Q3 2021 Avnet Inc Earnings Call
Greetings and welcome to the Avnet third quarter fiscal year 2021 earnings call I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.
Yeah.
Thank you operator earlier this afternoon I haven't yet released financial results for the third fiscal quarter of 'twenty 'twenty. One the release is available on the Investor Relations section of the company's web site for <unk>.
Copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet, but site.
Lastly, 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 the 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.
Sales are described in detail on Avnet. Its most recent form 10-Q, and 10-K and subsequent filings with the SEC. These forward looking statements speak only as of the day 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 presents.
Patient.
Today's call will be led by Bill Gallagher, Avnet, CEO and Tom Liguori Avnet CFO.
With that let me turn the call over to Phil Gallagher Bill.
Thank you Joe and thank you everyone for joining us for our third quarter fiscal year 2021 earnings conference call.
I hope everyone is safe and healthy.
Overall, we're very pleased for our third quarter results and I'm excited to talk from some of the quarter's highlights over the past year. Our employees have continued to demonstrate incredible resilience. Despite the enduring challenges associated with the pandemic and I'm personally impressed by and proud of the strides we've made as an organization sticking to the plan.
And we set for ourselves even in the face on what can only be described as a complex operating environment.
Let me kick this call by providing a bit on insight about what that operating environment looks like today from our seat in the center of the technology supply chain.
As many of you know whether it's a glimmer of light at the end of the tunnel as countries around the world work to vaccinate their populations, we're still operating in an unpredictable market supply constraints combined with our recent strong rebound in demand have resulted in the kind of widespread inflation, we have not seen for many years.
As we highlighted in our second fiscal quarter, we saw notable demand increases across the automotive consumer and industrial segments.
Those end markets. In addition to communications and computing growth end market demand throughout the third quarter.
Customers are seeking to reduce supply chain risk by securing longer term supply agreements and exploring second sources, providing welcomed opportunity. So we were not previously seen on top of that many suppliers are also experiencing raw material price increases for items, such as resins koppers and more.
I've met is in both cases able to pass along these price increases to our customers.
While this type of operating environment is not ideal we certainly navigated zone similar circumstances throughout our 100 year history and have a number of systems and processes in place that enable us to effectively serve our customers and suppliers.
Those systems are incredibly effective and enable us to continue to compete in this market.
It really is teed up for success is our commitment to prioritizing strong partnerships.
And it is and will continue to act responsibly and transparently and both how we manage and how we communicate about the supply and demand curves.
Our teams have established relationships that are unmatched in this industry by remaining in constant contact with our customers and suppliers on working collaboratively upstream and downstream to manage forecast and mitigate supply chain risks.
These deep relationships some of which extend for it for five decades or more provide us with strong visibility into potential pricing shifts in customer response.
We take great pride in the supply chain engagement practices, we've built with both our supplier partners and customers and will strive to maintain this approach.
Although we continue to see strong design activity coming off record registrations in the second quarter.
In our fiscal third quarter, our demand creation revenue design registrations and design wins increased sequentially and year over year really proud of that.
This success directly to your investment in relationships and our engineering capabilities, which include digital self serve and design tools and of course, our account management team and field application engineers.
Not only did this result, and engagements with stronger margins, but improves our revenue visibility, which in turn allows us to operate our business more intentionally with fewer surprises.
Our success in stabilizing our business by prioritizing strong partnerships has proven effective as the environment has become more dynamic and I'm confident it will enable us to continue to adapt to the changes as we have for the past 100 years.
Now turning to slide five you'll see evidence of our progress in the third quarter of fiscal year 2021.
In the third quarter.
Revenues were $4 9 billion up year over year and sequentially.
Exceeding our guidance range and also up sequentially and year over year on a constant currency basis.
Excluding ti in both periods sales grew 22 per cent year over year on a constant currency basis.
We're pleased with how we performed in the Americas and EMEA regions and we are encouraged by the continued progress we are seeing it for now.
In the Asia region, a certain Chinese new year and continued strong demand in all the end markets contributed to continued momentum in the region.
Looking at our core electronic components business on slide six.
Revenues were up year over year and sequentially in the quarter at $4 5 billion.
As mentioned earlier strong continued growth in Asia drove the outperformance in this segment demonstrating solid execution against our China growth plan as we gained share across the entire APAC region.
We were also encouraged by better than expected, resulting in Americas and continued incremental improvement in Europe, our strongest region.
Lead times are of course Lincoln throughout the quarter driving very high book to Bill ratios. In every region. We have continued to tightly manage our backlog and our teams are working closely with our customers to getting extended visibility, which we then sharing with our supplier partners.
While it is difficult to forecast how long the supply constraints will continue.
Most market participants expected to extend through at least the second half of calendar year 2021.
Turning to for now on slide seven.
Revenues were up year over year and sequentially in the quarter at $396 million and operating margin increased sequentially to six per cent progressing towards our target of 10 per cent.
We made the conscious decision this quarter to continue to maintain operations at both the lead distribution center and the existing facility for the foreseeable future.
