Thank you, operator. I'd like to welcome everyone to Avnet's second quarter fiscal year 2026 earnings conference call.

This morning, Avnet released financial results for the second quarter of fiscal year 2026, and the release is available on the Investor Relations section of Avnet's website, along with a slide presentation, which you may access at your convenience. As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict.

Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC.

These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non-GAAP measures.

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

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

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

In the second quarter, we achieved sales of $6.3 billion, driving a 3.2% operating margin in our electronic components business and a 4.7% operating margin in our Farnell business. We also generated over $200 million of cash flow from operations in the quarter and reduced inventory dollars and days as projected.

Our double-digit year-on-year sales growth was led by record revenues in Asia, along with better-than-typical seasonal growth in the Americas, Europe, and Farnell. I want to thank our team for delivering this performance while remaining focused on the areas we can control.

In the quarter, we made solid strides in expanding operating margins, optimizing inventory, and generating cash flow while continuing to make necessary investments to best support future growth. From a demand perspective, sales increased sequentially in most of the verticals we serve and, not surprisingly, were led by strong demand in compute and aerospace and defense.

Year over year, we also saw broad-based improvement across most verticals. Now, turning to today's market, demand signals continue to reset globally, resulting in lead times trending higher across most product categories.

This trend is still largely driven by the data center, artificial intelligence, but is also broadening as projected growth rates of all segments we track continue to improve. We're also seeing an increasing number of customers' orders being placed within lead times, along with higher instances of deliveries beyond lead times.

These factors are driving a mismatch, if you will, between customer request dates and supplier delivery dates. This creates opportunity for us to deliver our supply chain value to our customers by addressing those misalignments.

The pricing environment remains stable during the quarter, while we have seen spot price increases with a few suppliers and commodities. The supply dynamics suggest there may be upward pricing pressure across many technologies going forward.

We exited the quarter with robust book-to-bills in every region, led by Asia and EMEA. As momentum builds, we are coordinating closely with customers to effectively validate and manage our backlog, while continuing to encourage customers to provide us extended visibility that we can share with our supplier partners.

The more visibility we can give to our supplier partners, the more supply chain expertise we can bring to bear to solve for the complexities in the market. With that, let me turn to highlights for our businesses.

At the top line, our electronic components business drove year-over-year growth and sequential sales growth across all regions. In Asia, sales reached a record high of over $3 billion.

This marks our sixth consecutive quarter of year-on-year sales growth in the region. Demand increased across most of the verticals and geographies we serve for both the year-on-year and sequential compares.

In EMEA, we're seeing clear signs of recovery, with sales growing both sequentially and year-on-year. Most end markets showed year-on-year growth, including industrial, while compute, consumer, and transportation were the strongest end markets quarter over quarter.

We are encouraged with the improving outlook in the region, especially given the continued market uncertainty. I am confident that EMEA's new leader, Joel Petran, will continue to drive profitable growth in the region.

In the Americas, sales grew both sequentially and year over year, marking our second consecutive quarter of year-on-year growth. Most end markets showed sequential growth, led by aerospace and defense, while industrial, communication, and compute were the strongest end markets year over year.

Our EC team is focused on several growth and margin expansion opportunities, including demand creation, supply chain services, embedded solution, and our interconnect, passive, and electromechanical business, or IPNE. Demand creation revenues increased sequentially by 7% as our field application engineers continued to drive the funnel for converting design wins into revenues.

Our design registrations and wins also increased sequentially, which is a positive indicator for future revenues. We continue to develop and invest in both digital tools and hardware solutions that will allow our design engineers to better support our customers' design requirements.

We are also pleased with the growth in our IPNE business, which had double-digit growth year over year. As a reminder, IPNE products carry higher gross margins, and there are many cross-selling opportunities with IPNE components that are complementary to our semiconductor business, including for our demand creation efforts.

Now, turning to Farnell. Sales grew sequentially and year over year.

