Q2 2023 Avnet Inc Earnings Call
[music].
Please standby our presentation will now begin welcome to the Avnet second quarter fiscal year 'twenty twenty-three earnings conference call.
I would now like to turn the floor over to Joe Burke, Vice President Treasury and Investor Relations for Avnet.
Thank you operator earlier this afternoon Avnet released financial results for the second quarter of fiscal year 2023.
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 via the link in the earnings release as well as on the IR section of Avnet website.
Some of the information contained in the news release and on this conference call contain forward looking statements that involve risk 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 differences are described in detail in that but its most recent Form 10-Q, and 10-K and subsequent filings with the SEC.
Forward looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward looking statement or supply new information regarding the circumstances. After the date of this presentation.
Today's call will be led by Phil Gallagher, Avnet, CEO and Ken Jacobson Avnet CFO with that let me turn the call over to Phil Gallagher Phil.
Thank you Joe and thank you everyone for joining us on our second quarter fiscal year 2023 earnings conference call.
I am pleased to share that we delivered another quarter of solid financial results, which exceeded the higher end of our sales and earnings guidance.
More importantly, we achieved these results despite the macro headwinds affecting certain areas of our business, which I'll touch on in a minute.
In the quarter, we grew sales, 21% year over year in constant currency, making into our eighth consecutive quarter of double digit year over year sales growth.
We believe this growth resulted in another quarter of gaining market share. Thanks in large part to our customer partnerships and the dedication and execution of our employees.
Management of our operations also enabled us to drive solid operating margins of four 5%.
Which is the fourth consecutive quarter of greater than 4% operating margin.
Further the combination of strong sales growth and effective management of operations allowed us to increase operating income nearly three times faster than that of revenue on a year over year basis.
During the quarter, we saw continued strength in the Americas, and EMEA regions and began to see signs of slowing in Asia beyond the COVID-19 customer shutdowns, which had some impact on both electronic components and for now our team is executing very well and helping our customers manage market complexities.
They face dynamic supply chain conditions and uncertainties from.
From a demand perspective in the quarter. We saw continued strength in certain key vertical segments, most notably transportation and industrial.
In the last earnings call, we indicated that lead times were improving.
And in the second quarter lead times continue that trend for many products, although for certain products lead times still remain extend it.
Across all regions, we've been coordinating closely with customers and suppliers to effectively manage our backlog.
As a result of those actions our overall book to Bill ratio soften during the quarter and we exited the second quarter below parity on a global basis.
Across the supply chain inventory levels remain elevated including that of many of our customers.
In order to support our customers as they continue to be challenged with higher inventory and obtaining all the key parts required to complete their products. Our inventory levels also increased this quarter, which Ken will speak to further in his commentary.
Overall, we remain comfortable with the quality of inventory and are working to improve our inventory turnover heading into the third quarter.
Our role as a distributor is particularly critical in these types of uneven environments as we have proven over the years the value of Avnet in a complex operating environment is our ability to serve as a control tower for our customers and suppliers, helping them to proactively manage their supply chains.
With the changes we've made organization over the past two and a half years I'm confident that we are much stronger and more resilient company today and are well positioned to deliver value and quickly adapt as market conditions change in the future.
So with that let me turn to the highlights for our business.
Our electronic components business drove year over year sales growth across all three regions in constant currency electronic components sales were up 23% year over year, the seventh consecutive quarter of 20% or greater organic sales growth in constant currency.
I am, particularly proud of our mid teen.
Record sales and operating income for the quarter Humira.
The Americas team also continued to make steady progress and delivered another strong quarter with sales and achieving the highest operating income in several years, the Americas and EMEA regions, both benefited from strength in key verticals, notably industrial and transportation.
In Asia, we experienced a softening of demand as we worked with customers to adjust their backlogs due to lead time improvements.
Additionally, many of our customers across the region experienced challenges with their operations due to the rise in COVID-19 cases.
I'm proud of our Asia teams continued success not only in ensuring business continuity, but are consistently gaining market share in the region at the same time.
Although our Asia business saw signs of slowing they continue to gain market share during the quarter and a favorable sales mix led to operating margin expansion during the second quarter, both sequentially and year over year.
Overall across all regions, we continue to benefit from our unique engineering and demand creation capabilities with our field application engineers and digital design tools once again, achieving record revenue and gross profit dollars for demand creation.
We believe this ongoing strength is indicative of the increasing value of the capabilities, we provide to both our customers and suppliers.
