Avnet Inc

NASDAQ:AVT

Earnings Call Transcript 2018-Q2

[Operator]

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

[Vincent Keenan, Vice President of Investor Relations]

Good morning and welcome to Avnet's Second Quarter of Fiscal Year 2018 Business and Financial Update. As we provide the highlights for our second quarter fiscal year 2018. Please note that in the accompanying remarks we have excluded certain items including ERP accelerated depreciation, intangible, asset amortization expense, restructuring, integration and other items and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U.S. dollar based financial statements into U.S. dollars. When we refer to organic sales, we have adjusted the prior period to include the impact of acquisitions. In addition, when addressing return on capital employed, return on working capital and working capital velocity, the definitions are included in the non-GAAP financial information section of our earnings press release available on website at www.ir.avnet.com

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

In just a few moments, Bill Amelio, Avnet's CEO, will provide Avnet's second quarter fiscal year 2018 highlights. Following Bill, our Interim Chief Financial Officer, Ken Jacobson, will review some additional financial highlights and provide third quarter and full-year fiscal 2018 guidance. Also here today to take any questions you may have related to Avnet's business operations is Phil Gallagher, President, Electronic Components.

With that, let me introduce Mr. Bill Amelio to discuss Avnet's second quarter fiscal 2018 business highlights.

[Bill Amelio, Chief Executive Officer]

Thank you, Vincent. Hello, everyone. Thank you for taking the time to be with us and your interest in Avnet. We build on our progress that we made in the first quarter of fiscal 2018 as revenues came at a high end of guidance. Our adjusted EPS exceeded guidance in both gross profit and adjusted operating margin increased from the September quarter. Revenue of $4.5 billion increased 5.8% year-over-year with organic revenue increasing 1.9% in constant currency. Both the Americas and Asia region exceeded expectation. When combined with continued growth in EMEA region help offset the supplier program changes as electronic components revenue increased 4% year-over-year and 10.2% year-over-year when you exclude the impact of those channel shifts.

At Premier Farnell, organic revenue in constant increased 7.7% year-over-year driven by double digit growth in our Asia region. Our cost reduction initiative continue to gain traction as operating expenses declined $40 million or 2.9% sequentially, which contributed to a 17 basis points sequential increase in adjusted operating income margin.

Ken will go over more financial details later in the call. However, I want to give you some highlights of our achievements in electronic components Americas region this quarter. As discussed in our October call, the Americas region which was disproportionately impacted by supplier program changes, as well as their ERP disruption has brought about and many other metrics were beginning to improve. This quarter, I am happy to report that the continued upward trend in performance metrics is having a positive impact on the Americas regions financial performance. Year-over-year reported revenue growth improved from a declined of 16% in the September quarter to the decline of 5.7% in the December quarter. Demand and creation metrics continue to improve as design registrations were up both sequentially and year-over-year, and the cumulative design registration have now offset this August we loss due to supplier program changes in a relatively short period of time.

Our growth initiative continues to gain traction is evidenced by an improvement in sales process metrics this quarter. We've also begun to achieve some of the financial target as supplier built incentives around which partially contributed to 35 basis points sequential improvement in gross profit margin in the Americas regions of electronics component. The combination of sequential growth, gross profit margin expansion and cost reductions led to a significant improvement in operating margins for the September quarter. With an improving book-to-bill and an improving confidence of our suppliers and customers, we expect to continue to strength as we enter into the second half of fiscal 2018.

Now I'd like to provide you an update of the four pillars o Avnet's business strategy starting with our unique end-to-end ecosystem. Our ecosystem comprise of a small owner specialists, Premier Farnell, designed focused, Hackster.io and manufacturing solution provider Dragon innovation, provides a low cost model to reach a wider base of engineers, makers and startups earlier in the design phase. In this December quarter, our community members grew nearly 10% sequentially and 42% year-over-year. We continue to make progress integrating leading handoffs within the digital ecosystem with a strong and rapidly growing customer opportunity pipeline, which is up 40% this quarter.

In February, we will go live in the Americas with an enhanced digital functionality to allow customers to buy inventory for both for Premier Farnell and Avnet on our trading website. Thereby increasing our SKU count on avnet.com by approximately 50%. Our Hardware Studio, collaboration between Avnet, Dragon Innovation and Kickstarter provides resources and support for independent hardware creator, had a well attended boost at a recent consumer electronic show.

