the mix shifts in the fourth quarter. But I think what I would say is, again, we're managing gross margin at the business unit level, trying to drive that a little discipline in where the EMEA margin was at. But we understand it's a few different things going on there, but nothing to be concerned with in terms of a longer-term deterioration of the gross margin in Europe. We should see some improvement in gross margin as we have a seasonal mix shift. But I think again, if Asia is going to be 50% of our business, right, it's going to take a little longer in terms of growth with the West to kind of get the operating margin to that 4% level.

So we'll continue to kind of focus on each business and making sure they're being consistent with their gross margin, but we would expect, going into the second half of the year, we're at least going to get the seasonal mix shift that would occur, absent Asia continuing to reach record levels, right? The guidance implies record sales in Asia.

Okay. Yes. No, that makes sense. Can I ask the same question on margins for Farnell? If Europe remains flat from a revenue standpoint, can you still see Farnell margins continue to grow 50 bps, I think you were targeting? Is that -- does it depend on overall revenue? Or does it -- is it more dependent on mix? I think you called out some mix impacts this quarter. So again, how should we think about Farnell margins going forward?

Yes. From a gross margin perspective, Ruplu, I would think about Farnell being a little different than the core business, that they -- regionally, EMEA still has the best margin, but that's more because they sell more semiconductors and IP&E products, right, relative to the U.S. and Asia. But in general, each region has a pretty healthy gross margin there. So regional mix isn't as impactful to Farnell, but product mix is impactful.

So there's still some runway to go on Farnell gross margin as the broader market recovers and the mix improves in on-the-board components. We saw a little bit of uptick here, but I think there's still some runway there to go. And again, going into the third quarter, in the March quarter, you would have seasonality impacting Farnell as well because most of their business is in the West, so they would still have that kind of seasonality in terms of sales demand.

Yes, Ruplu, just to build on Ken's point to reemphasize it. Their mix is both regional, not as big a deal though. The tailwinds that we were kind of counting on for Farnell in the September quarter out of Europe, it didn't come. September kind of just didn't happen like we had expected. So that dampened it a little bit. And then you got to Ken's point that on board components, semis, IP&E run at a higher margin than the [ test the measurement MRO ], and there's a mix issue there. We're starting to see it improve, but as the on-the-board components increases, that runs a higher margin business. That all said, our expectation is to continue to grind it out at Farnell and continue to see modest improvement sequentially quarter-on-quarter, whether through revenue, profit or OpEx.

Got it. Can I sneak one more in for you, Phil? You've mentioned demand creation revenues in IP&E. What are those each as a percent of revenue? And are -- I'm assuming these are higher margin businesses. I mean, what is the margin delta with the core business? And can they be meaningful drivers for margin upside over the next couple of quarters?

Yes. The -- I'll give you a range, Ruplu. I think is what we typically do in the IP&E, so it's, call it 15% to 20% of our total components business, roughly. And the demand creation in the [ 28 to 33 ] depending on the quarter, demand creation revenue. And call it, 300, 400 bps incremental margin. But keep in mind on the demand creation, to get that 300, 400 bps, we also have more costs, right? Because we had FAEs and the technical support things, along those lines. So it's not -- it doesn't all drop because we've got to make investments for the suppliers with the technical front end.

Our next question is from Melissa Fairbanks with Raymond James.

I wanted to start off first with some questions around the transport business. Phil, I think you highlighted that as being one of the areas where you saw some favorable trends. Was that across all geographies? Or was it kind of more limited to the areas where you saw growth in Asia and the Americas?

It was -- depending on year-on-year Q-on-Q, it was up in both in Asia Pac, right? And Americas, we saw it up, sequentially down a little bit year-on-year. And Europe, negative in both, as you might imagine.

Sure. Yes. Do you have any kind of visibility into what your exposure to either pure EV or hybrid versus kind of that traditional supply chain for ICE vehicles?

I don't have that off the top. It will definitely be higher than EV in Asia. Asia will be heavier EV, Americas will be higher combustible and Europe will be somewhere probably in between.

Okay. Yes, that was a bit of a trick question. I didn't expect you to...

It's fine.

Maybe one quick follow-up on the data center business. Especially as you're getting deeper into some of these higher value components, whether it's the memory, the storage, the [ FPGA ], the interconnect. Is there any change in linearity with either how the bookings come through for that business? Or is it still just kind of book and ship and you see turns in the quarter?

Yes. No, it was -- most of those will be a supply chain arrangement, Melissa. So for the most part, we're going to see -- it would probably, for the most part, show up as a turn in the quarter because we're managing forecast. And then when the forecast flags shipment, we kind of book and bill at the same time. You know what I mean? So we don't -- a lot of that, we don't show on the bookings -- long-term bookings. That kind of happens same day, almost. Frankly, once they pull -- in other words, it's not really -- it's not inflating the bookings unrealistically.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Phil Gallagher for any closing comments.

Great. Thank you. And I want to thank you and everyone for attending today's earnings call, and I look forward to speaking to you again at our second quarter fiscal year 2026 earnings report in January. Have a great holiday.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good afternoon, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets. We're pleased to have Avnet with us today. We have Ken Jacobson, CFO. Welcome, Ken.

Yes, thanks for having me.

Ken, maybe just starting off, obviously, you've got kind of a very good perspective on just what's going on within the semiconductor industry. It seems like everybody is just talking about kind of the recovery that we're starting to see more broadly speaking. Maybe just give us your perspective of what you're seeing from a semi-cycle perspective? Are you starting to see signs of a recovery? Maybe just talk about what you're seeing from a bookings, book-to-bill, backlog and just inventory perspective.

Yes. Thanks. I think maybe I'll first point to our Asia business, and we just ended our fiscal year in June. Fiscal 2025 grew roughly 12%, 4 straight quarters of growth in Asia. So we feel pretty good about that sign, and that was pretty broad-based in terms of the recovery there. Typically, in cycles, although this one has been more prolonged than ones in the past, it typically begins in Asia and starts in Asia. And prior to the growth we've seen this last fiscal year, we were down 6 straight quarters in Asia year-on-year. So we feel pretty good about that. And again, our Asia business is heavy Taiwan, followed by China and then ASEAN and then Japan. But we feel pretty good about the recovery there and across multiple end markets.

