Q2 2021 Avnet Inc Earnings Call
Please standby.
Our presentation will now begin welcome to the Avnet second quarter fiscal year 'twenty 'twenty, one earnings call I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.
Thank you operator earlier this afternoon Avnet released financial results for the second fiscal quarter of 'twenty 'twenty. One the release is available on the Investor Relations section of the company's website a copy of the slide presentation that will accompany today's remarks can be found by the link in the earnings release as well as on the <unk>.
I R section of Avnet website.
Lastly, some of the information contained in the news release and on this conference call contains forward looking statements that involve risks uncertainties and assumptions that are difficult to predict in particular, the scope and duration of the COVID-19 outbreak and its impact on global economic systems, and our operations employees customers and supply chain.
Such forward looking statements are not the guarantee of performance and the company's actual results could differ materially from those contained in such statements.
Factors that could cause or contribute to such differences are described in detail on that but its 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 where.
New information regarding the circumstances after the date of this presentation.
Today's call will be led by Phil Gallagher Avnet C E O and Tom Liguori Avnet CFO.
With that let me turn the call over to Phil Gallagher.
Ill.
Thank you Joe and thank you everyone for joining us for our second quarter fiscal year 'twenty 'twenty, One earnings conference call I hope, everyone is safe and healthy and that your 'twenty 'twenty one is off to a good start all things considered.
'twenty 'twenty was a challenging year to say the least and of course, we continue to manage some lingering COVID-19 related headwinds, but speaking for myself I can say, it's nice to have some momentum moving into the new year.
Despite the challenges, we persevere and produced solid second quarter results.
Our success is due in no small part to the hard work and dedication of our incredible employees.
Our team's ability to continue to provide uninterrupted service at a global scale and supply chain visibility is remarkable this debt.
Interest rates the invaluable role Avnet continues to play for our customers and our suppliers.
As I've highlighted in past calls our employees continued hard work has been supported by a renewed commitment to our primary value proposition here at Avnet.
Bridging the world.
On accelerating the success of our suppliers and customers.
Our efforts have been focused on.
Streamlining the business leveraging the core in farnell and investing in our value added businesses, including the likes of Iot and Avnet integrated.
We've continued to add skus to the farnell inventory add salespeople on Ftes in selected geographies invest in employee development programs strengthened our supplier engagement teams and embrace digital capabilities. All of these actions put us on track to.
Grow revenue streams capture market share enhanced our global digital footprint and extend existing customer and supplier relationships.
Well, it's still early innings, our efforts in driving tangible results across the board.
I'm heartened by the performance this quarter and excited to tackle the challenges and opportunities in 'twenty 'twenty one.
By the way our 100th year in business.
Pretty amazing on 100 year anniversary in 2021.
Now turning to slide five you'll see evidence of this progress.
Our continued emphasis on execution, coupled with strong market conditions across Asia, and improving conditions in the Americas and EMEA enabled us to drive revenue and adjusted diluted EPS well above guidance, we are well positioned today to execute even in volatile conditions in.
In the quarter revenues were $4 7 billion up year over year and up sequentially. If we exclude sales from the additional week in the prior quarter.
Revenue grew nine 3% year over year, and nine 7% sequentially when excluding T. I revenues from the prior quarters and adjusted to reflect constant currency and an additional week of sales in the first quarter.
Our adjusted operating income increased 22% from the prior quarter and on operating margin also increased sequentially, even with Asia being heavy in our revenue mix.
We're pleased with how we did in the Americas and EMEA and are encouraged by the early results were seeing at farnell with improved operating margins.
The top that off the Asia region I do mean, the whole Asia region produced record sales in the quarter.
It'll be a surprise to know on on this call, but we saw strong demand in the auto industrial sectors.
In Asia, and frankly globally, Tom will discuss our financial performance in further detail a bit later.
We truly are hitting on all cylinders and competing favorably across the board.
While we are proud of the results that we achieved this quarter, we must remain vigilant and humble in the face of the continued uncertainty associated with the pandemic.
So before we take a deeper look at our core business line. So let me take a minute to speak about the widely reported chip shortages.
Regarding some of the comments in the market about lead times on shortages of certain products remember.
And that has a broad and diverse portfolio across franchises and we are not overly exposed to any one product category.
As we always have and will continue to do so we are managing our backlog tightly and staying close to our customers and suppliers continuity of supply and supply chain visibility are key assets of this value proposition.
Our teams have established relationships unmatched in this industry by remaining in constant contact with our customers and suppliers working collaboratively upstream and downstream with BOE day managed for cash and mitigate supply chain risk.
We remain committed to putting customers first and are pleased to see that focus reflected in our improving net promoter scores, which is our customer engagement scores.
Additionally, we are seeing that suppliers are responding favorably to our approach as we continue to gain traction where or what I like to call winning with the winners.
It's worth, noting our relationships with our top suppliers extend several decades cross the board clearly demonstrating the value added that brings to these partnerships.
We also announced early this month that we have rejoined the electronics components industry Association known as E. C. I E is it just distribution remember I'm very excited to take part in more directly contributing to enhancing the efficiency and effectiveness of our industry and look forward to furthering our industry relationships through that partnership.