Now, let's turn to our farnell business.
<unk> sales declined sequentially and year over year and continue to be impacted by product availability and pricing.
As shortages for certain parts begin to moderate customers will shift some of their orders to volume distributors, thereby affecting demand and pricing at farnell.
As we announced last quarter, we are the exclusive distributor for the Raspberry Pi single Board computer.
Which continues to see more potential and industrial applications. The backlog for single board computers remains robust and with certain key semi electric components become more available towards the end of our fiscal year, we expect to realize such sales.
Operating margins for farnell, where 9% during the quarter.
While operating margins are lower this quarter, it's really important to note that for those margins are still two times that of that and that's overall operating margin.
Our investments in Farnell E Commerce platform and improved user experience continued to yield results with 55% Farnell is total sales and 73% of total orders placed through the E Commerce platform this quarter.
We were pleased with these results and expect to see increased traffic and new customer acquisitions in the quarters to come as certain components for new product introductions and single board computing products become more available.
Additionally, farnell has a diverse product mix there not only solves customers onboard needs, but also sports test and measurement as well as industrial maintenance and repair operations as needed for.
For the long term, we remain very excited about farnell and continue to see opportunity to leverage cornell's and electronic components unique and synergistic collaboration.
This allows us to better serve our customers and suppliers from new product introduction to mass production and is a key differentiator is a key differentiator for avnet.
To recap.
We are pleased with the strong finish to the calendar year 2022, and the better than expected results for the quarter were closely monitoring market conditions and the impact of component lead times on our backlog and inventory levels as products become more available.
We expect to experience a high end of seasonal sales declines in the Asia region due to the lunar new year with some uncertainty on how COVID-19 may impact the return of the workforce wants to how it is over.
We're also keeping an eye on the impact of rising interest rates inflation and the signs of slowing growth in the global economy.
We continue to be confident in our team's ability to execute in a dynamic and uncertain environment by delivering value to our supplier and customer partners.
We've been in the business for over 100 years, we've weathered many market cycles and our team is up to the challenge.
There's never been a greater need for the capabilities that avnet has to offer and.
And we look forward to continue to play a critical role at the center of the technology supply chain.
So with that I'll turn it over to Ken to dive deeper into our second quarter results.
Thank you Phil Good afternoon, everyone and thank you for your interest in Avnet.
Yeah, Evan that team delivered another strong quarter of sales and operating income growth compared to the year ago quarter. We are very pleased with our second quarter in the calendar year 2022 financial performance.
We believe we continue to be well positioned to deal with the market challenges and uncertainties that Phil previously mentioned.
In the second quarter, our sales were $6 $7 billion up nearly 15% year over year exceeding the top end of our guidance range. This represents our 10th consecutive quarter of year over year sales growth and constant currency sales growth was 21% year over year with each region contributing to the growth.
Sales were flat on a sequential basis in constant currency, which was above our typical seasonal trend and included a higher mix of sales from our western regions.
We had year over year sales growth across all of our regions led by EMEA, which delivered a record $2 $3 billion of sales.
On a year over year basis in constant currency sales grew 38% EMEA, 21% in the Americas and 9% in Asia.
From an operating group perspective, electronic components sales grew 16% year over year or 23% in constant currency.
Electronic components sales were flat quarter over quarter in constant currency.
Farnell sales declined nearly 8% year over year, almost flat with the prior year in constant currency.
Excluding sales of single Board computers, Farnell sales grew 4% year over year in constant currency.
For the second quarter gross margin of 11, 7% improved 29 basis points quarter over quarter and was down 49 basis points year over year.
The sequential improvement was primarily due to higher gross margins across all three regions as well as a shift in sales mix from Asia to the western regions.
We continue to maintain discipline around SG&A expenses as adjusted operating expenses were $484 million for the quarter down 3% year over year and up 2% sequentially.
Adjusted operating expenses increased 4% year over year in constant currency to support the 21% sales growth.
As a percentage of gross profit dollars adjusted operating expenses were six 2% in the second quarter, a full eight percentage points lower than the 70% a year ago.
Adjusted operating income of $301 million increased 39% year over year and grew 2.7 times greater than sales. This is the eighth consecutive quarter of operating income growth exceeding our sales growth.
Our adjusted operating margin was four 5% in the second quarter, which improved 80 basis points year over year, and improved 12 basis points quarter over quarter.
By operating group electronic components operating income was $297 million or 57% year over year.