From a book-to-bill perspective, as we exited the June quarter, above parity in Europe and Asia and then kind of at parity in the Americas, so a pretty good sign, right? We've been running below parity in the West, and so we feel pretty good about that. We are seeing a lot of orders within lead times, and we call that our turns business, but as we get customers and then lead times, to us, that's a really good indicator that inventories have been depleted, right, and they don't have the inventory on the shelf when they need it.

And then the backlog is improving. So -- and that's just near-term backlog that we see in the turns business as well as backlog up to 180 days. And so all those things point to us that we've kind of -- obviously, already have growth in Asia, and we're nearing the bottom here in the West and are optimistic with our September quarter guidance. Sequential growth expected both in Europe and in the Americas. Although it's modest, it's still not declines. And so we're looking forward to seeing how things shake out here. September should be a good indicator for us in Europe, as they're on their holidays in July and August, when they come back in September, gives us a pretty good indicator of how strong the December quarter should be.

Great. Maybe just one quick clarification. How big is your Asia business? And then you talked about seeing a heavy turns business. I think a lot of the semiconductor companies at this conference have also commented on that. What do you make on that? Is that kind of unusual at this point in the cycle? And is that also limiting kind of your visibility in some of the out quarters at this point?

Yes. I think, I mean, first of all, right now, Asia is roughly 50% of our business. But if you go to, let's say, 5 quarters ago, it was closer to 40%. So what's happened is significant growth in Asia and then significant declines in primarily Europe but also in the Americas. So we kind of had a mixed swing, which is not necessarily great for us because of the fact that we get a higher margin in the West versus in Asia, but the good thing about all of our business units is they're pretty broad-based. We're heavy transportation, heavy industrial. We do have some in the compute in the communications area, so we feel pretty good about being broad-based.

No single supplier technology accounts for more than 10% of our portfolio. I mean, I think we are running into challenges probably over the past year of the semi companies need customer forecast to figure out what to build, and there's just been a reluctance for probably several reasons of why customers haven't been willing to give us that. I do think some of the increase we're seeing in the backlog is more longer-term visibility outside of lead times, which I think is a good sign, but we really still need to be able to dial in what to build. And so that's part of our role, is aggregating that customer demand and giving that visibility to the semiconductor and IP&E partners.

And so we're still encouraging customers. Give us your demand, right? Get in line. And as demand upticks, you could see pressure on lead times and things like that. We're not seeing that today. But just because you give us a forecast, doesn't mean you're hooked and have to buy the product. I think there's still some reluctance coming out of the force take kind of environment that they don't want to give us more than they really need. But again, lead times are one thing. The cycle times are much longer. And if we run into extended demand, we could run into some challenges.

Yes, that's an interesting point. Several of the companies that you [ wrap ] have been presenting at our conference, have been saying they've been sending out notifications and letters to their customers and warning them and encouraging them to kind of get ahead of these lead times that could be extending and maybe start placing more orders into backlog. Are you seeing kind of any sort of customer being receptive to that and maybe booking a little bit further out in response to some of these kind of letters that are being sent?

Yes. I think some customers are. I think it's getting more progress, but it's been several quarters we've been asking for that visibility. I guess what I would say is customers that have more near-term demand or where they see that own demand on their side will be more likely to put the orders in, right, making sure -- so customers dealing in the AI space, for example, they know they're running pretty hot. They need to get assurance of supply.

It's probably a mixed bag. Some of the larger OEMs are maybe more sophisticated in how they deal with their supply chain. So they've got line of sight to some of these things. And there's lots of buffer stock and kind of regional stock that customers can put in place to kind of help mitigate that.

So I think in general, customers that are viewing the different signals and signs are kind of erring on the side of caution, but there's still some more room to go in terms of that visibility. We've typically had -- even going back prior to COVID, we would typically have 180-day plus kind of visibility, and we're kind of seeing more near term, but again, I think, progress in the backlog.

Great. Maybe can you give us kind of your view on just what you're seeing in terms of demand trends via kind of different end markets right now?

Yes. So this last quarter, we saw growth, I would say, in the compute, the communications and the transportation kind of end markets. From a regional perspective, right, we're still seeing industrial pretty down. Our Asia and European business is pretty heavy industrial. We have some strength in aerospace defense in the Americas, which has held up relatively good. But it's a little bit of a mixed bag. I think Asia, in general, across all kind of markets was pretty good for us, and most markets in the West were weaker but starting to see signs of stability.

So our view is the trends are pointing to a positive direction. It still may be a little uncertain of how quickly it recovers and how many more quarters, but I think at least hitting bottom and kind of working our way out from there feels pretty good. And again, we think our diversification helps give us not any overconcentration in any one market.

Great. A question that I get a lot from investors these days is not just your results but just broader results. Like if you look at your results, how much of your results do you think are being driven by tariff-related pull-ins versus just kind of the broader cyclical recovery?

I would say from a financial standpoint, tariffs aren't largely impactful, but it is -- operationally been a challenge, and our team continue to work really hard to react to announcements and to try to implement, first of all, mitigation techniques but then secondarily, making sure we pass those through if we're incurring a tariff and have to pass it on to a customer, so we don't get stuck.

I think maybe when you look at regionally in Asia, I would say we've seen a little bit of demand pull in. That's probably over the past 3 quarters just due to uncertainty with some of the trade environment. So it's less about having to pay a tariff and more about am I going to be able to get this part into the country. Might as well err on the side of having some stock.

So we've seen anywhere from $50 million to $100 million in the broader Asia business each quarter for that, we'll call it, pull-in from customer uncertainty but not a whole lot of impact. And there's not a lot of U.S. product that we sell that goes into China that's subject to tariffs. I would say our biggest impact is in the Americas with China-produced products, although more countries are becoming part of the tariff regime. This last quarter, about 3% -- or less than 3% of our Americas sales was actually tariff billings, and globally, it's less than 1%.