Yeah.
Looking at our core electronic components business on slide six.
Revenues were up year over year in the quarter of $4 3 billion as mentioned earlier, we realized record results in Asia, our largest segment.
Posted 9% growth sequentially.
We are confident our China growth plan is working on that we are gaining share in the entire APAC region, which was really encouraging despite the Americas revenues being down this quarter. We're encouraged by the incremental improvement driven by cost saving initiatives and initial recovery in the region.
Revenues were down in the EMEA region, as well, which was largely impacted by Brexit and lockdowns in the U K overall, we were pleased with the gross margin improvement we saw across both regions.
We exited the quarter with strong book to bills in every region. We're.
We're continuing to tightly manage our backlog and our teams are working closely with our customers to extend visibility, which we are sharing with our supplier partners.
We continue to see strong design activity coming off record registrations in the first quarter.
Turning to for now on slide seven.
We're encouraged by the improvement we're seeing with farnell.
Well for now sales were down sequentially and year over year with higher gross margins and reduced operating expenses in the quarter, we were still able to increase our operating margin to four 5% from three 5% in the prior quarter tracked.
Tracking well towards our goal of 10%.
We're continuing to invest.
Adding 49100 skus through the first half of the fiscal year.
Progressing on our plans to add up to 250000 skus through fiscal year 2022.
Earlier. This month, we also announced that from now was appointed as a national instruments authorized distributor.
Significantly expanding its product portfolio to include Ni software connected test and measurement solutions for customers of all sizes.
Amidst ongoing lockdowns in the U K, we continue to carefully manage the ramp up of the leads distribution center.
We know it will take time, but with a fully operational Leeds facility, we have the potential to realize $19 billion of cost savings per year.
That number alone speaks to the value we see in this business.
Turning to slide eight.
Before I turn it over to Tom I, just want to reiterate how proud I am of our team they've truly demonstrated resilience adaptability and perseverance attendant of assets core and ability to evolve and deliver value over the past 100 years.
As I mentioned last quarter, <unk> 'twenty 'twenty, one kicks off adding this 100 year anniversary celebration, which is a rare accomplishment for any company, but avnet has proven time and time again, its ability to adapt and grow.
Certainly seen that in my going on 40 years with the company and I think many of you we're watching that story unfold today.
I'm confident the steps, we're taking will continue to deliver value.
Have the right team experience and strategy to build on our recent momentum.
With that I'll turn it over to Tom to walk you through the financials for the quarter.
Huh.
Yeah.
Thank you Phil good afternoon, everyone and thank you for attending today's call.
As Phil stated despite some sustained macro headwinds we produced strong results this quarter.
And made notable progress sharpening our execution and our primary distribution operations.
Revenues of $4 7 billion exceeded our guidance.
And grew from 4.5 billion from the prior year's quarter.
At this point, we fully implemented on $75 million Opex reduction plan.
Our nearing completion of our 245 million plant.
As our top line has grown adjusted operating expenses as a percentage of revenue have continued to decline.
Hitting 9.25% this quarter.
Down from 95, 5% in the previous quarter.
And we achieved our goal of reducing working capital days.
We started this initiative over two years ago, when our gauge where on the mid nineties.
Day working capital days are at 75.
As a refresher each day is worth approximately 50 million of working capital.
And to date, we've reduced working capital by nearly $1 billion.
We are very proud of our team's progress and that we've been able to use of cash over the last three years to reduce our share count by almost 20% and pay down debt.
Going forward well.
Back to invest cash in inventory, that's the economy and revenues recover we remain focused on our net working capital days targets.
On Slide 11, you can see the early progress we've achieved.
As noted.
Revenues of $4 7 billion and adjusted EPS of 48 cents.
Both came in above our guidance range.
Cash flow from operations totaled $85 million, our ninth consecutive quarter of positive cash flow.
Further demonstrating our team's execution on managing cash and working capital as we continue to navigate an unpredictable market.
We use the cash flow to reduce our debt to 1.21 billion and net debt to $831 million.
We also continue to support our dividend and returned $21 million to shareholders in the quarter.
We're pleased with where our debt level stand today in fact, our debt is at the lowest level it's been.
2010.
Looking at the income statement.
Gross margin of 11% was flat sequentially.
Primarily due to higher ease of revenues.
By business.
Margin performed in line with our goals.
Increasing across the Americas, EMEA and farnell.
Adjusted operating expenses of $432 million.
We're down by 4% sequentially.
As I highlighted earlier, our 75 million of operating expense reduction plan was fully implemented in the quarter.
And we are tracking well against our 245 million plant.
We have about 40 million to complete on that plan.
Not only utilized with two projects already underway.
In effort to outsource transactional processing performed on finance to an outside service provider.
And progressing on our leased facility.
As you've heard Phil stated earlier, we have faced strong COVID-19 related headwinds and get them to Leeds facility up to full production capacity.
We're pleased with how the team has managed in light of those challenges.
Happy with both on a gross margin and operating margin results in the quarter.
When we announced the $245 million cost reduction program over two years ago, We had an adjusted quarterly opex run rate of $483 million.