This decision is in line with our commitment to provide seamless service for our customers as we continue to see increased demand for now.
We remain steadfast in our commitment to continue to invest in this critical aspect of Avnet and are excited about the clear potential work for now as we further digitize our business.
Case in point for.
And also e-commerce sales up 20 per cent year over year, we are bullish about the contributions for now can make the avnet value proposition and.
And continue to invest in for now.
Added 67000, Skus through the first nine months of fiscal year 2021.
And progressing on our plans to add up to 250000 skus through the fiscal year 'twenty 'twenty two.
So with that I'll turn it over to Tom So he can dive a bit deeper into our third quarter results. Thank you Phil good afternoon, everyone and thank you for attending today's call is for.
Stated we are pleased with the progress we made and the results we posted in the third fiscal quarter.
Looking at the key highlights on slide nine.
In the third quarter, we grew our topline by 14, 1% year over year.
And expanded operating margins for the third consecutive quarter.
Our efforts to date have put avnet and a much stronger position to execute in this dynamic operating environment.
And I am excited to walk you through more of the highlights from the quarter as they continue to indicate avnet is critical in the center of the technology supply chain.
Our revenue for the third quarter were $4 9 billion and adjusted EPS for 74 cents per watt.
Our revenues and adjusted EPS exceeded our guidance range.
And grew from $4 3 billion and 38 cents in the prior year's quarter.
As Phil mentioned.
<unk> revenues were primarily driven by an exceptional quarter in Asia and for now and better than expected performance for class America's enemies.
We used $10 million of cash flow for operations to support our topline growth.
While working capital was up slightly in the quarter.
Further reduced our net working capital days to 70 to the lowest level in several years further demonstrating our team's success in managing cash and working capital as we continue to navigate a volatile market.
We are seeing strong returns from our investments in low touch ecommerce and then our steadfast commitment to deep supplier and customer relationships, which are yielding exciting design wins.
Looking at the income statement on slide 10.
Gross margin of 11, 6% was up sequentially.
Primarily due to increased prices, we are passing through and regional mix.
For now EMEA and Asia, each increased their gross profit margin sequentially, an encouraging trend.
As far as our revenue mix by region Asia revenues, well better than typical seasonality for a bit lower than last quarter.
For the Americas, and EMEA revenue both grew sequentially.
That's contributing to the higher gross margin.
Opex as a percentage of gross profit continues to decrease for you.
86% from $84 four per cent last quarter.
Adjusted operating expenses of $458 million were up by six 1% sequentially.
The dollar increase was primarily due to increased volume.
Strong euro and pound exchange rates against the dollar.
The discontinuation of temporary cost containment measures.
And higher distribution cost as we continue to maintain operations of both Parnell warehouses.
Phil mentioned the decision to continue to operate both warehouses was primarily driven by strong demand.
And the decision to prioritize customer service over cost savings.
Of course this means we will maintain higher operating expenses in the near term.
With continued growth at for now and improving E. Commerce results. We continue to expect to achieve our 10% operating margin target for the end of fiscal year 'twenty two.
On the non operating front interest expenses slightly up sequentially.
Due to slightly higher debt through the quarter for working capital.
So interest expense declined year over year by 25% hitting $22 3 million this quarter.
The decrease year over year was due to lower debt levels, which reflects our continued commitment to maintaining an investment grade profile.
We recorded foreign currency transaction gains of $1 2 million on this quarter.
It's from favorable one off items.
And we revised our annual tax rate expectation for fiscal year, 'twenty, 'twenty, 1% to 16% up from 15%.
As a result, he books 20 per cent tax rate in the third quarter to true up the year to date amount to 16%.
On slide 11.
Highlight results across our three geographic regions and from our two business segments.
Total revenue growth was largely driven by strong sales in Asia, which benefited from more shipping days in the region due to the shorter than expected Chinese new year and brought end market demand.
For example revenues grew substantially as our e-commerce and inventory investments are paying off and for Nellix capturing increased demand.
For the signs of continued recovery across the Americas and EMEA regions.
Looking at the electronic components segment, we achieved revenue of 4.5 billion, increasing for claim and 1% sequentially and 13, 7% versus the prior year.
The electronic components segment operating margins were two points since per cent for 23 basis point improvement from last quarter.
So no revenues for the quarter totaled $396 million up sequentially and year over year, primarily driven by our improving ability to capture share increased demand.
We saw strong e-commerce revenues that were up 20% year over year, indicating that investments to improve customers online experience are drawing a notable return.
We are continuing to invest from the business by adding Skus and prioritizing excellence in customer service.
So for now segment had an operating margin of 6% in the quarter.
While the Opex was higher than anticipated.
Primarily due to our decision to maintain operations of the existing facility and leased distribution center.
For now operating margins to continue to steadily improve over the coming quarters.
We remain on track to achieve our 10% target operating margin by the end of fiscal year 'twenty two.
Turning to cash liquidity and the balance sheet on slide 12.