Designed to make the manufacturing process for startups less daunting, the Hardware Studio booth provide live streaming broadcast and demos through stock startup as well as one-on-one session with creators and engineers to get tips on factory selection, sourcing, manufacturing and much more.

Our second strategic pillar. The digitization of our business represents a multiyear effort to digitize more of our processes. Our end-to-end ecosystems are prime example of this effort as digital revenues now exceed $800 million on annual run rate basis. By increasing our investment in new systems we believe we'll be able to enhance the customer experience, drive greater productivity and leverage big data and advanced analytics to support growth initiative. We took a major step in that journey when we transitioned our EBV division in Europe to a new ERP system at the beginning of January. While we are still early in the cutover, I am pleased to report that through the first three weeks of January, we are on track in meeting all critical deliverable. I want to congratulate the European team and our global IT organization on this significant milestone as we move closer to our goal of a global system that will provide greater efficiencies and data sharing across our businesses.

Many of the individuals in Europe work on the EBV ERP will now transition to the team that is designing our Americas ERP system. This will be based on the European system so that we can leverage the skills and experience on this critical next phase on our pathway global system.

Our third strategic pillar. Our transformation initiative is one of the most important as it reaches across the entire company, encompassing organization structure; get its processes to leverage the strength of Avnet. One of the important growth strategies that our transformation initiative has focused on is the Internet of Things. Although we are already been selling a lot of components in IoT applications, we felt the addition of new services and solutions would accelerate our growth by reaching more potential customers. Over the past year, we built our core team within the company augment with new hires from outside of Avnet to further enhance our go-to-market strategy. We showcased many of the results at this effort in the consumer electronic show already this month including our IoT connect platform. IoT connect which utilizes the enterprise grade Microsoft Azure hybrid cloud, the data distribution and analysis that provides customers with a single go to software platform to support the complex communication, device and data management capabilities required to deliver IoT solution. This allows our customers to incorporate any hardware platform when they address their Edge enterprise requirement. It also serves as a foundation for IoT partner ecosystem which creates vertical solutions that allows customers to develop applications, build on secure and scalable IoT infrastructure. By collaborating with a broad cross section of our supplier base, we developed an extensive selection of smart, market ready connectivity solutions to tackle business challenges common to many industrial verticals including manufacturing, medical, environmental, retail and the smart city.

This quarter we leveraged our nearly two year relationship with AT&T and introduced a new system on module IoT solution powered by AT&T IoT services that provides a complete development environment for both prototyping and production of sensor to cloud application and services. From exclusive startup kit to production ready module, Avnet is working with AT&T to bring evolving LTE technology to market. We also recently announced a significant collaboration with Not Impossible Labs, an innovative leader in the maker and startup community committed to creating technology for the sake of humanity.

Avnet will be collaborating with Not Impossible Labs to bring all end-to-end IoT solutions that will help bring right changing technology to those in need.

We are very excited about the opportunity to leverage these relationships across our broad customer base so that they too can take full advantage of the digital transformation opportunity that IoT represent.

The fourth pillar of strategy, right sizing the cost structure of Avnet is also about preparing Avnet for the future. The combination of the divesture of technology solutions at the acquisition of Premier Farnell and supplier program changes required to us reconsider how we both run and support the business across the enterprise. We expect to realize a $120 million of annual savings by streamlining our structure, eliminating redundancies and centralizing certain function. And we also in an execution phase on several initiatives and Ken will update you on the progress later on a call.

The important thing is we expect these savings not only to improve our financial performance but also allow us to reinvest more of our gross profit dollars back into the business. The technology market we serve are going through rapid changes as combination of the internet, new software tool, higher speed network and standard based designs are expanding number of potential customers and products we support. Our goal is to provide critical services at each stage of the product lifecycle as we help customers move from idea to product and from product to market.

Finally, we recently announced a key addition to our leadership with the appointment of Tom Liguori, our new CFO. In addition to his wealth of experience, Tom has an impressive track record helping transform businesses to drive financial growth and shareholder value. We are confident in Tom's ability to partner across all levels of the organization will expedite our transformation while laying the ground work for future strategic investment. And I also like thank Ken Jacobson for the outstanding job that he did as Interim CFO as we make steady progress on our financial commitment under his leadership.