And today, we're at $432 million on just about the same level of revenue.
So we've reduced our quarterly operating expense run rate by about $50 million.
Without touching salespeople, hefei, EPS or any market facing staff.
This positions us well as the market recovers. So we can focus on growing revenues with lower operating expenses without the cost of adding people.
Interest expense continued to decline.
It is now lower by $12 million or 37% compared to a year ago due to lower debt.
Foreign currency expense was $5 million this quarter, an improvement from the prior quarter.
Due to the weaker U S dollar.
And our tax rate remains below 20%.
On slide 12.
We highlight results across our three geographic regions and from.
Of our two business segments.
Total revenue growth was largely driven by record sales in Asia up.
16% year over year on.
We saw signs of recovery across the Americas and EMEA.
Looking at electronic components.
We achieved revenue of $4 3 billion.
Increasing three 3% versus the prior year.
The electronic components segment operating margins were 2.4% before.
46 basis point improvement from last quarter due to our lower operating expenses.
For Enel revenues for the quarter total $326 million down sequentially and year over year.
Primarily due to their being one extra week in the prior quarter Indeed.
And due to a slow recovery from the U K lockdowns.
The segment had an operating margin of 4.5% quarter.
Meeting expectations.
We expect farnell operating margins to continue to improve over the next six quarters.
As we work toward achieving a steady state 10% operating margin.
Importantly.
For now gross margins also increased sequentially and were over 30% in the December quarter.
Illustrating the continued value that for now provides day engineers.
I Havent skus on stock and the ability to deliver to their desk within two days.
We're optimistic that with aggressive Brexit resolution and improving economy.
Able to realize the full potential of the leased facility.
Continue driving for NAV forward.
Turning to cash liquidity on the balance sheet on slide 13.
Our liquidity position remains strong.
Puts us on a good position to fund operations has the macro environment continues to recover.
We ended the quarter with cash and equivalents of 376 million.
And with 1.6 billion of available lines of credit.
Our gross debt leverage was three <unk> and net debt leverage was 2.1.
Our net book value per share was $39 you know Tam.
Tangible book value per share was $30.
Turning to slide 14.
Before moving onto guidance I'd like to briefly touch on the progress we've made upon implementing our strategic priorities.
Let me share a few examples of how better execution in the December quarter resulted in improved financials.
We are beginning to see the gross margin benefits of the pronounced team wide adoption of the pricing analytics tools implemented earlier last year.
As well as the stabilization of inventory reserves.
Our Americas team implemented a number of cost actions that led to expanded Americas operating margins a key initiative for us as we work to capture market share across all three core regions.
Our Asia team is replace just about all of their Texas instruments revenue.
Sales of other supplier product lines to new and existing customers.
At the same time, we reduced our net working capital days until it.
We've managed our customer backlogs.
And if it added about $100 million of inventory on the first half of fiscal year 'twenty 'twenty, one to meet growing demand.
Spike a tight supply situation.
Even with the additional inventory.
<unk> <unk> components segment reduce working capital days to below 70.
Phil said it well.
There were still on the early innings here, we're pleased with the improved execution by our teams.
On managing our business.
Turning to slide 15.
I will wrap up with some comments about our expectations for the next quarter.
For fiscal Q3.
We are guiding revenue on the range of 4.3 to 4.7 billion.
And adjusted EPS on a range of 52 to 58 cents.
Despite the seasonally lower revenues in Asia for the March quarter, we are guiding higher EPS.
Asia tends to have a seasonal low in the March quarter due to the Chinese new year.
While our higher margin Americas, and EMEA regions are expected to grow revenues sequentially.
Coupled with our cost reduction programs, we expect to drive higher profitability in the March quarter.
In summary, we're on a pace will continue to take actions in line with our priorities.
We are aligning our operations and processes to improve the top line trends and gain market share on key areas.
On maintaining our commitment to enhance profitability and improve return on capital.
With that let's open the line for Q&A operator.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question. Please press one on your telephone keypad, a confirmation tone will indicate that your line is on the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up here.
Handset before pressing the star Kids, one moment, while we poll for questions.
Okay.
Okay.
Yeah.
Yeah.
Okay.
Thank you. Our first question comes from Adam Tindle with Raymond James. Please proceed with your question.
Okay. Thanks, Good afternoon, Phil I, just wanted to start out with a strategic question you've had a little bit of time to analyze the portfolio I think there's kind of two paths that investors are potentially thinking about on one past you conclude you have the right portfolio, you're going to pursue organic margin improvement and cash preservation or another path could be.
Sue M&A in an effort to enhance the portfolio potentially accelerate growth eight and supplier relationships. I was just hoping you could start by maybe opining on those two potential paths in which which are concluding is the right one to take here near term.
Yeah. Thanks, Adam appreciate that.
Well it might be an end version or.
Yeah, Adam short term you know.
Clearly, we're gonna be driving the organic strategies are as we've talked before you know the biggest needle mover for US is right here at home in the U S. Getting the Americas continued to stay on track to the to their plan, which which we felt good about this past quarter and making progress.
And continue to invest organically.
Europe as is frankly steady as she goes in and can continue to double down in Europe and of course Asia were really really pleased with the progress we're making in Asia.
