Q3 2023 Avnet Inc. Earnings Call

May 3, 2023

Speaker 1: you

Speaker 1: I and.

Operator: Please stand by. Our presentation will now begin. Welcome to the Avnet Third Quarter Fiscal Year 2023 Earnings Conference Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet. Thank you, sir. You may begin.

Speaker 1: So.

Speaker 2: Please stand by.

Speaker 2: Our presentation will now begin. Welcome to the AbNet third quarter fiscal year 2023 earnings conference call. And I would now like to turn the floor over to Joe Burke, Vice President of Treasury, and Investor Relations for AbNet. Thank you, sir. You may begin. Thank you.

Joe Burke: Thank you, operator. Earlier this afternoon, Avnet released financial results for Q3 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's website. Some of the 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 Avnet's most recent Form 10-Q and 10-K, and subsequent filings with the SEC.

Speaker 3: Thank you, operator. Earlier this afternoon, I have that release financial results for the third quarter of fiscal year 2023. The release is available on the Investor Relations section of the company's website.

Speaker 3: A copy of the slide presentation of what company today's remarks can be found via the link in the earnings release as well as on the IR section of AFNIT's website.

Speaker 4: Some of them.

Speaker 3: We're 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. Submarine factors that could cause or contribute to such differences are described in detail and have that's most recent.

Joe Burke: These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Today's call will be led by Phil Gallagher, Avnet's CEO, and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Speaker 3: regarding the circumstances after the date of this presentation.

Speaker 3: Today's call will be led by Phil Gallagher, Abnitz CEO and Ken Jacobson, Abnitz CFO .

Phil Gallagher: Thank you, Joe, and thank you everyone for joining us on our Q3 fiscal year 2023 earnings conference call. I am pleased to share that we delivered another quarter of solid financial results, which exceeded the top end of our sales and earnings guidance. More importantly, we achieved these results despite the market uncertainty and macro headwinds affecting certain areas of our business. In the quarter, we grew sales 3% year-over-year in constant currency, and we delivered adjusted earnings per share of $2, which is our fifth consecutive quarter of adjusted earnings per share of $2 or greater. We continue to manage our operations with a sharp focus on efficiency.

Speaker 3: With that, let me turn the call over to Phil Gallagher. Phil?

Speaker 5: Thank you, Joe, and thank you everyone for joining us on our third quarter fiscal year 2023 earnings conference call. I am pleased to share that we delivered another quarter of solid financial results, which exceeded the top end of our sales and earnings guidance.

Speaker 5: More importantly, we achieved these results despite the market uncertainty and macro headwind affecting certain areas of our business. In the quarter of the new sales, 3% year-over-year in constant currency.

Speaker 5: And we delivered a adjusted earnings per share of $2, which is our fifth consecutive quarter of adjusted earnings per share of $2 or greater.

Phil Gallagher: That, coupled with a stronger than expected performance in Europe and the Americas, enabled us to achieve a 5% operating margin in our electronic components business and a 4.8% operating margin for Avnet overall. During the quarter, we saw sales growth in the Americas and EMEA regions offset by a sales decline in Asia. The decline in Asia was due to the expected seasonal impact from the Lunar New Year holiday and from an overall slowdown in demand in certain Asian markets. From an overall demand perspective, in the quarter, we saw continued strength in key vertical segments, most notably industrial, transportation, and defense aerospace. Demand signals continue to realign globally, resulting in lead times trending down on several component categories. However, we continue to see constraints and shortages on other products, such as high-end MCUs, power, and MOSFETs.

Speaker 5: We continue to manage our operations with a sharp focus on efficiency.

Speaker 5: That coupled with a stronger than expect performance in Europe and the Americas enabled us to achieve a 5% operating margin in our electronic components business and a 4.8% operating margin for AdNet overall.

Speaker 5: During the quarter, we saw sales growth in the Americas and the MIA regions offset by sales decline in Asia.

Speaker 5: The decline in age was due to the expected seasonal impact from the Lunar New Year holiday and from an overall slowdown in demand in certain Asian markets.