Our liquidity position remains strong and our debt leverage continues to improve well.
We ended the quarter with cash and equivalents of 323 million.
And with one 7 billion of available lines of credit.
We are comfortable with our debt position, especially as the macro environment continues to recover.
We maintained moderate debt levels quarter over quarter.
The dead coming in at $1 2 billion and net debt at $873 million.
Our gross to net leverage was 2.7 and net debt leverage was 2.0.
We intend to refinance $300 million of capital market notes due in December of this year.
We continue to support our dividend and returned $21 million to shareholders in the quarter.
Our net book value per share was $39.
Turning to slide 13.
I will wrap up for some comments about our expectations for the next quarter.
For fiscal Q4, we are guiding revenue in the range of 4.7 to $5 1 billion.
And adjusted diluted EPS in the range of 71 to 77.
Our guidance is based upon current market conditions and inventory availability.
Before I turn it back over to Phil.
I just want to reiterate how incredibly proud we are of our team's efforts today.
Today, Thanks to their work Avnet is in a much stronger position to deliver to our stakeholders, especially as we navigate this dynamic market and capitalize on growth opportunities.
I am excited and optimistic about what lies ahead.
Bill.
Thanks, Tom.
Yeah before we turn it over to Q&A I just wanted to reiterate my excitement about celebrating and that's 100 year anniversary as many of you know I've done with Avnet for nearly 40 years and despite the macro challenges we've had to navigate over the past year and the uncertainties associated with the supply constraints the digital transformation.
Companies like Avnet are undergoing insignificant.
Those of US who've been running complex businesses for a long time understand what a game changer Digitization is isn't.
He has been one of the most exciting times to be at Avnet and in our industry and I'm proud to be leading such a tremendous team at this time.
It is because of our team's hard work, we continue to play a pivotal role at the center of the technology supply chain.
I just want to thank our employees for their continued support and dedication to our customers suppliers.
Avnet.
So with that I'll turn it over the operator for questions and answers.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like US from question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is on the question Kim.
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One moment, please while we poll for questions.
Yeah.
Thank you. Our first question comes from Adam Tindle with Raymond James. Please proceed with your question.
Okay. Thanks, Good afternoon, I just wanted to start with a question on margins on the trajectory you talked about being on track for the 10 per cent Parnell margin by the end of fiscal 'twenty. Two we can clearly see progress this quarter I wanted to ask in core components. You said you're around two six per cent now Americas I think beat expectation.
In this quarter and it may be turning how do you think about the core components opportunity except for an L piece. During this time to fiscal 'twenty, two and the key drivers and if you want to touch on near term Americas performance and in that a response it would be helpful. Thank you.
Sure Adam Thanks for the question I'm trying.
Trying to components was at 2.6% this quarter now our target is three to three and a half per sample and we see that as you know very doable by the fourth quarter of fiscal year 'twenty two.
You know a lot of that is continued revenue growth, while we hold our opex relatively constant and get dropped for us.
When we look at it.
We will get some benefits from pricing and again, we're just passing on price increases that would be more be a benefit on the for an outside with region mix. If you look at it today.
Asia is very strong and I think that's not unique to Avnet Americans and EMEA. They did very well this quarter.
But Adam I would consider them recovery like they are still on an upward track.
Really happy with EMEA, they're up 17% I think sequentially. They grew their operating margin 100 basis points, but there's more to go and as we looked at our budgets for next year, that's what we're seeing from the team.
And lastly demand creation associate demand creation is very very strong.
On the for now side, we see a lot of good things happening.
The investments from adding Skus is paying off you see that on the revenue number.
<unk> and e-commerce are paying off you see that on the online sales growing 20% year over year on and Adam that's important because online revenues are at a slightly higher gross margin because people are coming in and they were electing to choose a market price.
Choosing that because they can get the inventory you have it on their desk for two days.
See national instruments, starting to contribute in fiscal year 'twenty, two and one thing we didn't say raspberry Pi has been very strong so you know.
There's a lot of levers here for operating margin improvement.
Electronic components three to three five per cent for now get them from six up to 10%.
On a very positive story going forward.
Yes, Tom I'll just jump on that thanks, Adam appreciate that and just specific on the Americas I think Tom answered everything.
Yes, I just want to reemphasize it's.
The real opportunity for us still on we saw the improvement that you're looking for it to hit the numbers from all of them together. They they worked for him and that's still one of the bigger needle movers on when we talk a lot about for now as you know, but the Americans one of the bigger needle movers and we have a plan to get that back to where it needs to get too. So just on why we're we're pleased that on momentum and all the.
Regions, So just want to highlight that.
No that's helpful and maybe just.
Just as a follow up in terms of the near term guidance.
To ask you know why would revenue and EPS to be flat sequentially in the June quarter. You know on revenue you typically get a little bit of an uptick sequentially and I know that there's typically some margin pressure from mix and stuff are sequentially, but pricing is only getting tighter on a go forward you've got more wood to chop and Parnell. There's some good guys happening you know on.