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

[Ken Jacobson]

Thank you, Bill, and hello, everyone. In our December quarter, reported revenue grew nearly 6% year-over-year while organic revenue increased nearly 2% in constant currency. When you exclude the negative impact of the previously announced supplier program changes, revenue would have increased 7.5% year-over-year in constant currency.

At Premier Farnell, which is acquired in mid October of fiscal 2017, organic revenue grew 12.3% year-over-year or 7.7% in constant currency. Gross profit of $602 million increased $16 million or 2.8% year-over-year, primarily due to a full quarter of Premier Farnell result in the second quarter of fiscal 2018. Gross profit margin at 13.3% increased 18 basis points sequentially, primarily due to improvements in the western region of electronic component.

Adjusted operating expenses of $457 million increased $35 million from the year ago quarter, primarily due to the acquisition of Premier Farnell and changes in foreign currency exchange rates. Sequentially, operating expenses decreased $14 million, or nearly 3% on a reported basis. Of the $14 million sequential reduction, approximately $10 million is attributable to our cost reduction initiative for an annualized impact of $40 million. Since exiting our previous fiscal year, the quarterly operating expense run rate has been reduced by nearly 4% or $18.6 million on a reported basis. This reduction trend is net of the increase in operating expenses incurred as a result of year-over-year organic sales growth. Our reduced operating expense in December quarter further demonstrates our commitment to accelerating our cost reduction initiative. And 60% of our $140 million of annualized cost saving has been achieved in the first half of fiscal year with the remaining savings to be realized in the second half of fiscal 2018.

Adjusted operating income of $146 million increased nearly $4 million from the September quarter and adjusted operating income margin was up 17 basis points, primarily due to improvements in the Americas region of electronic component as well as increase at Premier Farnell.

Adjusted operating income declined nearly $19 million and adjusted operating income margin declined 63 basis points year-over-year as the addition of a full quarter Premier Farnell was offset by the negative impact of supplier program changes. Adjusted earnings per share of $0.78 exceeded the high end of guidance and increased $0.02 sequentially, primarily due to improvements in the Americas region for both electronics components and Premier Farnell.

Now let's take a further look at organic revenue growth by region. Avnet organic revenue in constant currency grew 3.5% and 1.9% year-over-year in the first and second quarters of fiscal 2018 respectively. When you exclude the negative impact of supplier program changes, our adjusted organic growth was 8.3% and 7.5% in September and December quarters respectively. These growth rates compares favorably to our fiscal 2017 organic growth and overall market growth. On a sequential basis, the Americas region have the most significant improvements as year-over-year reported growth improved from a decline of 16% in September quarter to a decline of roughly 6% in the December quarter.

In the EMEA region, when you exclude the impact of supplier program changes, year-over-year growth in constant currency slowed to nearly 6% in the second quarter of fiscal 2018. After four consecutive quarters of double digit growth that averaged nearly 17%. In the Asia region which is now offset the impact of supplier program changes, organic revenue increased 10% year-over-year in constant currency and over 15% when you exclude the impact of supplier program changes. With the EMEA and Asia region having offset the impact of supplier program changes and the Americas region improving steadily, we are confident that our growth initiative are ramping and we are expecting to drive further improvement going forward.

In the December quarter, working capital decreased approximately $6 million sequentially. An inventory increase is offset by a reduction in receivables and an increase in payable. The increase in inventory represents additional investments related to a strong book-to-bill and extending lead time to support the seasonally strong growth in the Western region in the March quarter. And further expansion SKU count of Premier Farnell. When you exclude the impact of changes in foreign currency exchange rate, working capital decreased $25 million on sequential basis and increased $467 million year-over-year. The year-over-year increase is driven by the organic growth in the electronics component business and the investments in inventory to expand the SKU count of Premier Farnell.