Speaker 5: From an overall demand perspective in the quarter, we saw continued strength in key vertical segments, most notably industrial, transportation, and defense aerospace.

Speaker 5: The man signals continue realign globally resulting in lead times training down on several component categories. However, we continue to see constraints and shortages on other products such as high and M.C.U.'s power and MOSFETs. Lead times for these constraint categories have improved.

Phil Gallagher: Lead times for these constrained categories have improved, but more modestly than other categories. Overall, semi lead times are above pre-pandemic levels, and IP lead times are modestly above pre-pandemic levels. The pricing environment remained stable during the quarter. At the beginning of the quarter, we still saw a handful of suppliers raise prices primarily due to the higher input costs for the components. As a result of the current demand and lead time conditions, our book-to-bill ratio remains below parity in all regions, at levels similar to last quarter, and our backlog remained relatively consistent with the end of last quarter. Inventory levels remain elevated across the supply chain, and our inventory increased in Q3 as well. Our customers' inventory levels are elevated due to a combination of softer demand in certain areas and overall market conditions as it relates to component availability.

Speaker 5: but more modestly than other categories.

Speaker 5: Overall, semilead times are above pre-pendemic levels, and IPAD times are modestly above pre-pendemic levels.

Speaker 5: The pricing environment remains stable during the quarter. At the beginning of the quarter, we still saw handful of suppliers raise prices primarily due to the higher input cost for the components.

Speaker 5: As a result of the current demand elite time conditions, our book to bill ratio remains below parity in all regions.

Speaker 5: at levels similar to last quarter, and our backlog remained relatively consistent with the end of last quarter.

Speaker 5: Inventory levels remain elevated across the supply chain, and our inventory increased in the third quarter as well. Our customers' inventory levels are elevated due to a combination of softer demand in certain areas and overall market conditions as it relates to component availability.

Phil Gallagher: They continue to seek certain key constrained parts that are needed to complete their end products. As a result, we are managing through adjustments to our backlog. While cancellation rates are up, they're still within our normal range. We remain confident in the quality of our inventory and are working to improve turnover and to ensure the inventory on hand is aligned to the near-term sales outlook. So with that, let me turn to the highlights for our business. Our electronic components business sales grew 4% year-over-year in constant currency, which led to EC delivering a 5% operating income margin. Our targeted margin is above 5%, so we were pleased that EC achieved this milestone this quarter, as it demonstrates our ability to continue to drive operating leverage as we focus on top-line sales growth.

Speaker 5: They continue to seek certain key constraint parts that are needed to complete their end products.

Speaker 5: As a result, we are managing through adjust restore backlog. While cancellation rates are up, they're still within our normal range.

Speaker 5: We remain confident in the quality of our inventory and our work is to improve turnover and to ensure the inventory on hand is aligned to the near term sales outlook.

Speaker 5: So with that, let me turn to the highlights for our business. Our electronic components business sales grew 4% year-of-year in constant currency, which led to EC delivering a 5% operating income margin. Our targeted margin is above 5%, so we're pleased that EC achieved this milestone.

Phil Gallagher: I am particularly pleased with the Americas team delivering another solid quarter of sales and operating income. Our Americas business delivered the highest level of operating income margin in the past several years. The EMEA region delivered its second consecutive record sales quarter, and our Asia business was able to maintain their operating margin despite the seasonally lower sales. Asia has been impacted by reduced demand in verticals like consumer and communications. We saw overall softness in key markets like China, leading to quarter-over-quarter sales declines, which we expect to continue for at least the next two quarters. We achieved another quarter of record revenue and gross profit dollars for demand creation, further proof of the value we provide to our customers and supplier partners despite the mixed market conditions. Demand creation and customer expansion remain critical to us, as well as our supplier partners.

Speaker 5: This quarter adds a demonstrates our ability to continue to drive operating leverage as we focus on top line sales growth.

Speaker 5: I am particularly pleased with the American team delivering another solid quarter of sales and operating income.

Speaker 5: Our America's business delivered the highest level of operating income margin in the past several years.

Speaker 5: The Amir region delivered its second consecutive record sales quarter. Our Asia business was able to maintain their operating margin despite the seasonally lower sales.