On margin. So maybe what are the main offset near term I think we went through a long term trajectory, but just didn't near term guidance why would be BB flat on revenue and EPS. Thanks.
Part of it Adam is March was very strong right Asia revenues, they were much higher than seasonality higher than expected.
And probably true for our peers as well. So you know I would say that's really the main reason why is flat when we look at what our peers are reporting I think generally.
Here's our reporting.
June June revenues up versus consensus, but somewhat flat to March now you know that said you know what would be the drivers to to exceed well the inventory availability depends on you know things like auto production and how successful our people and.
Continuing the strong demand we believe the demand is still there and you know those would all drive some margin upside as well, but I think really the main thing is March was a very strong quarter. So yeah.
I'm just filling in and typically I'm just looking at the EBITDA multiple years of history here in front of me totally margin either one of our stronger quarters right. So that's not really totally atypical to be flattish on gene now with the current market environment.
There's a possibility you can see that obviously, but there are a lot of factors out there pointing right now, but the agent strength.
On a 50% year on year without without the guys in Texas is pretty phenomenal growth. So we're just we're just watching that closely.
Understood that's fair congrats on a strong mark I appreciate it.
Thanks, Adam.
Thank you. Our next question comes from Nick Todorov with Longbow Research. Please proceed with your question.
Yes. Thanks, good afternoon, everyone I'm still you talked about customers exploring second sources I I guess can you talk about this opportunity what it means to avnet and what can you do to turn does a potential opportunities for longer term relationships rather than one offs.
Yeah, Thanks, Nick Yeah, well I was.
For a couple of things really there's obviously there's been some come on we'll get the question I'm sure later on some of the tightness in the marketing of certain technology.
I had a conversation yesterday with the supplier that might be seeing some opportunities around they can't get certain parts I Gotta do redesigns and try that second source for the sorts of different Oh platform. If you will but it's been fun and easy redesign, but that's that's happening out there right now to use it they can't get the parts. They think they've got to do something too for that application.
Well that was awesome and for them.
Twos is both on the supplier and the customer side.
That they are looking for options.
And on one of the silver linings in here that we're on.
We're seeing new opportunities from suppliers coming to us to help manage a supply change but.
Why change where that's our expertise and it's what we do is sitting on center technology Slide and I haven't got the customers obviously comes on and they want options right. So on both customers and suppliers.
Maybe move we're playing we're not playing are playing at a smaller level our bring your agenda to help with their supply chains architect for ways to go to marketing to move their products around.
The real takeaway is our people can take supply chain for granted until they can't get the product. Okay. That's whether it's a consumer on industrial Angola for that in the last few year and a half from certain things even on our household and people start to we look at the supply chain. So that's what I was referring to on both both sides on both sides of the aisle. If you will for us upstream and downstream.
Got it and it doesn't show up on the floor.
Uh huh.
Oh I thought of as a follow up on Europe.
Inventory decline on an absolute basis, and you mentioned inventory availability a couple of times by now. So can you talk about you know our water inventory constraints is limiting your sequential performance from June quarter, I'm I'm I'm I wonder what's your ability to build inventory at this time I would guess, it's limited, but when do you.
King do youre going to be able to share potentially some put some inventory on your books.
Well, let me take a crack at that and it's tough for them.
Work backwards with the first part of that which really ties back to Adam's question, probably on the on the gene June guidance. It it's tough to say what kind of constraints might be there that could affect billings I mean, I know, we'll get another question there are customers not taking other products because you can't get certain technologies, Inc.
We're not seeing that a whole lot right now that could come into play.
So it's tough to forecast that on like as far as inventory, yeah, we would like to have a little bit more inventory than we have in inventory minute call weekly asset folks around the world.
On the all came in at the inventory on.
For the inventory forecast on.
That's just the fact of the market. That's that's it was just for this and we could.
You get another 10% we'd take it on another 10% on working on our inventory day.
Yeah, we're managing that up and down on where you can daily calls with suppliers and customers. It's a it's a complex market but.
I'd remind our sales team, we still got a lot of I'm sorry on the shelf so.
It's easy to sell what you can't get its based on what we haven't yet so for that.
People listening thing chuckle.
Chuck let it out again.
Okay.
Yeah, Let me just quickly sneak one more if I can I just wondering you know because now T has gone to the equation.
What sales level would you consider America any mere recovered as does everybody understands doors are central to to your gross margin improvement.
You said two human T I think yeah.
We're getting close to the full lapse on that right now net.
We'll probably go on in Asia, we're pretty much there in the Americas and Europe, I think it will be there or close to it this year and we said remember we said it would take about 18 months two years and we think we will have that GAAP, Phil as we get into fiscal 'twenty two.
Okay.
Got it thanks, good luck guys.
Thank you.
Yeah.
Thank you. Our next question comes from Jim Suva with Citigroup investment Research. Please proceed with your question.
Thank you very much and congratulations and thank you so much for the detail on color I just have a kind of a longer term strategy a question, especially with the tenure of how long you've been there.