E C operating margin was four 7% up 122 basis points year over year, and up 47 basis points quarter over quarter.
All three E C region saw year over year and quarter over quarter operating margin expansion led by our E. C EMEA business, which expanded operating margin by more than 200 basis points year over year.
Yeah.
Farnell operating income was $37 million down 39% year over year.
Farnell operating margin was 9% in the quarter down 461 basis points year over year, and down 308 basis points quarter over quarter.
The decline in Farnell operating margin was primarily driven by a combination of lower sales in part due to the lack of availability of certain components for single board computers and from a lower gross profit margin.
The expected decline in gross profit margin was primarily related to the unwinding of pricing premiums as certain components became more available.
Farnell continues to be our highest margin within avnet and their operating income margin continues to be two times greater than avnet overall operating income margin.
We expect farnell operating margins to remain at similar levels for the second half of fiscal 2023 as seasonal sales growth will be offset by the continued unwinding of pricing premiums on certain components.
Turning to expenses and gains below operating income second quarter interest expense of $59 million increased by $37 million year over year and $14 million quarter over quarter, primarily due to a combination of increases in interest rates and higher borrowing amounts to support working capital increases.
This increase in interest expense negatively impacted adjusted diluted earnings per share by 31 cents year over year.
During the second quarter, we entered into legal settlements, which resulted in a one time gain of $62 million. This gain benefited second quarter GAAP earnings per share by 51 cents.
Our adjusted effective income tax rate was 23, 6% in the quarter.
Adjusted diluted earnings per share were $2 for the quarter, which increased 32% year over year and were flat quarter over quarter.
Turning to the balance sheet and liquidity during the quarter working capital increased by $876 million, including a $318 million increase in inventories.
As a result of this working capital increase working capital days was 84 days for the quarter, which increased 11 days quarter over quarter.
Our inventory days increased by approximately six days and our receivable days increased by approximately four days quarter over quarter.
Our return on working capital continues to be higher than our cost of capital and improved over 100 basis points year over year.
Our inventories grew during the quarter due to a combination of factors, including customers requesting delays or product shipments changes in foreign currency exchange rates compared to last quarter and an increase in farnell inventories as components became more readily available we.
We have seen an increasing trend of customers rescheduling product shipments as they manage their inventory production timing cash flow challenges. This contributed to the increase in days of inventory as turns slowed during the quarter.
The quality and freshness of our inventory continues to improve year over year.
During the second quarter. We also saw a slowdown in the collection of receivables. Our team continues to work diligently with customers to collect past due receivables and effectively manage bad debt risks.
Our team has done a tremendous job since the onset of the pandemic and minimizing bad debts by proactively managing the credit and collection activities with our customers. While we continue to focus on improving inventory turns our top priority is to ensure we are managing overall customer risks appropriately.
The increase in working capital led to an increase in debt of approximately $850 million and a corresponding $321 million use of cash from operations.
The increase in debt led to a gross leverage of 2.4 times at the end of the quarter.
At quarter end, we had approximately $300 million of available borrowing capacity and our teams continue to work on selling inventory on hand, and collecting receivables to provide additional liquidity.
In the second quarter, we repurchased approximately $64 million worth of shares which represented nearly 2% of shares outstanding.
We have $319 million left on our current share repurchase authorization entering the third quarter.
We continue to prioritize our existing business needs, including working capital and capital expenditures when we evaluate share repurchases.
During the second quarter cash used for investing activities, including capital expenditures was $107 million or an increase of approximately $90 million quarter over quarter, primarily to support our new warehouse being built in EMEA.
During the quarter, we also paid our quarterly dividend of 29 per share or $26 million.
Yeah.
Book value per share improved to approximately $48 per share or an increase of approximately $6 per share due to a combination of strong earnings lower share count and changes in foreign currency exchange rates compared to last quarter.
Turning to guidance for the third quarter of fiscal 2023, we are guiding sales in the range of 6.15 to 6.45 billion and adjusted diluting earnings per share in the range of $1 75 to $1 85.
Our third quarter guidance is based on current market conditions and implies a sequential sales decline of 4% to 8%. This guidance assumes a seasonal decline in sales from Asia, primarily due to the lunar new year and below seasonal sales growth for the western regions.
This guidance assumes similar interest expense compared to the second quarter, an effective tax rate of between 22% and 26% and $92 5 million outstanding shares on a diluted basis.
In closing I want to thank our team for delivering another strong quarter of sales and earnings growth.