What's effectively a record quarter. So that's in the core and then you've got you know I'll call that Theres really two though then you've got farnell. So they're the two two major pass and for now we've got we've made some progress this past quarter on expanding skus and the mild progress in the Leach facility.
But as far as M&A and then of course, they are added to an integrated which is our embedded business right and we.
Well restructuring that a bit and putting that closer to the core, particularly water boards and in software and displays that goes into many of our core customers and then we'll continue to invest in I O T. A S.
We've talked with just kind of took the pedal off the metal a little bit okay to I'm sure. We're getting a fair ROI based on the investments and.
And Tom can jump in on M&A, if he wants but on M&A you right now we've been pretty convicted due to continue to.
Strengthening the balance sheet and protect that as much as possible. While also protecting the dividend right now that doesn't mean, we're not gonna Dayton in and look at opportunities from the future for M&A and on and I'm sure that will begin.
Begin again at some point in time, we're just not ready to talk about it yet so I yeah, I think it's more of a and an in or am maniacally focused on on execution.
And Phil Let me, let me add you know just just to set expectations.
Any M&A would be a smaller tuck in with a distributor that it had a complementary either supplier customer so.
Keep that in mind Adam.
Okay. That's that's helpful and maybe just as a follow up I know margin improvement is a key part of the story I guess, if we were to double click on margin improvement Farnell is one of the big you know potential drivers here I wanted to ask on that path to I think you said, 10% over a six quarter timeframe I think you've mentioned.
On the quarter that gross margin was now over 30%. So that seems like it's you know quite healthy at present and you're still kind of in the mid single digits on an operating margin basis. So maybe help me bridge. The next six quarters, you know kind of doubling operating margin while the gross margin correction seems already done is their opex to come out.
<unk> is there a volume on the revenue side, you know what other drivers to get to that number. Thank you.
Bill should I take that sure.
Once you start Tom go ahead.
And I you know I think the main thing is getting the leads distribution center ramp.
19 million is I think close to maybe 150 basis points improvement.
Yeah.
But for now team was on a really good job on Opex management, and moving things to lower cost geographies.
So there's some of that.
You know, we're going to continue to add Skus, which we expect will help bring people into our into our website and grow revenues as well as enhance our.
E Commerce tools, and some marketing investments that we want.
Patients should stay the same about 100 basis point improvement per quarter, and we feel good about where we're at.
With that.
Yeah, Todd, where it's kind of on make yeah. Adam is that we were there. Okay. So six seven quarters ago, we were at that 10% on operating margin and where we're at.
Reverse engineering the.
The business back to get to that 10% and the debt. The maths working now the execution has to follow and that's what Chris and the team are working on.
Good point Bill I appreciate the details on congrats on the quarter.
Thanks, Adam.
Okay.
Thanks, Adam.
Yeah.
Yeah.
Thank you our next call comes from Tim Yang with Citibank. Please proceed with your question.
Hi, Thanks for taking my questions on corn Mundo margins, if I use the midpoint of the guidance I think you're guiding 88 to 90 million of operating profit, which means that you are guiding profit of roughly 18 million higher bids.
<unk> up 200 million on year over year basis, So that's roughly 9% on being quite a bunch of incremental margin looking forward. How should we think about the flow I mean closer to your margins on incremental margins given you have farnell recovery on the cost savings.
[laughter].
Well you know the day, they can say that.
Our financial model is that we feel very good about the cost structure, we feel very good that.
You know all of our organizations are staffed properly that we have the proper.
You know staffing out in the field. So we use the term drop through this is this is one one on Phil's favorite churns right Phil.
And you know what it means is that as we get them.
Gross profit dollars, Tim we're not going to be adding.
A lot of cost generally go straight down and help with the operating income.
And the operating margin percentage as well.
Does that help answer your question.
Sure, so, especially the incremental dollar amount.
Already in the revenue how much of that would flow through.
To your operating profit line on a year over year basis.
From a question.
You know I think we've said in the past seven day to 80%.
All right.
You know it kind of depends but you know that that's what we target internally so it should be quite healthy.
Got you and then on the Covid related costs can you, maybe just remind us like how much of that.
Last quarter, and then how should we think about that for going forward in the next two quarters.
You know, we've given out a number I think eight to 10 million, that's probably about steady.
You know keep in mind, we're also saving money right like no travel.
Building expense so.
Yeah, I think the net impact Tim is probably not that material.
Got you.
Yeah.
Thanks, Tim.
Thanks, Tim.
Thank you. Our next question comes from Matt Sheerin with Stifel. Please proceed with your question.
Yes, hi, good afternoon, everyone.
Just a question team about just the current demand environment, if you could drill a little bit more fill in terms of the book to Bill is that youre seeing per region.
And then also.
Just commentary you did talk about the supply constraints out there are you starting to see customers looking to build inventory do.
Do you think what youre selling is actually selling through versus some some inventory build.
And then with that.
Basically two to three years ago, we had a very strong cycle and you saw some benefits on the pricing side.
And obviously on the margin side.
Do you envision that kind of scenario.
Given.
Given the data points out there and you know.