So pretty nominal, a little bit of impact on gross margin but not much. And so we still think there's more opportunity to not only mitigate, which is our key priority, is to mitigate and try to avoid them, try to sell products where the customers aren't subject to tariffs, but if we do, how do we minimize the tariff. And so we've got -- we can do business in 140 countries. We've got warehouses in Mexico as well as the U.S. Our U.S. warehouse is a foreign trade zone, so it's not subject to tariff until it actually ships out of the warehouse, if we receive product into the foreign trade zone. So there's lots of things we can continue to do to help mitigate and minimize the impacts.

Okay. Can you talk about more specifically what are some of your mitigation strategies and also maybe just talk about China, what percentage of your revenues are from China?

So we do roughly $10 billion a year in Asia and about $3 billion of that is earmarked for the China business, so roughly $3 billion, which is 10%, give or take, a little bit less than that -- a little bit more than that, sorry. Mitigation techniques start with dual sourcing, working with our supplier partners to figure out if they've got product that's produced in China and produced elsewhere, okay, bring the China stuff for China and bring the non-China stuff into the U.S., right, mitigate that way.

Secondarily, we would look at where the end location is, right? Although our hub is in the U.S., we wouldn't necessarily bring product in the U.S. if we don't have to, right? We can bring it into Mexico, other places. So really just trying to optimize the regional footprint and figure out where the end demand is.

And so the dual sourcing helps a lot. There's been a lot of evaluation as of late with more tariffs coming into place about what the country of origin or country of diffusion is because depending on what that conclusion is, subjects you to a tariff. But again, it's a little bit of a moving target. So our hope is as we get more stability in the tariff space, we can continue to optimize and reduce the impact.

Great. Are there any questions? I'm wondering if you could just talk about just kind of your gross margin mix across regions. Obviously, with Asia being such a big percentage of your business, you are seeing a little bit of margin dilution there and it's half of your revenues. What are you trying to do to kind of offset that dilution?

I think maybe the important thing to emphasize is Asia is a critical part of our global footprint. And over time, more and more manufacturing is done there. I still think even in this tariff regime, when you think about a China plus 1, it's alternative locations within Asia. So you might have Vietnam. You might have Malaysia. You might have India.

So Asia is a critical market to us and our supplier partners, right? They've got pretty good concentration there too, and those are key markets where the demand is and where the growth is. And how we measure our Asia business is how do they expand their operating income dollars and how do they get the return on capital. And so although it's a more competitive environment there, there's lots of competition, which tends to yield a lower gross margin. They can make up for it in volume and still expand the key metrics we look at, which is operating income and ROWC.

We do believe the West will recover, and therefore, they should have higher growth in Asia as that happens. Again, longer term, perhaps everyone grows together depending on the end markets and things like that. But we do see some tailwinds coming just from some recovery of the West, which has a higher gross margin, which should benefit operating margins as well.

And the other thing we haven't talked much about is Farnell, which is our high service business, and that commands a really premium margin relative to our core business. And so we've got some trajectory of growth there that should help the overall portfolio's operating margins.

Great. Can you talk about what your long-term operating margin targets are? And what are the levers for you to get there?

Yes. I think, in general, with our model, and again, the last couple of years have been sales declines, but it's one of scale, so we need to get back our scale in terms of sales growth. We think the end markets we serve on a medium-term basis have high single-digit kind of growth rates, at least mid-single digits, but a lot of them like industrial and even aero, defense should have higher than that. So we believe we're well positioned to take advantage of that growth.

And we really have done a good job controlling costs. We were very careful about not going after cost too much in this downturn to kind of cut into the bone in terms of the sales force, the front end resources because we want to be well positioned to capitalize on the recovery. So I think it's a growth story with controlling costs pretty well, and we can drop through a lot of that to the bottom line.

Farnell is going to help with that a lot. There's a lot of things in Farnell that we've done. We have corrected the cost model there. There's still a little bit of room to go there. But there's also some revenue synergies we can continue to get out of Farnell. A couple of things I'll point to would be, first from a e-commerce, it's a high service kind of website kind of based business. And our conversion rate isn't where it probably should be.

We get lots of traffic to not only the Farnell properties but Avnet properties, but there's still some opportunity to kind of meet industry standards in terms of conversion rate, which, as we improve the website proposition and some of the underlying content, we think we can get there as well as synergies with the Avnet customer base. There's lots of large-sized customers that Avnet has strong relationships with that Farnell does very little business with. And so really, we refer to it as the [ power one ] but really just trying to bring the Farnell high service proposition to some of our best customers and getting some of that share of wallet, which is pretty sizable for these big, large customers.

Yes. So you brought up Farnell. Can you give us an update on just what you're doing specifically with the Farnell improvement strategy? And then maybe just talk about the Farnell operating margins. How do they compare to your overall corporate margins?

Yes. So Farnell is our high service business and think about it as speed and convenience, whereas the core Avnet may sell into the supply chain organizations of a company producing products with electronics. Farnell would typically maybe sell into the engineering group there that's doing the R&D, that's working with the next technology. And so it's smaller quantities, overnight or 2-day kind of delivery cycles. And so that speed and convenience demands a higher gross margin, right, more like 2 or 3x what the core business does.

And so as kind of the shortage market was occurring, what was happening is people were coming and getting parts from Farnell. It was upping their sales, and they were able to command a little bit more premium on the margin. And so we lost out on some opportunities to kind of look operationally and kind of fix some of the operational things they had going, and the tides were kind of rising.

But Farnell at its peak was running north of 30% gross margins as well as north of 14% operating margin. And so we believe the business and their competition can achieve that again, but the first thing we focused on is with some changes in the management team to really bring in a few more operational efficiencies in terms of the OpEx. So we took some OpEx out and really trying to get the operations rightsized and then really focused on looking for opportunities to kind of continue to grow the business.

And Farnell is -- a lot of business is on-the-board components, meaning what do you need to create an electronic board, but they're also into test and measurement as well as maintenance and repair type of products. So think about anything an engineer does on their workbench to design or develop a product. They sell all that proposition.