During calendar year 2022, we delivered sales of over $26 billion and adjusted diluted earnings per share of over $8.
<unk> diversification of suppliers products and the end markets. We serve are key differentiators that will enable us to be resilient, despite uncertain and challenging market conditions.
With that I will turn it back over to the operator to open it up for Q&A operator.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question is from Melissa Fairbanks with Raymond James. Please proceed with your question.
Hi, guys. Thanks, very much great work navigating kind of uncertain times today is really really great to see these results and the outlook.
You did mentioned that lead times are improving for <unk> for a lot of the products last quarter, you gave us some detail on which products still had the longest lead times I was wondering if you could maybe give us a little bit more a more detail on that.
Sure Melissa this is Phil and thanks for your compliment.
I appreciate that.
Yeah, New this is a hot one right.
So yeah, we did say that it will see some modest improvement right, maybe a little bit better than modest.
But at the end of the day lead times that they've stabilized and the vast majority of the products, but are still at levels, 20% to 60%.
Higher than pre pandemic, okay. So while some products that are coming in products like MCU, particularly in automotive analog power Igt's MOSFET 45 nanometer.
P. J, it's programmable logic are still still in many cases significantly constrained. So that's what makes this market is so much more complex than what we've.
Maybe you've experienced in the past.
And I, you know, an IP and EDA in the past as you know.
You know ceramics.
You know 12 months to 18.
<unk>. Some cases 26 to 32 10 homes are still 26 to 56.
Weeks on resistors like fixed film still 52 to 72 week lead times.
So it's kind of a mixed bag the connector guys overall overall again as a general statement.
Our probably the bill.
The lowest of all the categories are interconnected probably averaging 13 to 16 weeks, depending again on the type of connector products. So.
I was just sum it up.
Our high end controllers anything around power.
Amps voltage regs things along those lines are still still pretty tight as well as as I said automotive but.
Yeah, So hi, clears much waiting right when it's kind of it's just all of them.
Well over to Matt.
No.
That's actually really helpful absolutely yes.
Yeah, I really appreciate the detail.
Maybe one for Ken on the growth in inventory you know this is something that obviously everyone's paying really close attention to you highlighted a few different factors behind the growth this quarter and I think it's fairly well understood what's driving it but can you maybe quantify what was the majority of it due to farnell was the what was the kind of break.
Down at the contribution there yeah, I would say about 50% was actually driven by you know FX.
That we did have some <unk>.
<unk> there a farnell.
Farnell was about another let's say, 25% of that and then the rest was you know call. It I'm just just slower turns and those types of things, but I will comment that the FX impact kind of offsets what was last quarter. So it would be kind of a wash you know over the past two quarters. The FX is kind of normalized.
So clearly just some broader growth in the regional inventories this quarter, mostly in the west versus last quarter. It was mostly Asia.
Okay, great. Thank you very much guys. That's all for me now thanks Charles.
Thank you. Our next question is from <unk> <unk> with Bank of America. Please proceed with your question.
Hi, Thanks for taking my questions.
I was wondering if you can delve a little bit deeper into the margin performance for each of the segments. So in components on flat sequential revenue you had 50 basis points of margin improvement.
Is there any way you can parse out how much of that was because of pricing versus.
Volume versus mix versus FX, and how should we think about the sustainable level of margins in the components segment.
Same question for Farnell, I mean, 200 basis points sequential decline any way to parse that out between all of these factors.
Yeah, I'll go first and I'll, let Ken jump in you kind of answered it. The first part of that question group with a lot of that is mix regional mix.
Yeah.
Very little in ASP inflation this quarter, although we had a lot of supplier price increases that would not really affect the margin necessarily maybe some of the dollars, but not the percent in the margin, but most of it's the mix. If we noted that we said that the we saw some softening coming out of Asia at the end of the quarter and we had strengthening in the west.
It happens we pick up some margin. So it's really just good execution by the team.
On farnell.
So again, we see this as well they they get some appreciation in a market or a more constrained market. So they get some let's call. It a natural upside and some of that as products are coming into back to the question. We just got from Melissa where some lead times are starting to come in.
The more of the some.
Some of those customers they they get.
I'll call it non traditionally come back into the volume space, So they've seen some.
Some margin pressure and of course, some of the volume decline. Thus the negative drop through can you Wanna comment yeah on the on the components business I would say, it's it's regional mix, but then we did have a more favorable let's say product customer mix. Yeah. If you recall, what we said last quarter was cause gross margin was down a little bit. There you know all of our regional businesses that are at a more favorable mix.