Would that margin environment be it would be beneficial to you in terms of pricing.
Sure Matt I'll take that is that was that one question.
Okay.
Thank you.
You got it.
And yet so.
So on the books I jotted them down here I think I got them Hey, you know on the book to Bill Yeah. We did note in the script well above.
Parity at this point in time in all regions, where I think we noted in the last earnings we started to see it come out of positive book to Bill in Europe in the September month of that quarter and that continued strong in Europe, even through December as it did in the Americas and in Asia Pac. So yes, we are very positive book to Bill.
Bill and I think it leads to the kind of on the next question to cut other kind of combined.
It was part of it is lead times going out Matt right and I'll comment on that as well and as lead times go out customers do tend to book more out as well right. So just from a lead time. So that's what we track really closely.
Total book to Bill bookings inside of 30 inside at 19 and.
Anytime you get outside of the 90 120 of it obviously would be the.
Statistically the accuracy can comes down a little bit, but we're tracking that we got the mechanisms to do that were taken in roughly 1000, plus customers Mrp's every day week and month. So we got the analytics around that so feel good there as far as selling through I.
Just know that I'm on a lot of expedite calls where customers have real demand was on three today as a matter of fact, so and with the suppliers, it's hard for us to judge if they're building.
Building inventories internally I I don't sense that talking to other customers at this point in time and I'm, assuming you're talking on raw inventory buildup, you know as opposed to finished goods or maybe a little bit of both it's tough for us to track that we we try to manage it with our customers.
There's no there's no magic wand on that one we do watch the MRP for inflated demand right. We get a customer that comes in and is using a mature and inked using 100 pieces are a week and all of a sudden day. They want they want three or 400, we we try to catch that and go back on we verify that its that is.
True demand, so I'm not not feeling that at this point in time or cancellation rates push outs or that we look at are pretty consistent right now on that 25% to 30% range, which is for those that don't aren't aware that that's normal that's the buffer and a shock absorber, we we take care for the.
For our customers on our suppliers as we always sit net centered on technology right. So what we're seeing on on both ends.
As far as the.
Pricing, yeah, so it's been pretty pretty.
Pablo got there for many suppliers, we won't comment on on any one supplier.
But yes, it is definitely seeing some pricing increases.
And.
Whether it be ship and debit or just commodity cost.
And we do have processes in place to to go in and work to pass that onto our customers. Sometimes that's difficult based on the contract we have and we're going to do some further negotiation, but certainly the plan yes.
Is particularly where things were short supply. We we we certainly can't be the shock absorber to pick up the pricing increases so our sub and wonder.
Majors are price increases match suppliers going on with us and we work with the customer together there to explain that so.
It's not a black and white answered it so it's a challenge, but we do other mechanisms and today the analytics to go back and track that to be sure that we're driving increasing fairly by the way I mean, we might have questions. On this call fairly you know the public price increases that are being passed on to us okay.
Oh that is I think I heard him out no I appreciate it and just one quick follow up just in terms of the gross margin time sort of backing into the number it looks like it's going to be 30, or 40 basis points sequentially. I know mix is part of that Ti going away as part of that but as we look forward when Asia comes back.
Is it sort of be in that range for a while until you start to see more demand creation and premier farnell contribute or is it different.
No I think youre, absolutely right it'll be in that range, while others two factors.
Thank you Matt good thanks, a lot.
Thanks, Matt.
Okay.
Other reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Steven Fox with Fox Advisors. Please proceed with your question.
Yeah. Thanks, Good afternoon, everyone I'm just following up on that last question about where the supply chain is that hill can you sort of if we roll. This situation forward say three to six months.
The what's the buffer and that sort of keeps things from getting sort of out of hand, where you do get into a situation where customers are double ordering is it that is do you see the demand on the other side of some of the inventory build at some of your suppliers are talking about or is there another catch up here that I'm missing, but I'm just trying to understand why this doesn't become a problem say in <unk>.
Andy days, and then I have a follow up.
Yeah, Steve Thanks.
Again, I think it's based on what we're seeing today and in the forecast management systems, we have today and back and when I say that mean back upstream with our suppliers and downstream from our customers. So we're seeing bi directionally.
Right now just based on the activity we see.
On the backlog I mean.
Automotive the diversification, Steve as well, you know automotive industrial and consumer applications technology.
And I, you know I'm not a prognosticator to go out 369, and 12 months, we typically don't do that but just right now the demand looks looks pretty darn good and I was on with three major semi guys today and.
Certain commodities right now, but it does feel it feels pretty good.
So again, we've been around the industry a long time, so we see the cycles and I think this is just a different type of cycle, which is maybe make it a little bit more difficult too because you do other COVID-19 issue you know how much of its new demand versus replenishment of inventory because it day in the automotive for example, because they didn't have inventory so.
It's what we're just going to continue to tracking and put our own analysis around it and analytics around it and I think the other word I use with customers and suppliers that hey, we all need to be more responsible what is it we really need it what is it that the customer really need okay without inflating it right and we need to hold on hold ourselves a little bit more responsible in the supply chain.
Okay I appreciate that perspective, and then just on the the leads.