With the pandemic now behind us or at least making progress coming out of it at least in certain countries and now with the supply chain shock from the semi conductors has the management team there at Avnet do you ever talk with customers or your board of directors or CFO and CEO about structurally.
Do you need to kind of really change things I mean, you mentioned and I don't mean in a bad way, but you mentioned some of your customers and suppliers are looking at new ways to come to market. You know can you explain.
A little bit about what does that mean does that mean like changes like maybe it's worthwhile to hold a lot more inventory for the next shock that we can't participate or anticipate how should we think about that kind of longer term of what we've learned through these two very different but challenging situations in the pandemic and our semiconductor shortage. Thank you.
Yes.
Jim Thank you.
Good to hear your voice, Jim So look forward to catching up for sure. We're having these conversations I think the biggest thing well, let's go back to what next question was yeah. The supply chain services, if you will.
Roughly 50, 55% of our business today is in some type of MRP management, but we're getting feeds in some kind of electronic format on automation that we're getting daily weekly monthly from thousands of customers. So that's I think that's just going to continue to accelerate.
Hey, just on the opportunities already as opportunity today with sudden which lets say large Oems that are coming to us for new models, Okay to look at and and service models and things along those lines that might require more inventory or just different types of inventory or different types of managing the inventory and b M on consignment program. So.
Okay.
Okay.
I think what our suppliers do.
What they're going to invest in us.
No allergy R&D engineering.
Fabs, possibly in what we do really well on top of design services and supply chain services and that's our core if you will and its contracts many of our suppliers. So I think this is accelerating.
Accelerating some of the thought process on some of the tier one customers and of course with our suppliers I guess on accelerating I think the big change you're going to be the we're all going through.
Sitting on that that was kind of the point in my closing comments. There was is digitization right. So this has just accelerated okay digital like maybe what are the three years five years, what have you. So we're absolutely looking at her on a go to market strategy.
Physical go to market strategy aligned with digital.
I'm still on the demand creation, Jim for example, I mean.
Alright.
F N E. I don't think on going away and account managers on going away, but the answer to that is how do we put more digital online tools self serve design tools things on those lines, where we can make our R. R.
Feet on the street that much more valuable okay on the valuable I just want them to spend time on so they are the two big areas. One it wasn't brought up and obviously and then of course has ESG effect on that but that's a separate topic altogether new initiatives, that's going to be a big player in that for several years as well as it already is so low to two big ones.
So I would say Jim that the digital and then.
The workplace working.
Back to the office all of those things and stuff like that.
We're looking at our footprint, we're looking at so there's yeah, there's a lot of dialogue with the board him with Tom and the executive.
The executive leadership team.
Well. Thank you for the details and that's encouraging encouraging yeah. Thank you Jim.
Thanks, Jim.
Yeah.
Thank you. Our next question comes from Matt Sheerin with Stifel. Please proceed with your question.
Oh, yes. Thank you I wanted to ask about the Premier Parnell a growth that you saw him.
Certainly accelerated growth there and I'm just trying to figure out whether that's just a function of design activity you know picking up as you talked about Phil in terms of demand creation.
Or is it also and do just the fact that you know shortages are driving customers to the so-called per catalog distributors are small volume distributors, where they may have inventory I know you saw some of that last cycle is that part of it at all.
Yeah, Matt Thanks.
Thanks for the question I have.
All of them, that's kind of on and on the north.
Designs.
Non designs later, but our designs overall are way up registration design with them revenue.
We're leveraging the core and fund all really well so we're getting from some really good.
Sharing of leads back and forth from the Avnet core to for now and for now for the Avnet core.
We've invested quite a bit in the click side of things with the E Commerce and the digital with with for now and crisp resident and his team.
And then I think the.
As big as anything for the Skus that we've added net.
Another 67000 Skus on.
And working for the 250000 Skus you want to add to fiscal 'twenty, two and just from.
The main zone many of them along the years ago. This for I don't even have the capital of piggyback on the cash do that under Avnet. They do.
But part of that SKU count was that on the dollars and expanding excuse was having on warehouse be able to put it in and that's the lead you painted referenced in the script, that's allowing us to expand our SKU count because we were kind of at capacity in the previous facilities.
Little bit of.
Yeah.
There's really three or four things that I think are contributing to the growth.
Okay, Great and then in terms of the gross margin you saw some nice sequential growth there I know a part of it may do on maybe because of the mix of business you saw growth.
Sequentially in EMEA, and North America, and then no Ti business, but you would think that in terms of the on the overall pricing environment would be favorable for you now I know there may be some input costs, such as free but it sounds like you're passing them along.
Should we expect gross margin to improve here as we go through this cycle.
Well as you can see gross margin improve modestly on he can talk tough forecast out we are seeing good point, a little bit of inflation, okay on freight and some things along those lines, but we are planning on on margins expand a bit on price increases.
No.
Why don't I first of all we got about 40 different suppliers, we're managing through that well and we feel confident in our teams are working really well for customers two to pass on the costs, where we can.