The regional mix between the West versus Asia was was the bigger driver there.
With controlled expenses, obviously right and then when you get to Farnell I would say you know approximately 50 50 between the sales piece and then the the deterioration of the of the gross profit margin due to the unwinding of the premiums.
That's probably the right way to think about it and I do want highlight though you know farnell, we're still extremely pleased with farnell. The operating margins are two times. The core so we're going to continue to be doubling down on the on farnell performance and growth.
Okay. Thanks for the details there.
Phil you made a comment that Asia is softening and toward the next quarter you are guiding below seasonal growth in the west.
Can you, maybe touch a little bit deeper into that like which end markets or which verticals are softer now and in Asia versus in the west and how do you see that progressing as you as you go through the year.
Yeah, so tough to call throughout the year. So why don't you know be careful on that one because the market fluctuate so much but right now yeah.
As we've always thought that there was a bit of a inventory oversupply right in Asia Pac in general, Okay, and Ken just talked about we had some inventory increase last quarter there.
Except in the automotive automotive still strong matter of fact, automotive and industrial we've got great momentum in.
In Asia Pac it's really.
The end consumer.
<unk>.
Applications Youll P C mobile they continue to look pretty weak.
And then you got to remember the <unk> just a reminder.
There were no more traditional if you will or whatever that word means anymore.
With the lunar new year right. So that's kind of been on and off the last couple of years with Covid.
See how that affects us.
The market in the volumes of people that come back to work if they come back to work right. When they go into the lunar new year. So we got to watch that and then of course, we got the.
Predictability of the Covid right.
And what's going to happen that had that had a negative impact on us as well.
But overall.
I want to be clear, we're really pleased with our Asia performance.
I believe we're gaining share.
We have a really diverse market in Asia, a lot of times, you think age everything is China, I mean were doing really well in southeast Asia, the greater Taiwan.
We have a nice business in Japan, so all the more diversified.
Outside of just China.
We have a good presence in China as well, so a bit of a bit of a mixed bag on the west can comment on this a little bit I mean, the west and you're right typically we will see a sequential increase quarter on quarter from December to March but again a lot of these are the old.
You know traditional.
<unk>, if you will from a quarter to quarter seasonality I should say they they've all been kind of thrown out the last couple of years, but typically you do see the west come back.
And we're having a good performance in the West we just.
Frankly, as we said pretty much record quarters in Europe , and so they're just going against a tough compare but the the number in Europe is solid for the March quarter. We believe is the Americas.
Okay. Thanks, Thanks for the details there if I can sneak one more in opex as a percent of gross profit is that at a stable level now it looks like it's been in the 62% of gross profit for the last couple of quarters.
Or do you have more levers to take out costs. So how should we think about opex going forward.
Thanks.
This is Ken I would say I wouldn't think about additional cost take out.
Nearly depending on market conditions, we may have to tighten our our purse strings, a little bit but no significant actions planned at this time.
At these levels of sales and so I would say, it's a pretty stable percentage you know at this level of sales.
Okay. Thank you for all the details appreciate it.
Thanks.
Thank you. Our next question is from Matt Sheerin with Stifel. Please proceed with your question.
Yes. Thank you Phil I'm, hoping that you can be a little bit more specific on the book to bill ratios that you're seeing by region.
And and then on the on.
On the push outs that you're seeing from customers are you seeing cancellations as well and.
As <unk> gotten through the quarter, so far has that gotten worse or stabilized.
Yes, Thanks, Matt.
So on the book to Bill as you know, we don't provide it at the regional level.
But we'll just share that we're we're definitely as we said in his script were negative book to bill or below parity now in all regions.
I would say that the one that's closest to parity is still the Americas, then Europe , then Asia, Okay. So.
And you know I said this before they're moderating, but I don't I don't see that as a negative thing we've had.
Such a run up a positive book to bills that were excessive as we all know on the call that this is a I think a natural and healthy a moderation of the book to Bill.
So it's not really doesn't have any overly concerned.
Because a lot of this to your second part Matt is.
Honestly yourself with it but we're managing the backlog and we're working with our customers on this sooner there is certainly.
As the market shifts still reluctant to cancel I mean.
So we're having to do some of that form a twofold one the backlog.
They might be rescheduling, which as you know push out, but our cancellation rates and I'm looking at the chart now as I've said in previous calls our buffer.