And so -- although we've seen steady recovery in some of the test and measurement and maintenance and repair, we have not seen the recovery yet in the on-the-board components, and that will command a higher margin as well as the conversion rate we talked about on the e-commerce side of things and the opportunity to kind of cross sell with Avnet. So those are all kind of tailwinds that we believe will come in our way. But operationally, we've fixed a lot of other things, but there's still some room to go there.

What percentage of your revenues does Farnell represent? And when we think about the growth going forward for Farnell, is there an opportunity for that to see outsized growth? Or should we be thinking about what's sort of growth rate there?

I think yes is the answer. So Farnell right now represents less than 10% of our business at its peak. It was 7% or 8% of our business but 20% of our operating profits. And so we believe with the Farnell growth is going to come an improvement to the mix. The margins at each product level category are pretty stable there, including for on-the-board components. So we have a ways to go there. As they get the growth, they'll get the mix improvement as well, which will help gross margins and expand operating margins. But I do think with the other initiatives we have within our control, will have equal to or higher growth than the core business.

Great. Can you talk about where your inventories are? And just given where we are in the cycle, are you contemplating increasing inventories at this point?

I wouldn't say we're contemplating increasing inventories. I would still say we have pockets where it's a little excess than where we like it to be or relative to the current sales levels. So the first priority is continuing to work down the inventory where they're elevated, and we know those areas. I would say we've made really good progress, maybe not as quickly as we'd like but good progress in terms of the composition of inventory, whether it's aged inventory, whether it's pockets that weren't moving, been able to kind of turn that over and get to the product categories that we will be able to sell and will enable growth in the business.

Still some room to go there, but we think we have enough inventory in terms of dollars to support any near to medium-term growth, but we still need to make some progress on getting the right inventory on the shelves. And that's continually our challenge, is let's make sure we have the right product and only hold as much as we need to, to support what the customers' needs are. So still some room to go there, but we did make some progress this year with a little bit more progress to go.

Okay. What -- how many days of inventory are you at? And what's...

We're roughly 94 days of inventory. I think our goal exiting fiscal 2025 was to have lower than $5 billion of inventory when we started the year. When you normalize for currency, we're about $5.050 billion, so about $50 million short, but did make some progress towards that. So I would say we want our inventory days to be in the 80s as kind of the near-term goal here, and it's still going to take a few more quarters to continue to work things out there. But we definitely have line of sight, and it's a priority for the team.

But again, we want to emphasize that as a distributor, inventory is the kind of the lifeblood of our business. We need to have the right inventory to fit customer needs, especially when you talk about this turns business improving where there's near-term customer demand within lead times. If you have that product on the shelf, that yields a sale, and a lot of times, that yields a higher margin for us. So we want to make sure we're well positioned, as lead times extend out, if they do, with demand increasing, be ready to kind of take our fair share.

Great. Can you talk about what you're seeing from a pricing perspective right now?

I would say pricing has generally been relatively stable, right? We went through a period where we were having multiple price increases in a given year but feel that ASPs are pretty steady now. With the demand environment, where it's at, I think there's competitive pressures in terms of a customer wants a better deal and shops it, and to keep your customer entanglement, you might have to do some things on price. But I think that's -- in general, we're seeing puts and takes there, but nothing of note.

We think margins, overall pretty stable regionally, but ASPs are holding up, which is good. We don't see anything that would indicate any near-term or even medium-term move to lower ASPs as wholesale perspective, even -- we've even heard rumblings of price increases in certain specific technologies. So we feel really good about where pricing is at, and there was a lot of customer energy and outburst over tariffs. Of course, no one wants to pay a tariff, and I think we've worked through some of that, although we still want to minimize the impact of tariffs.

So we look at it year-over-year on each region. Gross margins held up pretty good. So from fiscal '25 to fiscal '24 across all 3 regions, including Farnell, generally, margins holding up pretty well, a little bit of puts and takes, but feel okay about that. So really focused on getting the regional mix improving and just getting back to growth across all regions.

Yes. I think the last question for me is just when you think about just competition, can you just talk about from a differentiation perspective, how do you differentiate yourselves from some of the other big distributors out there like Arrow or World Peace?

Yes. There's lots of competition out there, although it's a big market. I guess our first differentiator I'd point to is Farnell. We're the only broadline global distributor with a high service business, and we do think high service has a long-term future in the broader component supply chain. And Farnell is well positioned in Europe, and we're making some investments to make that a better business.

Next, I'd say, our line card, there is nuances with our line card versus some of the competition. We really excel at the high-end technologies and where we do have competing lines, we're usually #1 in some of those lines. So we feel pretty good about that. That's been a key focus area for the last several years to really be well positioned with the suppliers. And what we need to deliver as a distributor is we need customer count growth and overall revenue growth. And if we can deliver those, that we're in good graces with the supplier partners.

I do think our leadership team is pretty tenured. We just did announce the transition in Europe, and so we're excited about that. But at the same time, we've had a pretty stable leadership environment at each of our business units, not only in Asia but in Europe, but also at the CEO helm. Phil has been with us for 43 years. So we think that's important because we understand the value distribution provides, and we're trying to just be -- the best value a distributor be, not something that we're not, right? And so we understand our customer space, understand our supplier space and want to compete well in the distribution space.

I think in markets like Asia, we're a little stronger in Taiwan, which we're comfortable with as a good market, right? And so those are probably the key factors I'd point to. But again, we have really good competitors. And I do think there's room in the space for everyone to kind of rise, especially with the proliferation of electronics we'd expect over the next several years.

Great. Thanks very much, Ken.

Yes. Thank you very much. Appreciate it.

Welcome to the Avnet Fourth Quarter Fiscal Year 2025 Earnings Call. I would now like to turn the floor over to Joe Burke, VP, Treasury and Investor Relations for Avnet.

Thank you, operator. I'd like to welcome everyone to Avnet's Fourth Quarter Fiscal Year 2025 Earnings Conference Call. This morning, Avnet released financial results for the fourth quarter and fiscal year 2025 and the release is available on the Investor Relations section of Avnet's website, along with a slide presentation which you may access your convenience.