Possible for us to absorb all that book, but in doing that we're not we're not looking to gouge them, but we're just very transparent with the increases in now where we have contracts, we managed through that relationship and debits can somebody get into when you manage through that so it's as you can imagine it's hundreds of thousands of loans that we're.
We're managing in that but we feel confident we're having good success in passing on the increases.
We should have been on a S P.
And most of them on the margin per cent.
Sure.
Okay, alright, thanks, a lot for now thanks.
Thanks, Matt.
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Our next question comes from Bruce Lu bought a career with Bank of America. Please proceed with your question.
Hi, Thanks for taking my questions. My first one is on free cash flow can you give us on your thoughts on how components shortages would impact your working capital needs.
How do you see your inventory turns versus a normal year and as part of this can you also talk about your capital allocation strategy.
<unk> versus dividend versus any thoughts on M&A at this point.
Sure Bill Blue.
As we go forward and revenue growth, we will be using some cash for working capital I think this quarter, we were up about 130 million most of that receivables for it.
We're fine with that level of investment because it's higher margin business and it feels a little little up on the gross margin going forward a little ways to go on the operating margin. You know these are good return on capital with our capital allocation.
So really our priorities are just that in the near term liquidity and reinvest in the business. You know it has revenue growth and we see that continuing for some for some time, we will use some cash for working capital for.
It's clearly going to support our dividend.
Going forward that.
That you know, we're very happy with our debt levels. Our gross leverage is down to 2.7, you see that coming down into the low twos and there's probably more from earnings momentum then actually paying down more debt.
But we think it gets on a very good position and then every quarter. We do you know we talked to our finance committee about buybacks and M&A.
And you know with M&A, we continue to be focused on what we've said in the past.
For the extent that we find a company that either as a product supplier.
Our new market something that makes the greater avnet, a healthier stronger business. We will continue to look at book that we have a pipeline. Most of them are you know companies are there revenue range of 100 million for 200 million.
But that's how we view our capital allocation priorities going forward. Thank you for that.
Thanks, Tom Thanks for the details on that I have another question for Phil.
Can you talk about you know give us some color on what you saw by end market I think in the prepared remarks, you said that EMEA and Americas came in better than expected. So what are there any particular end markets that drove that outperformance and also I think you talked about design activity trending strong for Avnet can you just talk about like you know.
Are these related to the initiatives that you have around avnet integrated and Iot and just in general how does the pipeline of new business for free.
Okay I'll start with the end markets would be thank you.
We're really seeing is strong across the board as I did say in the prepared remarks.
And on Americas came in at.
Where we thought they would come in Asia, we already spoke about on across the board in all regions in Asia, including Japan.
Performed very well led by China, and greater China area, but the other regions performed well as well and that's you know automotive.
Automotive telecom consumer industrial medical and so it's really across all the segments in Europe, and Americas and again, we're playing more in automotive, but we all know for some of the challenges there.
We're still playing there, but we saw a strong rebound on the industrial.
Space, which is which is for two.
On Europe, and such are extremely strong position for us there on the long tail of customers, which is good revenue as well so it's really.
That's what's causing some of the challenges in the marketplace, which are.
Positive challenges the challenges nevertheless, with demand.
It's much more for them.
Diverse if you will from the standpoint on the portfolio and of course, our Tms sector isn't necessarily vertical on country manufacturers.
But that's that's going well for us as well, it's still roughly 33 per cent of our business with the E. M S guys out there.
Second part of the question on it was demand creation in the.
The pipeline we had.
And I'll go on actually Dominik region quarter.
The highest revenue quarters, we've ever had and actually demand design win revenue as we called it says pushing 30 32 per cent of our revenue out of the out of the core we saw registration activity up you on year and quarter on quarter as well as actual registered design wins and some new design wins came.
And at a really high number at Oh 15 per sample you're on.
Are you on Q on Q. So the funnel on to your question is from a design standpoint is looking really positive, which as you know almost every people wanted how's that happened with the work from home, but there's that much more accessibility to the engineers and design engineers and with our suppliers on recipes and digital all connecting so.
Yeah pretty pretty bullish on the demand creation very bullish on the demand creation side of the equation.
Alright, thanks for all the details appreciate it. Thank you so much but thanks for.
Bill.
Yeah.
Thank you. Our next question comes from Steven Fox with Fox Advisors. Please proceed with your question.
Hi, Good afternoon, a couple from me. Please first off I was wondering if theres any way to put in perspective, you know how things have maybe tightened up further you know since your last update either a month ago or 90 days ago, you know, what's the differences and along those lines. How you know I think you guys mentioned that.
There's a path to maybe I'm seeing.
The current constraints and by the end of this calendar year. So what is the path to sort of normalizing.
Yes, Steve I'll.
So first of all I'll start off on the second question first.
We're just trying to get a good handle on what we think that balance on the demand is gonna be it through the calendar year or something to get visibility much much beyond that.