In the second quarter of fiscal 2018, cash generated from operating activity was $69 million. During the first six months of fiscal 2018, we received approximately $125 million from the sale of Tech Data stock which was acquired from the divesture of our technology solution business. We used the proceeds to repurchase $139 million or 3.6 million shares via disciplined share repurchase program. The remaining $125 million of Tech Data shares will be sold after lockup period expires during the March quarter and will be used to repurchase shares through the remainder of fiscal 2018. Entering the third quarter of fiscal 2018, we had approximately $460 million remaining under our current share repurchase authorization. We ended the quarter with $590 million of cash of which $570 million was outside of the US. We expect to generate operating cash flow through the remainder of fiscal 2018 from a combination of operating income and disciplined working capital management. As we remained committed to value base management and achieving the right balance between earnings and return.

Regarding the recent US tax law changes from a Tax Cuts and Jobs Act, our adjusted effective tax rate for the December quarter remain within our previous guidance. Our current mix of taxable income comes mostly from our foreign operation due to our corporate and interest expenses being primarily US based and due to the recent challenges experiences in Americas business. In the near term, we do not expect the significant impact on our December quarter adjusted effective tax rate as a result of US tax reform. As the new US tax rate approximate our current blended effective tax rate in foreign jurisdiction.

We do have a significant amount of unremitted foreign earnings which totaled approximate $3.3 billion at the end of fiscal 2017. We are still gathering and analyzing necessary information on our unremitted foreign earnings and associated foreign tax credit but due to tax reform we currently expect to incur a material one time income tax charge on our historical unremitted foreign earnings that will be paid over the next eight fiscal years beginning in fiscal 2019.

From a foreign cash repatriation standpoint, we are currently evaluating the foreign tax implication of repatriating excess foreign cash. If the foreign tax impact of repatriation is cost effective then we will pursue a repatriation of excess foreign cash not needed to fund our offshore working capital requirement. For working capital purposes, we believe we need between $200 million to $250 million of foreign cash on hand to run our foreign businesses. Going forward, our intention is to maintain the same capital allocation priorities we have pursued in the past invest in organic growth, returning excess cash via disciplined share repurchase and dividend program and invest in strategic M&A opportunities.

Looking forward to Avnet's March quarter, we expect sales to be in the range of $4.65 billion to $4.95 billion. Based on this revenue forecast, we expect adjusted diluted EPS to be in the range of $0.90 to $1.00 per share. We have also increased our fiscal 2018 outlook from annual revenue in the range of $18.1 billion to range of $18.5 billion to $18.9 billion. And adjusted diluted EPS from the range of $3.10 to $3.60 per share to the range of $3.35 to $3.55 per share. The increase in fiscal 2018 guidance represents an approximately 2.2% increase in revenue and 3% in adjusted diluted EPS as compared to the midpoint of prior guidance.

Assumptions related to our third quarter and full year fiscal 2018 can be accessed in our earnings press release or 8-K filing at our website www.ir.avnet.com.

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

[Operator]

[Operator Instructions]

Our first question comes from the line of Jim Suva with Citi. Please go ahead with your question.

[Jim Suva, Citigroup Inc]

Thank you very much and congratulation to you and your team there, really nice to -- nice to see the turnaround and profitability in sales. A quick question, you posted for the December quarter operating margin in your EM group of about 3.1% about I think it might be right there. That is down year-over-year, of course you had some chip suppliers leave as well as some chip suppliers coming in ERP system and such and you also have restructuring going on. So my question is going forward do you anticipate that number to be stable at that, go higher, and if so, if does go higher, can you help us quantify so we don't get too ahead of our sales because I think a year ago it was in mid 4% range. Thank you very much.

[Bill Amelio, Chief Executive Officer]

Sure. I'll give a little color to that. This is Bill. And thanks for your comments there Jim, appreciate it. With respect to our long range planning target it haven't changed what we gave you last quarter was by 2020 we expect somewhere between 4.5% or 5% operating income margin so that's remain the same. And we were hoping to have a nice glide path to that number as each quarter goes by. So we are looking to get continued improvement. If you look at Premier Farnell, we had improvement there, we bought the property, and it was in 67% operating income range now it is closer to 10% range. And we are seeing strengthening across all of our regions in the core business including the Americas which is great sign of the fact that we will have improved operating income moving forward.

[Jim Suva, Citigroup Inc]

With that improvement do you think you can get back up to those historical ranges in a 4%? Or I guess the concern is with the vendor consolidation or the chip consolidation, is pricing and margin a little bit different than they what have been in historically?