The shock absorber in.
Backlog is roughly 25% to 30% adjustments in any given day.
Pulling and pushing out canceling right now we're running between roughly around 27%. So it's up a couple of points, but nothing that's overly alarming and again, we watch that on a on a daily daily basis. So that's how we're seeing it I mean I forgot that I don't think it's a negative thing I think it's an adjustment in the marketed.
The market is.
As required.
And you commented.
Previously on a question regarding seasonality next quarter, it sounds like you're saying that even though Europe and North America will be below seasonal they're both going to be up sequentially.
Matt I would I would say.
You know flat to down slightly.
And then Asia, obviously down and that's where the drop in revenue comes from but I think just to remind everyone.
By higher gross margin because of the more favorable mix. Okay. So Europe too okay. Okay, great and then just lastly on the inventory.
It looks like your inventory was up roughly 40% year on year, you're guiding revenue down modestly on a year on year, you talked about customers pushing out orders can you do the same thing are you turning around and canceling or pushing out orders to your own suppliers to try to start working this down.
Yeah.
Everyone's a one off Matt every supplier depending on the commodity is different you know we've got different N C and ours, not cancel that returnable and those things in place, but where are we can we certainly are and we're also working out with our customers you know so we.
We do believe as we said, we'll start turn that inventory. The inventory is good inventory is fresh inventory.
You know, we have a customer that needs need some help were a challenge and we're in it for the long haul. So we may be carrying a little bit more than we would for some customers because we want to work with them for the long term and not force them to take something we know they're not going to be able to pay for or don't want or need and that's not that doesn't bode well for the relationship and again, we've been in this industry.
Situation before it's not our first rodeo, but yeah. It's it's a constant negotiation are all one offs I will say the.
Positive is we're not seeing suppliers ship early and we're not so I think that's a really important point. So that's I'm sure I'm going to get that question, but so it's just they're catching up based on lead times coming in Okay. And then we've got to work with the customers to see what other parts they need to finish out their bills.
Got it okay. Thanks, Phil.
Thanks, Matt.
Thank you. Our next question is from Jim Suva with Citigroup. Please proceed with your question.
Thank you Phil and Ken.
Phil when you.
We're away from Avnet for a little bit of time, there were some supplier relationships that kind of went up for bid.
Some changes.
Some of them adversely affected avnet some of them did not know that we're exiting COVID-19 or the suppliers coming back and talking about changes or new terms or anything different because it seems like the past two to three years, it's been anything but stable. Thank you.
Yes, Thanks, Tim Yeah, those were some interesting years, they're behind us.
So far I'll say destabilization.
No I think the supplier that does <unk> ratios have been extremely positive and we even note that when it comes to things like demand creation are actually leaning on us more and so our demand creation numbers go up again this quarter to some record numbers. So I think that the supplier relationships are.
Our strong partnerships with our relationships and they're actually asking us to do more for them. So no.
I am very open about this we don't sit in their board rooms, we don't know who's looking to potentially buy who you know that.
We can only control how well we execute for them and we will look at the top.
Top suppliers on the semi side and the top suppliers in the IPD side, we're pretty much number one or two with every one of them. So.
Conversations right now very strategic and very very positive as we sit here today.
Yeah, No I didn't mean that in a negative way like share losses or disengagement minute, just as far as discussions could they potentially be evolving into more demand accretion or more yeah, krish isn't holding or consignment that didnt happened pre COVID-19.
Yeah. So.
Thanks, Jim So what they saw.
Suppliers are acknowledging.
Okay.
Customers are looking for as much around solutions as they are chips or they want total solutions right Board solutions, not just chip solutions, and that's where we can offer that value of the chip plus the balance of the solution for the customers, So and as engineering resources become more and more scarce and difficult to get and more on the software side.
The suppliers can still scale with us.
And we got the reach to help them get to that other customer base that they may not be able to get to so in that regard I mean theres not a meeting we have with the supplier that we're not talking about demand creation matter of fact that the first thing I wanted to talk about and then on the supply chain as we call supply chain is in service of our admin velocity business.
More suppliers coming into us.
And large OEM customers say, hey, we need some help in building out the supply chain capabilities, you know their suppliers want to drive R&D manufacturing sales and marketing.
We know that for some of our supply chain capability. So I think that's that's been a real positive through these last two and a half years.
And I think it's very sticky.
And then maybe a follow up for Ken Ken You mentioned Premier Farnell margins came down a little bit some of it due to.