Based on technology supplier vertical in the summer as you know one thing I'm going to quote who say hey, it could be from 'twenty 'twenty. Two you know I'm just giving a book has been around on all the time that we definitely see from 2021.
What I'm, saying from the old one point to one of them and that's what we see so just to clarify that.
What we're planning for it but it's a I think there's probably going to still be constraints into 2020 two at least based on the dialog won't have on some of the key suppliers that we were partnered with as far as the first part of the question.
We talk a lot.
I myself.
Yep.
Steve I'm, sorry are you there.
Yeah, you cut out when you started to answer the first part of the question sorry, If you could if you could strike at that time no no no problem sorry about that yeah. So on the first part of the question. So you heard about that for the second question. So the first part yes. It is.
But six months ago, let's call. It don't hold me to the for the month.
The topic of conversation was any controller space right at the high end controllers, when we got into the low end controllers 32016.
I think I might have lost you again I I can take it on.
Well, it's I think it's on our end so I apologize.
We tried to at least I'm getting a couple a crack at it.
So.
Yeah. There you go okay. So that six months ago, we talked about the high end controllers amendment leaked into the low.
Let's call. It 16 day, it et cetera, and that continues but that's that's continued to be the I still say that probably the longest Poland intent when it comes to the to the lead times extending Inc.
It's starting to spread out a little bit more pervasive than that and some other commodities.
Units empower areas some analog areas.
Op amps things along those lines is just starting to get a little a little broader.
Well, we haven't talked a lot about is in the eye opinion.
On that passive.
And they're all doing okay, right now, but there are some signs that there is some lead time extensions coming out of some of the passive guys on some of the capacitors and connectors.
Connectors to now.
Yeah.
Certain resins plastics et cetera, we're starting to see some lead times and the connector area as well. So I think it's just it's just broadened a little bit Steve and again I think that's based on what I said on insulin answering that question because of the.
Yeah.
Widespread growth for the different verticals just affecting different technologies.
What we see right now.
And then just as a quick follow on.
Can you talk about what you do to sort of avoid double ordering by your customers I know you could probably extend the window on noncancelable orders things like that are you taking on any of those steps to try and I mean, I know, it's hard to tell if it's happening in the moment for how're you doing anything to try to make sure your orders are real.
Yeah, you answered part Thanksgiving you answered part of the question with the MTN ours and for those who don't know that's non cancels on returnable. So as some of that is getting imposed on us.
For product getting poached.
Sorry about that so nancy on or non cancer non returnable. So that's just being imposed on us from the suppliers, where maybe the products weren't typically NCR, we're passing on to our for our customers obviously.
So that's gonna help limit some of the double booking but that's what that's the bogey.
It's more difficult for us to catch that what will catch Steve is inflated on demand. So we've taken these forecasts from our from our customers thousands of them and you know if you're you see Fox industries, using 50 pieces, a week or something on all of a sudden you come in for 250 pieces of week, we catch that right away and we go back and have that dialogue with the customer.
And make sure we're scrubbing that backlog appropriately.
And so that's what we catch more of these I'll call them on the inflated on that.
The conversation yesterday with a supplier on the bubble.
They tend to catch that more than once parts up yesterday, they're not really seeing that.
Although there somewhere but we're not really seeing that so again CNR yourself on your answer part of the credit that is helping.
I'll tell you I mean, we're sitting until this thing is there's certainly a lot of stress in the supply chains in the deliveries and all that but I think if you just continue to work through it responsibly.
That's a tough challenges, but we'll get through this we've been here before at this one's a little bit different.
We've been here before.
That's all very helpful. Thank you.
Got it.
Yeah.
As a reminder, if you'd like that from question. Please press star one on your telephone keypad if.
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Our next question comes from David Williams with Loop capital. Please proceed with your question.
Great. Good afternoon, and thanks for letting me ask a question congrats on the solid execution, but I wanted to see maybe tying into the last question and just think about from at the OEM and maybe E. M ask for your we're hearing that maybe they're trying to build a little bit of inventory from a couple of different channels or are you seeing that at all any inventory builds I guess beyond.
Your direct customers me, yet, but your math for warm or even on the OEM level.
Yeah. Thanks, David.
Tough for us to really manage that to be honest with you you have to get visibility into their inventory because you've got you know there's there's there's finished products inventory could be built up a little bit and then there's raw material, so really difficult for us to see that to be candid with you and rather not comment on any one customer segment building inventories or not we all go back from them.
First entering the.
On Steve's question, what we look for is inflated bookings and it's weighted backlog.
And a lot of the book to Bill was because of the lead time for calling out too. So the lead times go out of the Mlps get adjusted and we buy point for example, their suppliers because they want the visibility for but I tough tough for us to call that and we try to watch that we do surveys and things along those lines, but we don't have direct access to the end customer bill.
And inventory.
Okay and getting people Inc.
If I can ask for more real quick.
What do you think that the largest execution hurdles are between here and the end of the year, just kind of thinking about what you're doing with farnell and the margin profiles do you think is there anything there that we should be thinking about.