Farnell's continued improvement reflects recovery across all three regions. We believe this is a sign engineers are working on developing new products, which we view as another indicator of the upturn in demand for electronic components.

Operating margins improved sequentially in line with our expectations. We also continue to gain traction growing Farnell sales of on-the-board components through our Power of One initiatives, which leverages the best of Avnet core and Farnell digital platforms.

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

Here at the center of technology supply chain, as we look forward, there are many reasons why I'm optimistic about Avnet's future and our position in the marketplace. We have a diverse and high-quality supplier line card and customer base.

We have a seasoned and stable leadership team and employee base. We're the only global distributor that also has a high-service distribution business.

We have the right resources and, more importantly, capacity in place with our sales teams, our engineers, and our technical capabilities. From an operating expense standpoint, we believe we're well positioned for future growth.

Our model will create operating leverage over the next couple of years as we return to growth across the world. We're also well positioned with inventory.

We'll continue to drive down areas of excess while we invest in areas of need. To conclude, we are pleased with the momentum we're seeing moving into the new calendar year.

For those of you who attended CES this year, there was a lot of excitement at the show. We had the opportunity to meet with leadership of many of our supplier partners and customers, and we continue to be encouraged that 2026 will be a year of growth and margin expansion and improved returns for Avnet.

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

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

Our sales for the second quarter were approximately $6.3 billion, above the high end of our guidance range and up 12% year over year. On a sequential basis, sales were higher by 7%.

Regionally, on a year-over-year basis, sales increased 17% in Asia, 8% in Europe, and 5% in the Americas. During the second quarter, sales from Asia grew to over 50% of total sales compared to approximately 48% of sales last quarter.

From an operating group perspective, electronic component sales increased 11% year over year and increased 7% sequentially. In constant currency, electronic component sales increased 9% year over year.

Farnell sales increased 24% year over year and 7% sequentially. In constant currency, Farnell sales increased 20% year over year.

For the second quarter, gross margin of 10.5% was flatish year over year and up slightly sequentially. EC gross margins are still being impacted by the Asia region growing faster than the West.

From a regional perspective, EC gross margins were stable by region, with gross margin improvement in Europe compared to last quarter. From a Farnell perspective, gross margins were up over 100 basis points year over year and were down 25 basis points sequentially.

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

Gross margins at the product category level for Farnell continue to be stable. Turning to operating expenses, SG&A expenses were $492 million in the quarter, up $55 million year over year and $27 million sequentially.

The sequential increase in SG&A costs is primarily from a combination of higher sales volumes and increases in stock-based compensation expense. As a percentage of gross profit dollars, SG&A expenses were lower sequentially at 74% compared to 76% last quarter.

We anticipate that our operating expense to gross profit ratio will continue to improve as we grow our gross profit dollars. For the second quarter, we reported adjusted operating income of $172 million and the total Avnet adjusted operating margin was 2.7%.

By operating group, electronic components operating income was $187 million and EC operating margin was 3.2%. The sequential increase in EC operating margin was primarily due to EC operating income growing more than two times greater than sales, driven primarily by the growth in the Americas and Europe.

Farnell operating income was $20 million and operating income margin was 4.7%. Operating income margin was up nearly 40 basis points from last quarter.

This is the highest operating margin Farnell has had since fiscal 2023. Turning to expenses below operating income, second quarter interest expense was $61 million and our adjusted effective income tax rate was 23%, both consistent with expectations.

Adjusted diluted earnings per share of $1.05 exceeded the high end of our guidance for the quarter. Adjusted diluted earnings per share grew nearly four times sales compared to last quarter.

Turning to the balance sheet and liquidity. During the quarter, working capital decreased by $42 million sequentially.

Working capital days decreased seven days quarter over quarter to 88 days. From an inventory perspective, we reduced inventory by $126 million or 2.3% sequentially.

At the end of the quarter, our EC business received approximately $150 million of high-demand inventory related to memory and storage products, which partially offset some of the broader inventory reductions that took place across EC this quarter. Substantially all of the memory and storage products received at the end of the quarter has already been shipped to customers in January.

