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 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. Bookings improved as the region returned from its summer slowdown. The industrial and communications 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 strengthening in Asia and the Americas. Operating margin remained stable sequentially due mostly to increased sales of the on-the-board 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 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, I 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 translates 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 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 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 a $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 our 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.

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 believe you calculated the end of quarter inventory using average inventory, which results in some differences in measuring inventory days. However, we are noticing a trend of declines in the EC business, with inventory days down approximately 10 year-over-year. Inventory has increased slightly, particularly in Asia, and we lack the right inventory to support growth in those areas. We're investing in certain inventory, but we still have opportunities, especially in Asia, to reduce inventory, which will help decrease inventory days. On the supply chain services side, we are seeing a slight recovery in that business after a decline in FY '25, and we expect further improvements this quarter. There is still room to manage excess inventory and drive it down while sales increase, which should enhance our position. Expectations remain positive, and while inventory days were a bit higher than we anticipated at the end of the quarter, there’s nothing concerning regarding longer-term trends due to the developments at 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 to 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 trajectory down.

Our next question is from Joe Quatrochi with Wells Fargo.

You mentioned that EMEA performed better than expected in the September quarter, and now it seems you anticipate it may be stable in December. I understand the seasonality is tricky to assess right now, but how should we view the demand trends for the December quarter in relation to seasonality in EMEA?

Yes. So I'll go first. Thanks, Joe. Positive but modest. I think we used the word modest. The December quarter typically does not see sequential growth in Asia Pac, in response to your question about seasonality. This quarter, we're expecting modest growth. Why is that? Well, we believe Europe is about to hit the bottom. It has been a tough several years in Europe, as you know. However, we have been seeing positive bookings for a couple of quarters and backlog is building. Based on that, we think we'll see some modest growth from 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 believe this is a positive development as it will start to provide more operating leverage and help expand our operating margins. Our guidance suggests that gross margin will remain steady year-over-year, which we view favorably. While there are still some adjustments we want to make regarding our mix, EMEA's gross margin was lower this quarter, but we are maintaining our gross margin on a year-over-year basis. In the upcoming quarter, we anticipate a seasonal mix shift. The performance during the Lunar New Year in Asia will have an impact, but we expect seasonal growth in the West to positively affect gross margin, which should then influence operating margins, assuming all else remains equal. We are not ready to discuss the third quarter yet, but our book-to-bills are currently healthy.

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 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 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.

Can I ask the same question about margins for Farnell? If Europe remains flat in terms of revenue, can you still expect Farnell margins to grow by 50 basis points, as you were targeting? Does this depend on overall revenue, or is it more influenced by the mix? You mentioned some mix impacts this quarter. How should we think about Farnell margins going forward?

Yes. From a gross margin perspective, I see Farnell as somewhat different from the core business. EMEA has the highest margin primarily because they sell more semiconductors and IP&E products compared to the U.S. and Asia. Generally, each region maintains a strong gross margin. Therefore, regional mix is not as significant for Farnell, but product mix does have an impact. There is still potential for improvement in Farnell's gross margin as the overall market recovers and the mix of on-the-board components enhances. We did observe a slight increase here, but there is still room for growth. Additionally, as we approach the third quarter and the March quarter, seasonality will also affect Farnell since the majority of their business is in the West, leading to seasonal variations in 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 ask one more question, Phil? You've discussed demand creation revenues and IP&E. What percentage of revenue do these represent? And I assume these are higher margin businesses. What is the margin difference compared to the core business? Can they significantly contribute to margin improvements in the upcoming quarters?

Yes, I can provide a range for you. Typically, in the IP&E segment, it represents about 15% to 20% of our total components business. The demand creation revenue falls between 28% to 33%, depending on the quarter. This brings an incremental margin of about 300 to 400 basis points. However, it's important to note that achieving that additional margin comes with increased costs, as we need to invest in field application engineers and technical support, among other things. Therefore, not all of it translates to profit because we have to make investments in technical support for our suppliers.

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 up both year-on-year and quarter-on-quarter in Asia Pacific. In the Americas, we experienced a sequential increase but a slight decline year-on-year. Europe, on the other hand, showed negative trends in both comparisons.

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, most of those arrangements will relate to the supply chain. Generally, we can expect a noticeable change in the quarter because we're managing the forecast. When the forecast indicates a shipment, we typically record and bill at that moment. We don’t reflect much of that in long-term bookings; it tends to occur on the same day. Once the shipment is initiated, it doesn't inflate the bookings in an unrealistic manner.

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.