The ramp of that distribution facility, Tom you mentioned $19 million of eventual cost savings.
Do we think about that as sort of a fairly straight line or is there is there are certain pumps you still have to get over before you start realizing the bulk of the 19 million how does that play out.
It'll be Oh, sorry, I didn't mean to interrupt Steve.
Was just saying between now and say you're talking six quarters from now.
Yes, yeah, and it's going to take.
Another quarter or two before you start to see the savings.
You know, but it's designed to have higher capacity and lower total cost and.
What do you see it.
Its on track as far as ability to achieve the savings.
Okay, and Tom if I could add to that Steve because it's it's a terrific question and we're all over that is it's also going to add more capabilities force caters certain value added to the new logistics center will offer our customers that in the current facility today in the U K, we can't do it because it's not only our cost on a hard black and white cost savings to Tom's point.
But it should enable us to sell more and offer more services as well.
That makes sense, thanks for that call it.
Oh, thanks, Thanks, Steve.
Thank you. Our next question comes from Nick Todorov with Longbow Research. Please proceed with your question.
Hi, guys good afternoon on things.
I wanted to double click on the comment on replacing Ti's revenue and in Asia.
Just to confirm this is sales does that mean that you guys have replaced essentially more from a gross margin perspective, what your cash.
Getting from Ti in Asia, and maybe if you can give us a split you know how much of that is a new new program wins and then lastly on that point, maybe how is progress on doing the same thing in EMEA and North America.
Yeah. Thanks, I appreciate that.
The interest real yes, and yeah. So yeah. So we are on the on the revenue side.
Just looking at the last three years away from what we're talking there was as we said that the highest number we had net would've had the guys from Texas in the number so it is now.
It was effectively out altogether and.
Similar symbol on the profit side.
Which which to the earlier question drove drove nice drop through for.
For us and in Asia Pac So effectively yes. So we got on our revenue and GP what was the follow up question on on that one.
Just on Americans in Asia.
Yeah. So so on Asia, obviously, we got some yeah. That's it. Thank you so obviously and as we got a little bit of a lift from the market as well right because the Asia market is really hot so that certainly helped us as well as organically working with other suppliers.
To help drive more shifts and design.
Three areas, we're focused on and we've mentioned this before one is the pin for pin replacement. So that's in a range of 10% to 12% of the business.
And that's a global statement by the way.
And the second one is the design win and the that bucket is going to be the longer pole in a tenant that will affect more of the west okay and be slow to fulfill in both Europe and the Americas than even some of that might be fulfilled in Asia Pac on will attract debt, but but that number is is growing nicely and that's when you're catching the.
Next generation of designs at a customer they're not going to typically designed something out to midstream, but we got to our design registration design win tracking and we've actually got some design wins already going into production in replacing some of that business and then the third bucket is what we call shift.
And that's where there is I think the.
I think that's where.
We also remember that the customers are care, what happens with their supply chain and their suppliers and there's they got to at times.
I'm sure that business, Okay, and there might be reasons they have to share. So there's some shift inside the customer where we lost a line like this one that we can go make it up in D Tam or Tampa D. Tam shift inside the customer and that we're tracking are as well. So there's a three pronged approach that were were getting after.
On T R and we're ahead and to your point. Good observation. We're ahead in Asia Pac versus the balance of the west.
Okay, great. Thanks for the color on if I can follow up with one more maybe bill can you I understand that there is pockets of where lead times on strict Chang and maybe out of pocket there or not.
If you can compare and contrast, the lead times relative to the prior cycle, maybe to the pre COVID-19. The prior cycle and if lead times are stretching what do you think is customers ability to build inventory because it seems like we're hearing more of the fact that day, they cannot get product rather than build inventory on their shelves.
Yeah, that's right and that goes to I think Steve's question and part of Matt's question earlier on the building of inventory again, it's tough for us to attract that although we try to with our with the MRP sharing.
So the lead times here, it's a really good question versus 17 18, it feels a little different in 17, and 18, I mean, and I think we all need to remember this this can change within days and weeks, Okay and on 17 and 18.
It was more more on the passive area and the other capacitor area not exclusive but just if you'd make a statement was more net capacity area, where today it seems to be more on the actives you know on in the semi after side on that.
That's not to say it can't spread.
Spread into the passives as well, but it's really a moving target on the last call we had with everybody back in October.
October it was predominantly 32 bit.
Microcontrollers, which is predominately driven by by automotive that's still maintains to be a challenge and it's a huge range because yeah. You, we say 32 bad winters of tons of different packages and whatnot, but it's you know 16 to 52 weeks on the lead times.
It's spreading into and you into some of the F. P. G. As power so some parts of the analog or find other parts.
So you did it hit in the power devices and certain other op amps and so many automotive Ics.
16 bid starting to leak out a little bit out of about four to six weeks from where it was several weeks ago.
And so many eight bit or starting to get out the extended lead times as well so.
It's a bit of a moving target, but it definitely seems to become a bit broader. Okay. Then than we saw even in the October timeframe.
Got it very helpful. Thanks, Good luck.
Thank you thanks Nick.
Okay.
Yeah.