The sale of some of the due to the removal of the premiums that happened during the shortages I'm wondering have those premiums now been largely or completely resolved or are those premiums still coming out of the model or we should model a little bit more.
Margin compression in the quarters ahead, thank you gentlemen.
Thanks, Jim Thanks for the question I think you know how I'd look at it would be in and I think I said this in the commentary was really that.
Have a seasonal uplift in sales because they're more of a western kind of business.
But that'll be offset by the continued unwinding. So I'd say you know.
I don't know if I'd say most of them, but you know over half, but there's still some to go and so that's kind of what we're expecting is a flattish or a stable margin operating margin because you have higher sales offset by some further price deterioration to get to a steady state and we do see positive signals, especially when it comes to you know what we just talked about with product.
Availability.
<unk> board computers in the components needed, we see that being a positive momentum going into our fiscal year 'twenty four.
Well, thank you, Phil and Ken and congratulations to you and your team for navigating a very challenging time.
Thanks, Jim and Jim.
Thank you. Our next question is from William Stein with Truth Securities. Please proceed with your question.
Great. Thanks for taking my questions.
First the receivables increase I think was a little bit unusual I know you guys historically have not had any <unk>.
Sort of unusual.
Collection issues. So I don't think we expect it during.
During this cycle, but I wonder if you can comment as to any concentration in the Ah <unk>.
Increase either by G O or end market or any other way you categorize it.
Yeah, Thanks, well I guess I would say no no specific concentration, but again, we don't have any major customer concentrations or supplier concentration of that matter. So we like the fact that we're not.
The holding to any one customer supplier, but what I would tell you is it was kind of across the board regionally and you know part of it was you know challenges with customers, but their own cash flow situations that we worked through like Phil talked about and the other part was just quite frankly, it was December 31st and and people wanted to pay us in January and you know that was.
A piece of it which kind of then recovered.
Early in the next quarter. So I would say actually just had a call with the team today, because we are definitely focused on credit collections any any high risk areas that we can get the business involved in and I think they're saying actually the agings improved a little bit you know still have about a normal amount past dues, but it's improved a little bit, but clearly something we continue to focus on.
I'll just jump on that do you actually because thats really couple of years ago. When all this started to happen with Covid, two and half years ago, We actually were very concerned about receivables and from the standpoint of bad debt and we were concerned that customers arent going to make it the ones with the weaker balance sheets and actually we've been.
Pleased frankly that we've not had that little extension yeah for sure. We're all over it but our bad debt exposure of write offs. If you will have been minimal okay and I, that's a complement to our AR collections and receivable teams in or the business overall, just I just want to add that on.
I appreciate that.
Two other real well one quick one and then more in depth point, if that's okay.
It sounded like the way you were talking about the changes in order patterns. The backlogs the order reduction it sounds like that was more of a China focused event, but I would think lead time is more of a global.
Metric so im hoping you can just level set me on that.
It is not it <unk>.
Lead times are definitely on a global global basis, and it's not no. It's not just hey.
Asia as I said, we saw the west I, just said that the west was still a little bit stronger and book to Bill.
And then Asia Pac that's all in.
And again I only get would surprise anybody with it.
What's going on in Asia Pac right now and what we're doing is just.
We're being a little bit more sort of then even the customers are with us and making sure were working to clean that backlog up.
So to Matt's point, we won't fare negotiated with suppliers on that side as well, we don't want product coming in that the customers don't want right and suppliers don't want us to have the product on the shelf. That's no good as they build out their capacity they want they want to know what's real and what's not.
So that's going back to Matt's question.
<unk> summer working with us really really well and letting customers out of the NCI and ours, because they don't want to build stuff that they are ultimately not going to one of the suppliers a little bit more rigid so everyone's a little bit of a one off.
But on that last unique to agency.
I appreciate that last one if I can squeeze it in can you remind us of the capital allocation.
<unk>.
Our strategy or tactics. However, you want to describe it the dividend in particular, what the plan might be for future increases there. Thanks, so much guys.
I think our and the dividend in particular, our historical pattern has been you know once a year in the September quarter, We would look look at it increase.
Buybacks I think we've been pretty pretty good there. We've we bought back 8% of our shares since in the last 12 months.
This quarter I would say if you'd look at our buybacks plus dividends plus capex that was actually higher than any of the past few quarters. So we did have a larger capex. So you know from a priority standpoint, we're going to continue to prioritize the business.