[Bill Amelio, Chief Executive Officer]

No doubt that we have pressure from gross profit from supplier consolidation. However, with our four pillar strategy that I laid out earlier in the call, we believe that going to position us well, getting more of our business digitally focused which is not just ecommerce but it's also digitizing our own business so we can take more OpEx out. Rightsizing the company and maximizing usage of the ecosystem as well as the transformation project that's well underway. Let me speak to that for a just moment. We are about half way through the transformation project and we are heading where we expect to believe with respect to savings which include both growth project as well as cost reduction projects and we see that those four things is helping us shore up our margins going forward and being able to offset what we've seen as far as pressure from the suppliers.

[Operator]

Our next question comes from the line of Adrienne Colby with Deutsche Bank. Please go ahead with your question.

[Adrienne Colby, Deutsche Bank AG]

Hi. Thanks for taking my questions. I was wondering if you could tell us what book-to-bill was in the quarter.

[Bill Amelio, Chief Executive Officer]

Sure. Book-to-bill across all that net was well over 1.1 and in some cases I'd say the average of a company about 1.16 so really healthy outlook for the business right now. So we are pretty excited about with the future of product.

[Adrienne Colby, Deutsche Bank AG]

Great. So my question would be organic growth is accelerated sequentially from about 2% to 1% despite what seems to be an otherwise pretty positive or healthy demand environment and what you mentioned we are improving declines in the Americas. Can you help us to define the dynamics in the quarter and maybe the weakening you are seeing in the EMEA region in terms of your expectation they are going forward.

[Bill Amelio, Chief Executive Officer]

Okay. Couple points I make on that. First, if you take out the supplier impact that we have we grew at the company at 7.8% so that's I think an important metric to look at. So when you normalize that it would be six suppliers we had a pretty healthy growth. Regarding EMEA specifically, look, we had 18 quarters of growth in EMEA, we have now lapped double digit growth year so it's not surprising that it has come down a little bit but that's -- I would still say EMEA is on fire for us and we were taking share, we've been able to win lots of customers and will replacing all the sockets that we've lost with respect to some of the supplier dislocation. So we are pretty bullish around what's going on in EMEA.

[Operator]

Our next question comes from the line of Matt Sheerin with Stifel. Please go ahead with your question.

[Matt Sheerin, Stifel, Nicolaus & Company, Inc]

Yes. Thanks. Just following up on that question regarding this current business environment. If you look at your guidance, it actually looks like you are seeing accelerated organic growth above seasonal. So could you give us an idea of what you are expecting per region relative to normal seasonality?

[Bill Amelio, Chief Executive Officer]

We usually don't break it out in that sort of detail. I'd tell you what we think overall as guidance; we are roughly in line with what we think the seasonality is. So I am just call -- I don't think you are going to give a change in seasonality. As you know, we are a different business than we were a couple of years ago. And when we do our Analyst Day we will be real specific about what we think the seasonality is by quarter, we will lay that out for you.

[Philip Gallagher]

Hey, Matt. This is Phil. I'll jump into that -- just by region outlook if you will, I mean we thought about the Americas, September was going to be tough quarter, we feel confident coming out of December quarter in Americas. And we think that's going to continue, as Bill pointing out the positive book-to-bill backlog is growing and we are gaining more customers as far as confidence here at home in Americas. Europe - Europe continued to be strong, and as for last question that the Bill commented on, we are lapping on our comp at this point in Europe but definitely we see positive, continued positive in the March quarter. In Asia Pac, even with Chinese New Year, okay, the outlook in Asia is looking very positive. So I think I don't want to be - -and it's tough to define what seasonality is or with all the business change and the climate changes, the application to the market, I think we got to look in the venture if I got to readjust some of our own seasonality based on the new model we have moving forward. But I don't want to get into additional color. All regions really, really good at this point in time.

[Matt Sheerin, Stifel, Nicolaus & Company, Inc]

Okay, very helpful. And then just regarding the operating margin opportunities going forward to that 4.5 plus, is that primarily improvements from North America? It sounds like by region North America maybe actually the lower of the three regions. So -- and is that the opportunity as you go forward or there are some -- I guess with improving Farnell integration in Europe you still have some room to go there as well.