Thank you. Our next question comes from route Blue part of Korea with Bank of America. Please proceed my question Hi, Thanks for taking my questions. Tom I think you said that there was 40 million left in the 245 million cost reduction program, how should we think about that flowing in.
And also how should we be thinking about SG&A trending over the next couple of quarters are you done with all the hiring that you needed to force sales force and our engineers and do you have enough staff to capture the end market demand or how should we think about SG&A over the next few quarters.
Thanks for asking that I think that's really important.
You know.
I would expect our opex dollars to remain relatively flat.
With some adjustment from volume, we have $40 million left to go remember that half of the $75 million with temporary measures things such as.
You know furloughs.
And then as Phil mentioned earlier, we are making a number of investments.
But the good thing that we're really pleased with the Opex is that you know as the market recovers as revenues grow we're not gonna be adding dollars and.
Other you know other than sales commissions on distribution related costs, and therefore, we will get some pretty good drop through down.
Now on to the operating income dollars on the operating margin that helps.
Yeah. It does I mean, that's very helpful. Maybe just as a follow up to a prior question on the Ti revenues.
In the past you've said that you don't have to.
Makeup the entire Ti revenue that that's going away because you were targeting revenues that are at a higher margin. So in that vein is there a way to quantify how much of the revenue.
We knew that you need to make up you've already made up so like have you made up half of that revenue that you need to make up or or one fourth or three for it. So I mean is there a way to quantify how much more revenue.
In that you need to make up to get to the same gross profit dollars.
Yeah.
We're probably in a range of between 30% to 35% right because again the biggest bucket is that design win registration bucket and that's the one that's going to be further out because of just the sheer cycle time of designed to fruition a registration to fruition in the 30% to 35% range.
And we and we said we would just remind you. We we've always says it's roughly a two year period, that's going to take so we feel were tracking right no that makes sense and just the last question I don't know if you've mentioned this but are the end markets that were strong. If you can just kind of quantify I'm pretty sure like a demand from automotive was strong but as you go forward I mean, which.
The demand that you're seeing from different end markets. If you can quantify like which one is stronger which one is weaker and then that way are you seeing any unusual demand from markets like automotive. So I mean getting back to the question of double ordering you're using anybody like the tier ones versus Oems it could be both ordering at the same time till you are you concerned about any day.
Total ordering in the in your backlog.
Yes.
Well again, we always track the double ordering as I said earlier and and we work with other suppliers on that because they could see it too by the way you know as they see they see X Y Z customer, replacing the St. Part with three people then that you know they they catch out as well on there they're working on that so I don't think it's as prevailing as maybe it used to be sure some out there, but they are auto.
I don't think there's any you mentioned auto they're they're they're taken anything they they can get right now so I don't believe there's any buildup.
Other or exaggeration, there on what they need and that's pretty public information on industrials come back strong and that's you know that's still about 30, 35% of our business, which is really nice thing about industrial it's really a diverse a.
Customer set and we need to make sure that we we'd rather they can to protect that customer base that tends to be much longer tail, a higher mix a little bit lower margin.
Lower volume, but we bring a good value prop to them. So the margin tend to be good the consumer has been strong defense Aero.
Running against their own compares there, but you know on.
Aerospace not as much we kind of combine them, but on the defense side, you know definitely are still strong and the defense side as well.
Got it we're not going on.
So we're not we're not dependent overly dependent on any one vertical really which is which helps our diversification model.
Got it thanks for all the details appreciate it.
Oh, thank you.
Thank you.
The other reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from David Williams with Loop capital. Please proceed with your question.
Hey, thanks.
Let me ask a question here and congrats on the progress.
Just wanted to see maybe if you could talk a little bit about the execution hurdles that are in front of you and what are the main sticking points are the area that we should be concerned with or potentially could could hang up some of the <unk>.
If you are making it.
Sure.
Working toward.
Okay.
Well I'll go first time, if you want so thanks, Thanks, David I appreciate the question.
It's a good question because we're focused on execution so.
I always say, we can't control the market and the size of the market or the growth of the market, but we can focus and control what we control which is execution. So.
Good question. The two we talk about most frankly is as the Americas I'm sure Tony Our President is on the call somewhere or will listen transcripts. It's our it's our biggest needle mover Yo from several years ago. We took a couple of hits here and we're pleased I'm gonna make that really clear we've been picking up share in Americas, and we're pleased with the progress being made there.
And that that's probably number one and then number two we've talked about quite a bit in the script and then Tom section.
Farnell, we got it for now and again when I say for now on includes Newark here in the U S.
With Houma and team leading that effort.
We just added national instruments by the way, which is exciting so we'll be executing on that that should be a gross line for us as well, but those two are the most critical to get us back to where we need to get to and we both we have line of sight and both both of those businesses to get there and then we need a you know Asia into printed on.
We continue to focus on execution, Tom talked about you know they've had a nice run and they've done a nice job and of course, Europe's our most profitable region and will you need to marry importantly keep.
On the pedal on metal in Europe, and in steady state and continue to drive execution. There. So are there you know demand creation is key that's 30, 35% of our business today, our suppliers value what we bring in demand creation. It's a topic of every conversation we have with our top suppliers and we need to continue to grow that.