As a reminder, 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. [Audio Gap] 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 presentation.

Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website.

Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Joe, and thank you, everyone, for joining us on our fourth quarter and fiscal year 2025 earnings call. For the fiscal year, we delivered $22.2 billion in revenues and $3.44 of adjusted diluted earnings per share.

Looking back, this was a year of intense focus on managing the things within our control, including competing well in market, strengthening our supplier and customer relationships by demonstrating the value Avnet brings to the technology supply chain. Controlling costs, while continuing to make investments that enable our long-term strategy, optimizing our working capital and generating healthy cash flows and continuing to return cash to shareholders through buybacks and the dividend.

We also announced a couple of key executive additions this fiscal year, including the appointment of [ Dave Youngwood ], a 25-year industry veteran as our Chief Digital Officer and more recently, the promotion of [ Gilles Bertrand ], a 23-year veteran of Avnet as the new President of our EMEA region. Congratulations. Joe. Joe will be succeeding [indiscernible], better known as [indiscernible] and [indiscernible], who have covered the EMEA region with distinction for many years. They will remain with us for the next several quarters to ensure a smooth transition. Succession planning is critical to any organization, and we have a thoughtful structured process in place at Avnet.

Mario and [indiscernible] did a great job leading the success of our EMEA region over the years and also developing talent for the next generation of leadership. I want to thank them for their many years of tireless dedication. And I want to express my gratitude to our team for their unwavering commitment and hard work in driving us toward our objectives in challenging markets like we have faced the past couple of years, our collective efforts truly highlights the critical role we play at the heart of the technology supply chain, reinforcing our value to all stakeholders.

Now turning to the recent completed fourth quarter. I am pleased we delivered another quarter of financial results that exceeded our sales and EPS guidance. In the quarter, we achieved sales of $5.6 billion and adjusted operating margins of 2.5% highlighted by a 4.3% operating margin in our Farnell business. We also generated $139 million of cash flow from operations in the quarter. Sales were better than expected, led by Asia which delivered 18% year-over-year growth in the quarter. Sequentially, demand increased across most of the markets we serve. On a year-on-year basis, demand increased in the compute, transportation and communication end markets globally.

Semiconductor and IP&E lead times and pricing remained stable for most technologies. Our book-to-bill ratio improved across all regions and for now last quarter. The improvement was led by our Europe and Asia regions, which were both above parity. Bookings also continued to grow in our IP&E business and remain above parity as well. We continue to coordinate closely with suppliers and customers to actively manage our backlog, which is growing again. New customer orders within lead times, which we refer to as our turns business, also increased across all regions and is a positive sign that customer inventories are normalizing.

Order cancellations have remained at normal levels. I am pleased with our progress on reducing inventories, although there is still work to do. Even so, we believe we are well positioned today and remain focused on ensuring we have the right inventory on hand balancing reductions with investment opportunities. We expect to continue to be disciplined in optimizing our ivory as we move through fiscal year 2026.

Now with that, let me turn to the fourth quarter results. At the top line, our Electronic Components business increased on a sequential basis and year-over-year. All regions were higher sequentially and notably, this was our fourth consecutive quarter of year-over-year growth in Asia. Sales in Asia were better than expected and demand in most end markets increased both year-over-year and sequentially. Similar to last quarter, we experienced a slight benefit from customers ordering due to the uncertainty of potential regulatory changes in the U.S.

In the Americas, demand increased sequentially for the communications end market and compute was strongest on a year-on-year basis. We did not see pull-ins [indiscernible] and customer billings for tariffs were not meaningful during the quarter. In EMEA, the market is still mixed with some signs of improvement in certain end markets [Audio Gap]. With that said, we are optimistic that bookings in EMEA will grow in September as the European [indiscernible]. From a demand creation standpoint, revenues increased 7% sequentially and as our field application engineers continue to engage with our customers and suppliers on design wins and registrations. The strength of our FAEs and technical teams is a key part of our value proposition.

Now turning to Farnell. The team continued to deliver on the strategy that [ Rebecca Obregon ] and her leadership team put in place 1 year ago. Rightsizing the cost structure, reorganizing the management team and leveraging Avnet's broader relationships and bolstering our digital and e-commerce capabilities. [ Quarter ] sales were higher both sequentially and year-on-year with improved operating margin. We are pleased that Farnell's results have stabilized but we still have work to do to achieve its full margin potential. We are confident they are well positioned for steady improvement.

To conclude, Avnet has momentum as we enter the new fiscal year despite challenging business conditions over the last 2 years. And with that, we have a number of reasons to be optimistic about fiscal 2026, beginning with Asia's double-digit growth in fiscal 2025. The region has historically led us out of cycles in the past, and this one should be no different. Stabilization [indiscernible] with a right-sized cost structure and synergies from the Power of One initiative Farnell's poised for steady growth. Book to bills above parity in all regions and in our IP&E business, which is one of our higher-margin growth opportunities. We have made significant investments in our digital infrastructure to boost our customer experience and data insights. Demand creation as semiconductors become more pervasive, the value of added engineering capabilities will further increase.

And finally, lead times have normalized. Our backlog and turns business are improving. And through it all, gross margins have held up well for each of our EC regions in fiscal 2025 compared to fiscal 2024. I continue to be optimistic about our value proposition and are encouraged by the positive signs that market conditions are beginning to turn in the Americas and EMEA. At the center, of the technology supply chain, we are well positioned to help solve for the increasing complexity our customers and suppliers face around the world and bring resiliency to the supply chain. With that, I'll turn it over to Ken to dive deeper into our fourth quarter results. Ken?

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our fourth quarter earnings call. Our sales for the fourth quarter were approximately $5.6 billion, above the high end of our guidance range, up 6% sequentially and up slightly year-over-year. Regionally, on a year-over-year basis, sales increased 18% in Asia but declined 17% in EMEA and 2% in the Americas. In constant currency, EMEA sales were down 21% year-on-year.