[Bill Amelio, Chief Executive Officer]

Yes, no, I wouldn't just point to Americas. But clearly Americas is an important part of recovery of our [OI] percent but it's also these four pillars that I described impact every one of the businesses across. So every one of the regions and business unit across Avnet.

[Operator]

Okay. Our next question comes from the line of Adam Tindle with Raymond James. Please go ahead with your question.

[Adam Tindle, Raymond James & Associates, Inc]

Okay, thanks and good morning. I just wanted to circle back to the earlier question on supplier dynamics and pressure. I think you previously mentioned that the changes from TI are going to be out of the model by the end of calendar 2017. So just wanted confirm that is still the case and maybe for Phil, what are you seeing from other suppliers? I think you mentioned in the prepared comments you actually had some upside to margin in the quarter due to payment of a supplier program and margin in the core business in the western region improved so it doesn't sound to me like other suppliers are moving to pressure price or reduce margin. Am I understanding that correctly?

[Bill Amelio, Chief Executive Officer]

Yes. I'll take that. 2017 marks the end of the TI model change. We generally don't like to talk specifically to suppliers and they are still great supplier for us moving forward no doubt. One of our top ones. As far as the model change, the common question we have, no, we don't see other suppliers following through. As a matter fact with some of the other changes we have had to our line card, we see other suppliers really doubling down with us on demand generation registration to design wins I think we noted in the script. Actually where we have had model changes or line card changes, we replaced all those sockets, and the number sockets in registration and design wins now we know the gestation period of taking of anywhere from 8 months to 18 months for us to see that revenue come back into play. But we feel really confident where we are at today and never comfortable but really confident in where we are today with the current supplier base.

[Philip Gallagher]

Yes. I'd add to that Adam that the highlight that we've added six new franchises in electronics component this quarter and we experienced this regional coverage of additional four suppliers and at Premier Farnell we added nine new franchises. So I think we are gaining momentum when it comes to the suppliers.

[Adam Tindle, Raymond James & Associates, Inc]

Okay. That's really helpful clarification. Just one follow up on the guidance particular the EPS guidance. I think you are implying operating profit dollar or kind of somewhere in $1.70 to $1.80 range for both Q3 and Q4. I maybe missing something below the operating line so please correct me if I am wrong. But why wouldn't we see more of a decline in the June quarter based on the implied revenue decline. I don't think regional mix is typically favorable and it seems like there is little incremental cost cuts. So just trying to understand the expectations and linearity to the back half of the year for profit dollars. Thanks.

[Ken Jacobson]

Yes. Adam, this is Ken. I would say you are in the ballpark from an operating income perspective. And I guess how I would characterize it is I think they typically from an EPS perspective from a Q3 to Q4 or second March and June quarter we have typically been around flattish not a significant decline so two point about the cost cut being some -- the rest of the back half loaded that kind of make up some of the lower GP from available decline.

[Operator]

Our next question comes from the line of William Stein with SunTrust. Please go ahead with your question.

[William Stein, SunTrust Robinson Humphrey, Inc]

Great, thanks. First regarding the last topic. It seems to be that the implied guide for Q4 is little bit below historically what you have done in terms of normal seasonality. I know there was comment earlier that it's different now. Does this just fit into that narrative of the seasonality being different today given all the changes in last year or two? Or does it reflect some incremental conservatism or anything else?

[Ken Jacobson]

I think it's more of predictability of seasonality is still kind of shifting target but we think that it is in line with what we are seeing right now and if we see a strong Q3 and have to change that and get to Q4 guidance we will, but right now we feel good with the range we've given. Our track record is kind of being coming in the higher end of that range but we feel pretty confident right now.

[Bill Amelio, Chief Executive Officer]

I'd also point out that in our guidance also include the nice sequential improvement operating income margin. We went up 41 basis points versus the historic range and 35 to 45. And I think that's consistent with electronics components historic performance with the experience of the mix shift to higher margin western region. So I'll give you a little bit color on, our thoughts on the seasonality.

[William Stein, SunTrust Robinson Humphrey, Inc]

It's really helpful. Just a couple quick follow ups. First, there was an inventory build sequentially and even year-over-year it was even more significant on a dollars basis. That was sort of surprising to me given the number one, you are improving what was the main issue right that you've improved this ERP implementation, you normally expect to see inventories coming to a more tame situation so are shortages influencing that or something else -- what's causing this?

