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, semiconductor 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…

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 Components 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…

[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 are 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 use 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 will 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. 80s 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, we exited the quarter at roughly 91, 92 days. We think we'll 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 the 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 is 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 the Lunar 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 one 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, without getting 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 interconnect 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 called 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 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-the-board components, semis, IP&E run at a higher margin than the test and 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 and 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 as 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? So 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 -- depends on year-on-year or Q-on-Q, it was up in both in Asia Pac, right? And the 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 in the 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 the 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 it -- 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.