We ended the quarter with 86 days of inventory as we continue to make progress on reducing total Avnet inventory days to below 80. As a reminder, the inventory turns models are different between the EC business and Farnell.

Our EC business typically runs between four to six turns per year, whereas Farnell typically runs between 1.5 to 2 turns per year. Farnell's high service value proposition requires a breadth of on-the-board, test and measurement, and maintenance and repair product inventories.

For further context on these inventory model differences, at the end of the second quarter, our EC business had less than 80 days of inventory and our Farnell business had less than 230 days of inventory. Even with the overall inventory improvement, our team remains focused on reducing inventory levels where elevated while still making inventory investments where needed.

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

In the second quarter, we generated $208 million of cash flow from operations. Cash used for capital expenditures was $15 million.

In line with our commitment to lower leverage in order to maintain a strong balance sheet, we paid down an incremental amount of debt from the prior quarter and we ended the second quarter with a gross leverage of 3.9 times, with approximately $1.7 billion of available committed borrowing capacity. We still anticipate reducing our leverage to approximately three times over the next year.

We continue to deploy cash in a manner that generates the greatest long-term return on investments for our shareholders. In the second quarter, we paid our quarterly dividend of 35 cents per share, or $28 million.

Turning to guidance. For the third quarter of fiscal 2026, we are guiding sales in a range of $6.2 billion to $6.5 billion and diluted earnings per share in the range of $1.20 to $1.30.

Our third quarter guidance assumes current market conditions persist and implies a sequential sales increase of approximately 1% at the midpoint. The sales guidance implies sales growth in the Americas and EMEA and a less than seasonal sales decline in Asia due to the Lunar New Year.

Our third quarter guidance also implies further recovery in our higher-margin Western regions, which accelerates the operating leverage in our business model. This guidance also assumes similar interest expense compared to the second quarter, an effective tax rate between 21% and 25%, and 83 million shares outstanding on a diluted basis.

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

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

Hey, thanks for taking my question. I guess I'd like to squeeze in two if I can.

First, could you talk to us about the linearity of orders during the quarter? Anything unusual or noteworthy there?

I think typically new orders tend to fade as you go into December. Maybe I have that wrong, but whether it's right or wrong, maybe comment on that trend, and also the duration of your backlog as it stands now.

Do you have a bit more visibility? Are you seeing customers place at a longer sort of time to request?

Thank you.

Thanks, Will. I appreciate you joining the call.

I guess that was the two questions, right? I'll go first, and Kim wants to add something.

On linearity, the December quarter is always an interesting one, right? Because your billings continue through the quarter, but your bookings do tail off near the end of the second half of December, let's say, give or take a few days.

It's definitely a stronger booking, in this case October, November, pretty good through December till about midway, then that booking start to trail off. The billings continue, because even if there are shutdowns through the holiday, manufacturing starts up when they get back, you do bill out some a bit more than bookings.

Even that said, the book-to-bills were positive on top of a pretty good billing quarter. That was good news thus far.

The other point, which really ties to the longer-term view we're getting, is the drop-in orders inside of lead time from customers is increasing, or expedites are increasing. What that tells us, and we don't know absolute well, that inventories are depleting, with lead times not going out until recent, right?

Customers weren't pipelining and giving us enough visibility, and then when they go to their manufacturing, boom, they're coming in with drop-in. We call them drop-in inside, kind of a quote-to-book-ship bill inside the 90 days.

That's, again, a positive sign, which then leads to your last question, or second part of the question, is the visibility. It's improving, Will.

The suppliers in front of them on this call, they're banging us for backlogs. They want to know what to build, and we're banging the customers for more visibility into the future, longer-term bookings, if you will, or forecast.

We're starting to see that increase, still probably not at the level we would like to see it, but yeah, we're starting to get a bit more visibility into the future, which the customers on the call, and you'll see a lot of them next week here in Arizona, that's the message still. We still want that visibility and pipeline, we can pipeline appropriately for them.