From an operating group perspective, Electronic Component sales improved 1% year-over-year and 6% sequentially. Farnell sales increased 3% year-over-year and 5% sequentially. For the fourth quarter, gross margin of 10.6% was 99 basis points lower year-over-year, mainly due to a higher mix of Asia sales, and 49 basis points lower sequentially, mainly due to product and customer mix, in addition to some impact from foreign currency exchange rate changes. The regional mix shift to Asia impacted EC growth margin year-over-year. Sales from the Asia region represented 48% of fourth quarter sales in fiscal 2025 compared to 41% in the year ago quarter.

Gross margins for the Americas and Asia regions were lower both sequentially and year-on-year, while gross margins for EMEA increased year-on-year and declined on a sequential basis. Overall, on a region-by-region basis, we believe gross margins are generally stable although they can be impacted by product or customer mix within any given quarter. Farnell gross margin declined both sequentially and year-over-year, primarily as a result of a higher mix of off-the-board components and single-board computers. Farnell gross margins at the product category level, including on-the-board components continues to be stable.

Turning to operating expenses. We continue to manage expense as well and take costs out where necessary. G&A expenses were $451 million in the quarter, up $1 million year-over-year and up $16 million sequentially. Foreign currency negatively impacted operating expenses by approximately $14 million sequentially to $10 million year-over-year. Excluding the impact of foreign currency and the prior quarter benefit from the gain on sale and leaseback facility, our operating expenses decreased approximately 2% both year-on-year and sequentially.

As a percentage of gross profit dollars, SG&A expenses were slightly higher sequentially at 76%. Moving into fiscal year 2026. We expect some operating expense headwinds as a result of our decision to invest in our people by providing merit pay increases, which were not awarded in fiscal year 2025. We believe these increases are necessary to reward and retain our employees, especially ahead of the expected market recovery this fiscal year.

For the fourth quarter, we reported adjusted operating income of $143 million and our adjusted operating margin was 2.5%. By operating group, Electronic Components operating income was $157 million and [indiscernible] operating margin was 3%. The year-over-year decline in EC operating margin was primarily due to the sales mix shift to Asia and the [indiscernible] decline in EMEA. Farnell's operating income was $17 million and operating income margin was 4.3% and Operating margin was approximately 129 basis points quarter-over-quarter and up 25 basis points year-over-year, reflecting improved sales and the benefits of prior operating expense reduction efforts. It is worth noting that this is the first year-on-year improvement in Farnell's operating margin since Q1 of FY '23. Farnell operating expenses were down $7 million year-on-year and down $5 million sequentially on higher sales. There is still a lot of work ahead of us at Farnell, but as expected, we are seeing steady improvement, led this quarter by the increase in sales of single-board computers and the improvement in the number and size of customer orders.

Turning to expenses below operating income. Fourth quarter interest expense of $58 million decreased by $6 million year-over-year and decreased by $3 million sequentially due to lower average borrowings. This quarter's interest expense positively impacted adjusted diluted earnings per share by $0.05 year-over-year. We continue to look for ways to further reduce interest expense, including paying down debt with operating cash flows or reducing our average borrower rates. Our adjusted effective income tax rate was 23% in the quarter as expected. Adjusted diluted earnings per share of $0.81 exceeded the high end of our guidance range for the quarter.

Turning to the balance sheet and liquidity. During the quarter, working capital increased $29 million sequentially and included a $35 million decrease in reported inventories, a $232 million increase in receivables and a $168 million increase in payables. Sequential increases in foreign currency exchange rates added [ $200 million ] to working capital, including $150 million to reported inventories. Excluding the impact of changes in foreign currency exchange rates, inventories decreased by $185 million or approximately 4% compared to last quarter. On a year-over-year basis, in constant currency, inventories are down over $400 million or approximately 8%. We remain focused on reducing inventory levels where elevated, noting that we also want to make investments where needed.

Our return on working capital was 9.4% for the quarter. We generated $139 million of cash from operations in the quarter to $725 million for the fiscal year. We expect lower cash flow from operations in Q1, primarily due to certain income tax payments that need to be made. For the fiscal year, we lowered our debt by $237 million. We ended the quarter with a gross leverage of 3.4x, and we had approximately $1.1 billion of available committed borrowing capacity. This quarter, net cash used for capital expenditures was $60 million, which included the land purchase of an office building. We expect capital expenditures to return to normal levels of approximately $25 million to $35 million per quarter in fiscal year 2026.

For the fiscal year, we returned a total of $415 million to shareholders through our share repurchases and dividends. In the fourth quarter, we paid our quarterly dividend of $0.33 per share or $28 million. We also repurchased approximately $50 million worth of our shares. We achieved our goal to reduce shares outstanding by at least 5% this fiscal year as we repurchased nearly 7% of our outstanding shares. Additionally, we have more than $300 million left on our current share repurchase authorization.

Book value per share increased to approximately $59 or a sequential increase of $3 per share, primarily due to the changes in foreign currency exchange rates. With regard to our capital allocation, we continue to prioritize our existing business needs and investing in areas that can make our overall business better. We also remain focused on ensuring we have a strong balance sheet and making sure our leverage remains at appropriate levels.

Turning to guidance. For the first quarter of fiscal 2026, we are guiding sales in the range of $5.55 billion to $5.85 billion and diluted earnings per share in the range of $0.75 to $0.85. Our first quarter guidance assumes sequential sales growth of approximately 2% at the midpoint and assumed sales growth in all regions. This guidance also assumes similar interest expense compared to the fourth quarter, an effective tax rate of between 22% and 26% and 85 million shares outstanding on a diluted basis.

Our team has made significant effort to adjust our processes for tariffs. We continue to work with our suppliers and customers to mitigate the back where possible. During the fourth quarter, less than 3% of the Americas sales and less than 1% of global sales were from customer tariff billings.

In summary, our fourth quarter performance is better than expected despite the challenging market conditions. Our team continues to focus on generating operating cash flow. And over the past year, we've been able to balance the paydown of debt with returning cash to shareholders through our share repurchase and dividend programs. I want to echo Phil's comments and thanking our team for continuing to focus on the things we can control. Our global scale, diversification of our distribution center locations, the supplier technologies we buy and the vertical markets we serve gives us the ability to reduce complexities and better serve our customers. With that, I will turn it back to Phil for one last word before questions. Phil?