[Bill Amelio, Chief Executive Officer]

I'll give you a little color and I'll let Phil jump in as well. Couple things that we -- definitely things that we've done. One for example we expands SKU count and the inventory in Premier Farnell now as you would recall if you profile that versus their nearest competitors we didn't have as many as SKUs now we are adding more in order for us to gain more business and we will get a big pay off for that. That's a good thing Second thing is we implemented the first ERP system since the Americas one highly successful in Europe and we had inventories build up in order to make sure that we were prepared for any glitch that might occur which didn't occur because we had essentially knock on wood, a flawless implication and to those are primary reasons why the inventory went up a bit and our game plan going forward support that by bringing down working capital and working capital day.

[Philip Gallagher]

Yes. Let me add to that. Well, and you mentioned in the Americas and ERP and hey we are still working through the right. So we are gaining improvements there. We are going to continue to see improvements as well. We are helping all the industries that we track and that you track. Another thing is lead time. And Bill kind of alluded to that. Our lead times are not coming in. Lead times are out. Our book-to-bill is solid, in case we got to grow -- it's perfect inventory, they support the book-to-bill in the backlog we have going to the March June quarter. So we feel pretty good with the inventory level right now by the way. And we don't see them increasing in the March quarter by any stretch of the imagination. It's really there just to support the growth and the lead time issue as well as Bill mentioned to boost implementation ERP in Europe.

[Operator]

Our next question is come from the line of Shawn Harrison with Longbow. Please go ahead with your question.

[Shawn Harrison]

Good morning. Wanted to start first about he linearity of I guess the remaining cost cuts. It looks like there is $50 million annualized. How is that split between the margins in June quarters?

[Ken Jacobson]

Yes. I guess I would say that it's more back loaded to the June quarter and we got about 60% so I would say kind of directionally you get another 15% in the third quarter and then the remaining 25% in the fourth quarter.

[Shawn Harrison]

Okay. And then if I may follow up, you just touched on this briefly earlier and then in the prepared remarks, the new sockets one that comment that essentially saying those that have left at and now you found other suppliers now let's replace those. And you are at a point of ramping just fulfillment revenue or was the comment on your design registration associated with that business. Just trying to get better triangulation of kind of what those comments actually mean to revenue growth let say.

[Bill Amelio, Chief Executive Officer]

I'll say few comments and let Phil want to chime in as well. It means that we've -- sockets that we lost we will now replace them with design registration with other supplier on our line card. However, as you know, it takes anywhere from 6 months to 18 months to convert design registration into a design win and get the revenue for it. So the point is we made great progress on being able to design in others in the line card and be able to make up the losses that we have with those supplier shift.

[Philip Gallagher]

No, I can share -- it wasn't our new supplier. It really most of our current suppliers so they have a similar technology. We don't have any one supplier apart from maybe an FBGA supplier that is excludes from the technology standpoint. So it's gaps and overlaps with the line card. Some of the size we moved to different model or change their line card or their channel strategy. We have others supplier that have those similar technologies that we can move forward with. And that's what we do. We just double down our resources with them and as they did back with us.

[Bill Amelio, Chief Executive Officer]

For the demonstration of the breadth of our line card and as Phil pointed out that we don't have any gap. We actually have the ability to be able to shift pretty quickly with respect to our design resources.

[Operator]

Our next question is comes from line of Steven Fox with Cross Research. Please go ahead with your question.

[Steven Fox, Cross Research LLC]

Thanks. Good morning. First question, you mentioned that you have added SKUs to Premier Farnell and you also mentioned I think it was 9 suppliers that joined the Premier Farnell for their line card source, hoping to get just a little bit more color. How much can you give on in terms of how much this SKUs account went up, how much just from using internal relationship at the cross Premier Farnell and how much was related to some of these new suppliers. And then I had a follow up.