It's improving, not where it needs to be quite yet.

Thank you.

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

Thanks, Joe. I think we said there's upward pricing pressures in this, I think it's going to continue.

I think before we get into increased pricing, the good news is in this cycle, one of the positives, and it's been a long cycle, is pricing has kind of held up, ASPs overall have held up. As lead times start to trend higher across other product categories, then you can anticipate some that's already happening for sure in memory, storage controllers, certain capacitors in the IPD space.

We're starting to see some pricing inflation, and a lot of that's driven obviously by the activity around the data center increase in the hyperscalers, but it's really a lot of our industrial customers are increasing demand based on their exposure to the data center, if you know what I mean. Overall, it's not across the board.

Pretty much from Q2 is stable, but we're starting to see some increases, and I think that will continue as we move forward.

Joe, maybe just a point of clarity, we've seen the increases announced and we know they're coming, right? The actual quarterly results didn't have a lot of impact from actual pricing increases in the quarter.

Just to kind of clarify the timing of some of those things.

That's helpful. Then just as I'm thinking about just the guidance on the revenue, you talked about Americas and EMEA up, and then Asia maybe a bit better than seasonal in terms of the rate of decline.

How do I think about just Americas and EMEA relative to seasonality? What's your expectation for the March quarter?

The March quarter, I would tend to jump in. Typically, Joe, the West bounces back in the March quarter over December, and a lot of that's a math equation with just more days and whatnot.

Last year it was an anomaly. You might recall where the West did not increase over December quarter.

That was kind of the first time that I saw that ever, I think. This year it's back to more typical seasonality, where the West will be up, which is positive, and obviously that's our higher-margin regions, as you know.

Asia, it's going to have a typical, well, maybe not say, Lunar New Year, Chinese New Year is going to have an impact, but not as significant as we've seen in the past, right? That's also positive.

Our regional mix shift is in our favor this quarter as we get into March, which is good news. Can anyone add to that?

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

I guess what I point to in the guidance is, because the revenues are up slightly, normally what you'd see is Asia down even double digits and the West up, and so that mix shift usually created a nice gross profit margin boost. We're not seeing that because of where Asia's at in terms of low single-digit down, but we are seeing the operating margin expansion from that seasonal mix shift, right?

We're seeing good operating income growth from the West, think about high teens. We're happy about the operating margin expansion implied in the guidance, even though gross margin is still being impacted by mix.

That's really helpful. I appreciate all the color.

Thanks.

Joe. Thank you.

Hi, thanks for taking my questions. Maybe a last follow-up question on the guidance for the March quarter.

Last couple of years, the March quarter has been sequentially down. This year, given the regional mix, you're guiding to slightly up.

From the guidance, from what I can tell, it looks like the core business margins can be up year on year, depending upon how Farnell does and how the overall mix is. Can I ask, do you think going forward, your core business margins can grow on a year-over-year basis for the remaining quarters of this year?

Do you think the seasonality in the March quarter being different than the past couple of years impacts the seasonality going forward for the rest of the quarter? As you go through the year, do you think we'll see more than seasonal growth either in revenues or year-over-year growth in margins?

Ruplu, let me take the last part first. I think there's no reason to believe seasonality would change.

How we think about seasonality is simply just the number of shipping days. If you had a traditional Lunar New Year with, let's say, seven to ten days, depending on the country, of shutdowns, you have less shipping days to ship the product.

I think what's offsetting that is just the fact that bookings are up and business is booming there in Asia. I think, similar to the West, it's just a matter of shipping days.

I think as we look forward into a more, let's say, normal, mid to high single-digit growth environment, I think you will still see those normal swings within seasonality. I guess to answer your question about operating margin, I think, yeah, from an operating margin standpoint, we do expect continued momentum, especially as the West recovers, right?