Thanks, Ken. And before we go to questions, as some of you may know, Joe Burke, will be retiring and leaving Avnet at the end of the year. And I want to thank him for his many contributions over his remarkable 37-year career at Avnet. Joe has been instrumental in setting the foundation of our finance team, having served as our long-time Treasurer and Head of Investor Relations. I've been grateful for his leadership through the years, and I will miss his insight, wisdom, candidness and his dry sense of humor. Joe, I wish you the best in your retirement. Congratulations. You got it. So with that, I'll turn it over to the operator, we'll open it up for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Joe Quantrochi from Wells Fargo & Company.

Congrats to Joe Burke. Thanks for all the help over the last several years. Maybe just to start, it feels like the commentary on EMEA is definitely maybe a bit more positive than 90 days ago. So can you talk about just kind of what's changed there? And like what end markets maybe are driving?

Yes, Joe, appreciate the question and comment on Joe. Well, we have more optimism, okay, as we look at EMEA right now, I would put it that way. I mean, as you know, it's fallen down -- if you look at our charts as a percentage of our revenue, it's come down quite a bit. It's been soft. So we're just starting to see -- again, we're not celebrating, I'll be really clear. But the bookings are coming back modestly. When I look at the backlog buildup in EMEA, it's starting to increase year-on-year. I'm looking at it as we speak. And Q-on-Q, I'd just say it's modest, but we're definitely starting to see some movement there. And for us, that's a deal. It's a critical region from a profitability standpoint, as you know.

That's helpful. And then I guess as a follow-up, I appreciate that FX is kind of making the inventory dynamic a bit more difficult to kind of track quarter-to-quarter for at least just looking at it on the balance sheet at that point in time. But I guess, how should we think about just inventory trends in the September quarter that you're thinking about relative to trying to still work down maybe in some pockets?

Yes. Joe, I'd say we expect the EC business to continue to drive inventory down a modest decline next quarter and then offset a little bit by Farnell. So i think this quarter was about $186 million, net of FX, some of that was coming from Farnell, a lot of it came from Europe. But continued progress in the core, including Asia and the Americas. So still have work to do there on the inventory side, but would expect despite the up sales a little bit to bring inventory down a little bit still.

Yes. And I'll just add to that. The -- as we talked in the past, Joe, and we put it in the script, we're still making investments in inventory, too. So it's not all a bad thing, right? So it's a handful of commodities more that are driving a lot of the upside in inventory need to keep working that down while we continue to make sure we have the appropriate SKUs and inventory levels to service the balance of the customer base. We want to get back into the mid-80s, if we can, from a day [indiscernible] our goal.

[Operator Instructions] Our next question comes from the line of Ruplu Bhattacharya with Bank of America.

My questions, Joe. We're going to miss you. Stay in touch. You're retiring too soon. I mean, so really appreciate all the help.

Thank you.

All right. Phil, I wanted to start by asking on the core business. So Asia remains strong. How do you see that trend continuing over the next couple of quarters? How do see the mix of regions? And how does that impact the core business margins as we go forward?

Yes. Great question. I'll let Ken jump in on the margins a bit. Yes, I will make it really clear too. We're super proud of our team in Asia Pac. And they have been not only growing and increasing share, but holding their margins as well. So they have 4 quarters in a row of year-on-year growth is pretty good and proud of them and our position there.

As far as the next several quarters, we feel pretty good about Asia. So they're still cranking along and as you know, Rupul, typically, and it's a little delayed this time it seems. But typically, the turn of the market, which is why we're cautiously optimistic, starts in Asia Pac that typically swings around to the West. And just hasn't happened yet. But that -- we feel confident about Asia continuing to perform well.

And then, yes, as we put in the slide, you can see that Asia has grown as a bigger percentage of our business. It's had an impact on the margin. That really is the impact with Europe coming down and Asia going up. It's just been the swing in the margins. It's just a clear math issue, but we have no intention of slowing down in Asia to increase the balance of the other regions. We got to get the other regions to start growing, again, an increase in the margin profile.

Rupul, I think Phil mentioned the script, but I want to emphasize, we kind of measure the businesses in terms of their stand-alone gross margin, right? We can't necessarily control the mix because of the fact of where the different markets are at. But each of the regions really were flattish year-over-year for the full year. So we feel pretty good about that, that fundamentally, the gross margins are holding up. Again, EMEA was down 21% in constant currency -- year-over-year. Last quarter we can kind of move that tide. You should see normal margin uplift. So how long it takes to kind of catch up that mix from what it was before is still to be determined based on how fast the recovery is. But just getting back to growth in Europe has some positive benefits on the margin and the Americas is all right.

So we should, as the West begins to grow year-over-year and starts to recover, we should start to see a more favorable mix to the West, but getting back to where it was, it may take some more time. And clearly, that would have an impact on the broader operating margin of EC, but you also have Farnell that's out there that could help lift that up to if that begins to recover and expand their margin that helps the overall business uplift the overall operating margins.

Okay. Well, that's a great segue into my next question, which is on Farnell. What are some of the things that you guys are doing to improve margins there? One aspect was you've hired a digital office -- Chief Digital Officer and your. Can you give us like how much of sales for Farnell are now -- has now come through the online portal. And how do you see margins trending? It was at 4.3% this quarter. How should we think about -- how about that going forward?

Yes. So some of the things we've done there, as you know, we changed and we put in the script, we changed leadership at Farnell, obviously, a year ago, and Rebeca has made a lot of changes. We've probably turned over roughly 70% of the executive team or a little bit more and have been very assertive on reducing non-value-added expenses and getting that out, which is ongoing to drive more efficiency.

As far as the digital side of the equation, we brought [ Dave Young ] in, got a great background of what respect in the industry and -- he's [indiscernible], if you will, with Rebecca and the digital team at Farnell and make some real progress on the site in some of the areas in which we need to improve from a digital customer experience standpoint.