[Bill Amelio, Chief Executive Officer]

So I have a lot there, Steve. [Multi Speakers] I'll take a try at. So what we did was we profile the industry and we looked and said okay where this Premier Farnell stack up with respect to SKU counts versus where they compete against and we were short. So what we did was we analyzed where the highest runners were and we are systematically putting those higher runners and we are continuing to add as long as we see that there is a payback and return and as you see with the growth out of Premier Farnell and increased profitability, it's a good bet for us. And we will continue to do that. With respect to the nine suppliers and franchise, some of that, the fact we have the ability to utilize some of the supply lines that are in Avnet and therefore we are able to now win in Premier Farnell because of the relationship between Premier Farnell and Avnet. So I'd give you this kind of number as far as you can't go, in half a year we added about 50,000 SKUs to give roughly like number.

[Steven Fox, Cross Research LLC]

And most of that was by leveraging existing relationships that Avnet already had?

[Bill Amelio, Chief Executive Officer]

No, most of were actually -- it is the relationship from Premier Farnell and Avnet. Some of that works from Avnet but most of it from Premier Farnell.

[Steven Fox, Cross Research LLC]

Okay, thanks. And then can you provide a little bit more color on just the exact level of growth in terms of design wins and how it compared to maybe the last quarter or two?

[Bill Amelio, Chief Executive Officer]

We'll have to get back to you on that. I don't have that one right in front for me but we will get that offline, we will have it for you later.

[Ken Jacobson]

Yes. Steve, I don't have that data point in front of me but we will give you it one way.

[Steven Fox, Cross Research LLC]

Okay and then just very last question if you could, just give us a sense when you look at the guidance for the full year now versus prior, how much exactly was related to currencies on the top line versus 90 days ago?

[Ken Jacobson]

Yes. I would say currency is driving a little bit, the rate went up but we also have fair amount of what the dollar sales in Europe. So there are some little bit of washing of FX because although there are some declines and some improvements because of the stronger euro so I don't think it's biggest driver of that.

[Operator]

Our next question is come from the line of Mark Delaney with Goldman Sachs. Please go ahead with your question.

[Mark Delaney, Goldman Sachs Group Inc]

Yes, good morning. And thanks for the opportunity to ask question. My first question is on the 2018 revenue guidance. I think the company took up its revenue guidance by $400 million at the midpoint. Can you help us better understand what the key drivers are? Is there incremental $400 million versus company's prior expectation? And if any of that is going from the Marvell win that the company talked about last quarter, or if not shifting this year what should we think about that comment?

[Philip Gallagher]

Yes. Let me take a shot at that, Mark. Thanks. This is Phil. We are just seeing -- we are seeing generally good organic growth right. And Europe as we touched on earlier is continue to show strength, good strength in both you have automotive by the way and I should note automotive in all regions we are seeing good growth. And as well in the industrial segment. So we are seeing good organic growth in Europe, accelerated continued growth as we talked about earlier in Asia Pac and as we talk our Americas numbers are starting to get better and that is helping tremendously, okay on not only the Bill pointed earlier on the top line but also on the bottom line as we get more help in the Americas. So that's about it. I wouldn't say Marvell win big one, I think that will start to have a bigger impact towards in the balance of the calendar year but that wouldn't be -- some of that would be in there but not a whole lot at this point in time, Mark.

[Mark Delaney, Goldman Sachs Group Inc]

That's helpful color, Phil. Thanks for that and for my follow up question and I am hoping just to better understand the SG&A dollars for the March quarter. I think traditionally in the March quarter is maybe $5 up $10 million or so or some years you may have a little bit more than that, but with incremental cost cuts that are coming, I have been expecting it to be relatively flat. But when I try back it into the guidance, it seems like maybe SG&A dollars are more like $15 million to $20 million sequentially. So maybe just help me understand the SG&A line a little bit better and maybe trade-offs around gross margin so we can better understand the guidance. Thank you.

[Ken Jacobson]

Sure. Yes, this is Ken. I would say that one thing is to think about it is on your OpEx line, do have some FX impact there and then you have the volume as well. So those two things are driving up a little bit. You are right that historically it is up and then there is still some net savings there from the cost reduction actions we talked about.

[Operator]

Thank you. This concludes our question-and-answer session. I'd like to turn the floor back over to management for closing comments.

[Vincent Keenan, Vice President of Investor Relations]

Thank you for participating in our earnings call today. Our second quarter fiscal 2018 earnings press release can be accessed at a downloadable PDF format at our website www.ir.avnet.com. Thank you.

[Operator]

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