And then IPD interconnect passive electromechanical right. So that's a that's a higher margin business for us and we got to focus on that as well. So it's not any one but they're there four five as we build out the new business models that will have a bigger impact on margin as we go forward.
Iot and AR, the Avnet integrated business.
Hope that helps.
Uh huh.
No I think he covered yourself. Thank you.
And one more if I could just maybe any color on kind of the registrations and maybe where the activity has been the strongest specifically.
Within the industrial segment I know, it's been strong but are there pockets or areas that youre seeing maybe greater degree of demand than others or is it really truly just very broad based.
Yeah. It's a it's a good question on are we reported last quarter. The registration Act registered income and registration, which was the highest we've we've had on record.
We're pleased this quarter that actually our design win revenue. So that's when you actually ship the product against that registration. It was the highest in six quarters and so we're pleased with the progress.
Even with some of the line losses, we've had to be able to close that gap. So positive on that front and then on the AR on the segments. You you asked about industrial industrial is really diversify but on a quarterly test and measurement strong one of our medical falls into industrial as well as a subset are effectively but.
It's pretty diverse isn't on it not not really any wanted to just you know just thinking about other industrial applications out there on how diverse that is.
Yeah.
Great. Thanks, so much and best of luck on the quarter. Thank.
Thank you.
Thank you.
Yeah.
Thank you. Our next question comes from William Stein with Truth Securities. Please proceed with your question.
Great. Thanks for taking my questions.
Bill can you.
Can you talk a little bit more about the shortage is maybe in this way what is the biggest product.
On a problem area for you now and when you talk to the suppliers.
I think we all understand that these are real shortages.
I'm guessing there is from double ordering going on but.
You know Theres also very low inventories on the supply chain. So it doesn't seem inappropriate.
And you know demand is probably going to continue to get better as we go through 'twenty. One what are those suppliers, telling you about their recovery plans for adding capacity for sort of fixing this because hopefully it doesn't fix.
The other way, but demand crashing.
And then as a follow up to that.
And then other compound question, but.
Can you talk about customer behavior in the case.
Their inability to get a full kit are they taking what they can now and then chasing the other parts for either through you are on or any channel. They can or are they waiting in a way that they make sure. They are always balanced.
Yeah, Yeah, yeah, thanks, well really really good questions complicated questions.
I'm I'm I'm working on a lead time charge here and I don't want to have a day, one supplier, but for sure the the higher nims M to use that consistently.
Probably the hottest the hottest right now.
And in the 32 bit space, we talked about on October and that continues.
And it's complicated because there's so many different package sizes you know on it.
And you know I would just say in today on expediting a power module for a major customer in the industrial segment. So.
On the subset of the medical.
On the phone literally about two hours ago. So it's kind of it. It's a tough question to answer, but I would say probably gonna pick one okay, it'd be probably more than likely the the hiring.
32 bit, but as I said earlier, it's probably leaking into the 60 bed, even some of the EBIT right now and that's where you're going to get into that broader customer base, particularly a bit broader a broader applications in the industrial segment as far as the with what they're saying a lot of this is out there already is that's why the.
Cycle is so much different and than others, because because of the COVID-19 and some of the issues that some suppliers had in packaging and whatnot over the past six to nine months and playing playing catch up.
Hmm.
But if you look at your when you look at the front end versus the back end and in the lead time, just to get a fab up and running I mean, it's it's you know it could take upwards of nine to 20 weeks just to get a fab up and running on the back ends and other.
10 weeks or so so.
Depending on where the suppliers might be on it and some of them outsource that obviously in that process is is the is the moving target is it just starting now and then we're going to have a long road to go you know if in and some are just starting some are already underway.
And whatnot. So it really just you know that that's the only that's roughly the lead times that you that you'll see out there and based on that recovery of capacity and demand and we will see the see how that debt adjustment plays out.
And then the follow up was about are they waiting to get fully balance you can't sorry, they take them what they can oh, yeah. There is there a prevalent answer to that question. It's something that comes up all the time when there are shortages and you know we have.
Adam.
Yeah Yeah.
On the cycle protracted that happens every couple of years right. So yeah.
Yeah, no sorry, well it wasn't reported that one no it wasn't a volume but yeah. So so we track that are we're not seeing a lot of that right now I think what you're saying is that they can't get there in 2017, we ran into some of that right. If they can't get the MLC see capacity. They may not want the rest of it if it's kind of what you are saying, we've not we've not seen that play out yet it could on.
On a.
Item by item on individual basis, but not not a whole lot and again, we're not I'm not seeing the hoarding effective of inventory either on the other side to the earlier question, but I can't I can't say that there's not some of that happening right now.
We're not tracking to it we're not tracking that we don't see it.
Thank you.
You got it.
There are no further questions at this time I would like to turn the call back to Phil Gallagher for any closing comments.
Yeah. Thank you very much I appreciate that and I want to thank everyone for attending today's earnings call. We hope everyone stays healthy and safe during this time and wishing everybody a great 2021 look forward to speaking you again in April with our fiscal third quarter earnings report.
Thanks again.
Ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful evening.
Yeah.