So we're doubling down there, not backing off at all. And the overall activity -- in Farnell, [indiscernible] that goes through digital 70% from an activity standpoint, probably close to 50-plus percent from the revenues, and we -- and that will continue to increase.

And Rupul, I also add that we have the opportunity we have with more partnering with Avnet to help drive the top line, too. So in addition to the belief that the market will recover for on the board components, which should help their gross margin and their sales overall. There are some things on the revenue side that we have within our control, including the efficiency of our e-commerce and proposition there as well as the partner with Avnet that should continue give Farnell lift over the upcoming quarters.

Yes. Rupul on the margin, just going back, the message of the Farnell team is continuous improvement. Okay, will be a tailwind for Avnet to Ken's point. So got the 4.3%. Now we just need to quarter-on-quarter, see that continue to improve, and that's the plan over the next, let's call it, 4 to 8 quarters to get back into double-digit operating margins plus.

If I can just sneak one quick one, and it's a very top level, high-level question. The industry has been going through an inventory correction over the last year, 1.5 years. Phil, do you think that we're at the bottom of this is excess inventory now out of the channel? And how do you see that -- are we now at an inflection point, do you think?

I think we're getting close, Rupul. I don't have a crystal ball in front of me to give you an exact answer. But when you look at some of the book-to-bill started to increase the -- I'll call it short interval -- turns business, drop in orders from customers are starting to increase, which means they're short, right? They're coming in and buying -- still would a little bit more visibility out there from the customers from a forecasting standpoint. They're still a little conservative on that front. And because lead times are kind of settled down, right? There's not much change. I actually look at the lead times -- there's hardly any change at all across the board in semi passives and interconnect other than high bandwidth memory and things like that.

We track and looking at it as we speak, and the inventory by our top suppliers, which I won't get into by individual. But there's no question, if you look at the semi set of suppliers that have reported so far. The inventory days are definitely down in total, roughly 11 to 12 days from a couple of quarters ago. And IP&E has been pretty well steady. So there's not been an issue in the IP&E.

When you look at EMS, again, not mentioning any names, their inventories are down from 1 year ago, roughly 20-plus days. So -- and then there are some OEMs we track, and they're in the 54-day range of inventory, which is also down. So there are some indicators. Again, that's not a statement of fact across the board because I think there's still a little bit more inventory than we would like to see out there. But -- and speaking for ourselves. We brought inventory down. Yes, we want to bring it down more, but it's definitely down. And so that's -- we just do some of our optimism, not overly optimistic, but optimism as our backlog increases and lead times stabilize and you see some of these days of inventory coming down.

Our next question comes from the line of Melissa Fairbanks with Raymond James.

I have a few questions. To start with though, Joe, I'm hopeful we can still play golf together in the spring. That would be great. You might have more time.

Just to follow up on some of Rupul's questions on Farnell margins in particular. Phil, I think you kind of hinted at it, get back to a double-digit margin percentage. I'm wondering what we should of as being a normalized margin for Farnell? Obviously, we had some pretty extraordinary situations, conditions going on during the supply chain crisis. Just wondering what kind of the -- if you could let us see that spreadsheet, let us know what the internal targets are for margins?

I can't do that, Melissa.

I would love to see whatever spreadsheet you're looking at right now with all the lead times and inventory levels. I would love to see that.

There's about twenty of them on the table. You want to pop over. But anyway, thanks, Melissa. Yes. So we do have -- you're right, we went to that -- we swung way up in that, let's call it, the false market several years ago with the shortage of supply and got into a 14% operating margin, that's all public data, as you know.

And then when the tide went down and all the stuff showed up at the bottom of the harbor, we went down to [indiscernible] breakeven at 1%. We can't let that happen again. So we are modeling -- I don't want to say a peak, but they definitely get into double digit, 10%, 11%, 12%, 13% operating margin over the next couple of years. And if there's a correction like we saw, which will come as the market is up, it will come down again some day, but do not let it get down to like below mid -- like 5% or something like that. So that's kind of the range, but we definitely want to get to an average of greater than 10% operating margin is where we want to get to.

I had a couple of questions for Ken. You mentioned that you would restart the merit increases that we didn't see in fiscal '25. Just wondering we should model OpEx going forward? If it's the September quarter outlook that kind of contemplates that entire uplift? Or it's going to be kind of like a rolling, I don't know if it's on a calendar year or fiscal year for those merit increases.

Yes, the full impact in the guidance in the first quarter. So how I think about it is there's been some currency impact on number. But really, the impact here is really the merits. So think about it being $8 million to $10 million for those and it's already a run rate. Now with that being said, there's a few things we're looking at to help curb potentially other inflationary things that come with the new fiscal year. So I wouldn't expect expense to go down a lot, but there could be a little bit of movement there down, but that was probably a good point for your models, the number modeling for Q1, extrapolating out to the year, assuming there's no massive volume increases. We always have some OpEx tied to volumes up or down, but it's very good run rate now getting into the Q1.

Okay. And maybe as a last question, asking you guys to pull out your crystal ball forecasting. It was nice to see interest expense come down a little bit in the June quarter, that you're guiding for flattish during the September quarter, assuming that we are starting to see some stabilization, maybe even an inflection point in some of the broader demand. What should we be assuming in terms of inventory investment and then potentially what that means for the interest expense going forward?

Yes. I think most I'd look at it is we have enough dollars of inventory, right, for the current level of sales even for some growth. It's really about continuing to get a higher quality mix. There are some pockets where we need to continue to work it down. So I would say we expect the bill to come down again modestly, but at the same time, we wouldn't expect to utilize a lot of cash to grow the business here. So there's still some work to do internally in terms of the inventory, but we expect to go down a little bit still, all things be equal, but even with more aggressive recovery, we think we've got enough dollars and we'll be in the turn it faster.

Gentlemen, there are no further questions at this time. I'll now turn it back to Phil Gallagher for closing remarks.

Thank you, operator. And let me thank everyone for attending today's earnings call and look forward to speaking to you again at our first quarter fiscal year 2026 earnings report in October. Have a great rest of the summer.

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