The West is really our operating leverage horses in terms of profitability. Although Asia is at record levels, which we're happy for, and it's really good signals over there, we're still roughly 20 to 25 percent off the top line in the Americas and probably 30 to 35 percent off the top line in Europe relative to their historical peak levels.

That's a lot of gross profit dollars that need to kind of come back. I think as the West recovers, you'll start to see operating margin expansion.

I think to answer your question more specifically, it kind of depends on how quickly the West continues to recover. I think this last quarter, in terms of the December quarter and the March guidance, is good progress in terms of getting those EC margins back, which is really being led by the West.

Ruplu, Jen covered it well. I'll just add, we don't guide out, as outside of the 90 days.

I'm looking right now as I talk to you, as I look at the backlog in the one to 30, 31 to 90, 91 to 180, et cetera, and 180 and above days, it's encouraging. That's the word I'm using with the team.

The signs are all very encouraging, but as we don't guide out beyond the quarter. We are encouraged and optimistic about the next several quarters.

That's helpful. Can I ask a follow-up question on the pricing comment you made?

Can you remind us if suppliers are raising prices, how does that impact Avnet's revenues and margins in the near term as well as in the more medium term? I might have missed this, but did you specify which product categories or areas you're seeing squad prices increases?

Thanks, Ruplu. Pricing, it really affects the average selling price, right?

A lot of our business is under contract, and some of it's not. Where it's not, and it's let's call it spot buys, if you will, customer come in, time, place, utility.

We can increase the price and the margins, particularly if the product's tough to get. We're not rate gouging or anything, but just to kind of get a little bit unfair margin on that, which is positive for us.

In the contracted customers, if the price gets passed on, it doesn't have as much effect on the margin percent, but it can affect the revenue dollars and margin dollars, if that makes sense. Similar to what we saw in the last tightness in the market.

Customers, we can absorb, but that's for sure. We're definitely starting to see that, particularly in certain areas, memory storage, where storage takes memory.

Anything around memory storage, we're going to start seeing some more in the controllers, some of the high-end products in networking, and there are selected parts, like in tantalum, capacitors, things along those lines, we're starting to see some price increases. Some are modest right now, others a little bit more than modest, based particularly in the memory space.

Thanks for that. If I can sneak one more in, as Europe is recovering, right, I think you said for Farnell, maybe 50 basis points improvement every quarter.

As the region itself improves, do you think that can accelerate and you can see a faster recovery in Farnell margins? Just help us level set our expectations for where this can go from a margin standpoint by the end of the year.

Thank you.

Thanks, Ruplu. Yeah.

Specific to Farnell, typically their largest region and most profitable is Europe. Okay?

That's not been the case here the last several quarters, based on Europe softness. Still doing well, but actually the Americas, which is, like we also pointed out, a higher mix in the Americas of test and measurement, which is really good business, just runs at a different margin level than the onboard components, being semiconductors and the IP&E.

Any additional lift in Europe will further drive the drop through, as Farnell could possibly accelerate that, you're right, that 50 bps points of margin that we're looking to see them improve on quarter on quarter. That's the message to the leadership team at Farnell, who I know are on this call.

We need to see them and expect them to continue to show incremental improvement in operating margin. A lot of that can be accelerated, to your point, with higher revenues in the right mix.

Although we may not be projecting that, certainly we would really like to see them accelerate that beyond 50 to 100 bps. That's our commitment at this point in time, while they continue to manage their expense line, right?

There's still other things we're always doing as a company, and Farnell specifically as well, driving out more efficiencies, taking out costs where we need to take out costs, while making investments where we need to make investments, i.e. in digital e-commerce, AI, etc.

Hope that answers your question, but we do see it as a continuing tailwind for us as we move forward, and we would look to accelerate getting to that double-digit operating margin.

Thanks for the details.

Yep, you got it, Ruplu.

Thank you very much. I want to thank everyone for attending today's earnings call.

We look forward to speaking to you at upcoming conferences and at our third quarter fiscal year 2026 earnings report in April. Have a great day.

Thank you.