No I think it's I think the biggest challenge gonna be interest against the COVID-19 Center technology. This just be sure we are managing the suppliers and staying in close communication with them, which we're doing with our customers and manage them.
All the information flow that's coming in to be sure.
Helping as much as we possibly can fill any any on products that are needed by our customers from our suppliers and that's I think that's I think right now that's one of the biggest things that may sound easy, but it's certainly not without teams you know for.
Full bore ahead and focus on that externally on engine.
I think Tom for that we think we have on our site for the team.
The projections for farnell.
In the Americas, which are the two big needle movers.
On Asia looks really good right now still as those as those Europe. So.
No I think that's what we need to focus on I think and then of course, you know getting the appropriate inventory to fill those needs, which again that's back to working with the suppliers with which we do.
So we feel we feel.
We feel good about where we are right now.
Thank you.
Thank you Dan.
Thank you. Our next question comes from Joe Quattrochi with Wells Fargo. Please proceed with your question.
Yeah. Thanks for taking the question congrats on the results.
I was curious on on the change of book to Bill relative for last quarter I guess, how do we think about the makeup of that change is it more of a strengthening of kind of inside 90 day 120 days or is it customers, giving you indications into late 2021.
Yeah, Joe So I looked at that low.
Yeah.
Our book to Bill.
It was high last quarter as well I'm just looking at it and it was high this quarter and it's so much with what I just said the demands we're getting a lot more visibility on the demand from the customer based on the lead times going on its lead times go out if they change their internal perhaps for scheduled and needs and demands.
And of course, we could we get bad debt so on.
But I would say that's the majority of it the <unk>.
Sorry to 90 days 100 unemployed day.
Really solid actually for me for me.
Standpoint of whats in the pipeline to go on to the next 30 60 90 120 days on what do you see that moving on.
That much that's actually a great question as well, we also track, which really ties it as Jos we track our cancellations and rescheduled day.
We obviously and and in a normal market, but like we we we we flex our our backlog is the buffer if that's what we do on a buffer on the supply chain you know 2025 per cent as normal. So we go up and down to 125 per cent and that's about where it is right now so there's no we're not seeing anything that's zone. It also reschedule.
It's getting pushed out or things along those lines, we're not seeing that yet when we do that is the first indicator, we know something's going on than.
When we drill down but right now.
The cancellation of Windows to reschedule.
Pretty consistent what we typically see it feel if I don't at least from you know Joe.
If you look at you know what are we three and a half for weeks into the quarter. If you look at what we shipped in our backlog you know, it's a very healthy percentage very similar to last quarter, which is encouraging is that getting worse not getting them.
Yeah, you know, it's not not changing so we're pretty much on track it is far better than it was 12 months ago right. I think you know we would all agree with that so you know it seems youre looking internally where.
Where they should be there looking stable.
Lots of good indicators and targeted enjoys it the only other thing at times a lot of the questions I think they see the diversification.
Occasion for our portfolio I mean, you were talking about hundreds of thousands of customers that we're managing which helps you level. Those most of the questions that were book club up today and no. One customers you know any more than five per cent of our revenue and wait on any supplier. That's it's a greater than 10 per cent. Okay. So that that helps.
Smoothed some of this out from a vulnerability standpoint, if you will but helps de risk you know some of them would you asked and some of the other questions as well.
That's really helpful. And then just you talked about customers looking to sign and maybe longer term supply contracts can you just kind of help us understand what are those look like in terms of you know the contract length. You volume commitment is it based on a fixed pricing just any any type of detail like that would be helpful.
Well that all of those I mean, some of the on some of those complex supply chain, we've been managing on a job and we've had them for years.
Just get more complex as I'm talking.
10, 15 years, you know that we've been we've been ingrained with these getting some household names customers imagine or supply for.
For the suppliers and we're we're kind of let's call. It low hub. So we're integral so almost everything that they do from a supply chain standpoint, so yeah. Some of them are.
Traditionally you you are a concern for an implant Stuart that's fine no problem. That's a typical contract. Some we have engagements where we got 40 50 people on site managing.
Intake of demand forecast the waters, receiving like the red for the shelf and it's a customer for the top of my head that we'd been engagements from 12 years or something and so its really you really become an integral you almost go into some of these customers you went over the avnet person was versus the the customer person you know, so which is great but there for the.
Most part are typically longer okay. When you get really complex because you gotta make investments, you're making investments upfront and we're transparent on that and you need to get a return on net investment and.
So they typically tend to be much more strategic I'm much more longer term in nature.
Okay.
Thank you.
Thanks, Joe.
Yeah.
Thank you there are no further questions at this time I would like to turn the call back over to Phil Gallagher for any closing comments.
Thank you operator, and thank you all for attending today's earnings call. We really appreciate it and I look forward to speaking to everyone again in August for our fiscal fourth quarter earnings report on the interim stay safe and have a great rest of the week. Thank you.
Ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful evening.
Yeah.