In terms of needs for working capital and Capex before we get into returning to shareholders, but we think especially as we start to get back to cash flow generation versus use of cash on working capital will be able to have enough to.
Repurchase shares and we do look at it still is below trading below book value.
And it still looks like an attractive price, even though our stock has performed relatively well to to others over the past couple of quarters.
Thank you.
Thanks, well thanks Paul.
Yes.
Thank you. Our next question is from Joe <unk> with Wells Fargo. Please proceed with your question.
Yes, thanks for taking the questions I was curious have you guys thinking about that the pricing pressure that youre seeing in farnell as being.
Maybe correlated to the components business has this kind of like a leading indicator of precursor that you you are a little bit worried about.
I guess I would answer that to say I don't know that we're worried about it and I think it was expected we knew that we got some uplift there in the market and normally it would correct itself and I guess, how I would characterize it is you know I think we talked about it as in a 200 basis points range, you know, maybe maybe a little bit north of.
There, but we still have a very healthy margin gross margin in farnell.
And they do have a pretty diverse product set right. There's on the board type components and that's really what we're talking about pricing agreements. When you talk about on the board in semiconductors certain IP any but they also have you know a lot of their business and other kind of areas test and.
Maintenance and repair so you know theres, a nice balanced portfolio that can keep that steady margin. We believe yes. So Joe This is Phil I'll just reemphasize it no. It's not it's not a concern, but we just spent a week with them.
U K last week as a matter fact, Canada, we've got a solid team we've got a solid plan since we called as we signaled this quarters ago.
They're a little inflated and that is going to come down.
Top of that the single board computer backlog is really really growing so that's impacting some of the top line.
And that will that will definitely come back as Ken pointed in the near the end of our fiscal year ended Q1 fiscal 'twenty four.
Got it and maybe just ask it a little bit differently.
Do you see I guess the pricing pressure.
Happening in farnell is potentially spreading into the to the.
Core components business I guess is what I'm trying to ask.
Yeah, Okay got you, yes so.
Good question again farnell by is different than the than the core right, there's not as much the infamous ship and debit and things along those lines. So you'll see.
It's it's different or sorry on the core side, we will start seeing some pricing pressure right now not not to not not so much okay. The theres still a matter of fact, there is still as I called out 20, plus apart is that raised prices in January so back to the first question on lead times lead times are coming in are not all of them because they are still raising prices. So.
Hey, there's always pressure in the system right, but right now we're not seeing anything that overt that's going to have that big a negative impact.
And I would just add to that there are competitive pressures will always put pressure on our gross margins, but we do have and we talked about supply chain as a service IP any initiatives as well as our demand creation and help us kind of keep the margin stable right. So we're always probably going to have some competitive pressure going down, but we can keep on filling the funnel with the higher margin revenues.
Including farnell and getting farnell growing again helps offset that overall and that's kind of how we're thinking about the model yeah, sorry to jump back and Joe but just because this is a good question and that's why we got to drive digital right and that's why we've got to drive E Commerce and online sales and as for now we added a record breaking number and 55% of the revenues were actually done online and 73.
Some of the transactions so that really helps you drive in and offset some pressures because you're you have a much lower touch lower cost to serve on that piece of business. So just want to add.
Yeah that's helpful.
Just maybe as a follow up.
March quarter revenue guidance declining here beyond the mid point.
How do you think about.
Cash flow generation shall we start to think about that as maybe even putting positive and then just also on that note. How do we think about Capex I know, there's maybe more of a one time kind of Capex. This quarter, how do we think about the capex in the next couple of quarters.
Yeah to answer the Capex question first I'd I'd say you know, it's it's maybe more consistent flow, so $25 million ish, a quarter give or take something with.
What would kind of be the expectation there on capex and I'd say the answer is yes on cash flow, but we've got some work to do to get the inventory levels down and collect the receivables. So that's clearly the goal when sales go down you know our model then needs less working capital, including less receivables unless inventory in and it works through so it may take a little bit more time.
Than we'd like.
That's what we're clearly focused on this next quarter and then going into the fourth quarter.
Thank you.
Thank you.
Thanks, Joe.
Thank you there are no further questions at this time I would like to hand, the call back over to Phil Gallagher CEO for any closing comments.
Thanks, a lot Brad I want to thank everyone for attending today's earnings call. Yeah, I look forward to speaking to you again in our fiscal third quarter earnings report in early May I have.
Have a great 2023.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.