Speaker 5: Asia has been impacted by reduced demand in verticals like consumer and communications. We saw overall softness in key markets like China leading to quarter of a quarter sales declines, which we expect to continue for at least the next two quarters.

Speaker 5: We choose another quarter of record revenue and growth profit dollars for demand and creation. Further proof of the value we provide to our customers and supplier partners despite the mixed market conditions.

Phil Gallagher: Just a few weeks ago, I was able to meet with leaders of 3 of our top 10 suppliers, and one of the first things they wanted to discuss was demand creation and how Avnet can continue to help them grow their sales and increase their customer accounts. The success of our engineering teams and the digital design tools have been key to improving our margins, particularly in the Americas and EMEA regions. Roughly 1/3 of our revenues come from demand creation, and this strategic priority is one of the elements that should enable us to achieve our higher margin goals in the medium term. Now, let's turn to our Farnell business. Farnell's sales increased 9% sequentially and 1% year-over-year in constant currency.

Speaker 5: Demand creation and customer expansion remain critical to us as well as our supplier partners. Just a few weeks ago I was able to meet with leaders of three of our top 10 suppliers. And one of the first things they wanted to discuss was demand creation and how adnet can continue to help them grow their sales and increase their customer accounts.

Speaker 5: The success of our engineering teams and the digital design tools have been key to improving our margins, particularly in the Americas and the Middle Regions. Roughly one-third of our revenues come from demand creation, and this strategic priority is one of the elements that should enable us to achieve our higher margin goals in the medium term.

Speaker 5: Now, let's turn to our Cornell Business.

Phil Gallagher: Farnell's operating margins held steady sequentially at 9% during the quarter and were down year over year, primarily due to the expected unwinding of pricing premiums as certain components become more available. Overall, Farnell continues to be our highest margin business, and we expect the operating margin to expand as supply constraints on single-board computing devices ease in the first half of our fiscal 2024. To be clear, there continues to be a healthy backlog for single-board computers, and when the semiconductor components become more available to complete their production, we expect to begin to realize improved sales as we move into the September quarter. We have made substantial investments in Farnell's inventory offerings over the past 3 years and plan to make additional investments where we see the potential for accelerated growth and a solid return.

Speaker 5: Arnell's sales increased 9% sequentially and 1% year-of-a-year in constant currency.

Speaker 5: Farnels operating margins held steady sequentially at 9% during the quarter and were down year over year, primarily due to the expected unwinding of pricing premiums as certain components become more available. Overall, Farnels continues to be our highest margin business and we expect the operating margin to expand as supply-gauge strength on single-board computing devices, e.es, the first half of our fiscal 2024.

Speaker 5: To be clear, there continues to be a healthy backlog for single-board computers, and when the semi-locked components become more available to complete their production, we expect to begin to realize improved sales as we move into the September quarter. We have made substantial investments in front of inventory offerings over the past three years.

Phil Gallagher: Our Farnell inventories have increased nearly 50% in the past year, as Farnell has expanded its line card, replenished inventory levels, and continued to focus on both on-the-board and off-the-board growth opportunities. Farnell's e-commerce business mix continues to improve, with 56% of Farnell's total sales and 74% of total orders placed through their e-commerce platform. We remain excited about Farnell and continue to see opportunity to leverage Farnell's and electronic components' unique and synergistic collaboration, which is a key differentiator for Avnet. Our near-term milestone is driving Farnell to over $2 billion of annual sales at double-digit operating margins. While we are pleased with the sales and earnings results for our Q3, we are closely monitoring market conditions and the impact of component lead times on our backlog and inventory levels as products become more available.

Speaker 5: and plan to make additional investments where we see the potential for accelerated growth and a solid return.

Speaker 5: Our F1L limitaries have increased nearly 50% in the past year. As F1L has expanded its line card, replenish inventory levels, and continue to focus on both on the board and off the board growth opportunities.

Speaker 5: Farnels e-commerce business mix continues to improve with 56% of Farnels total sales and 74% of total orders placed through their e-commerce platform.

Speaker 5: We remain excited about Furnell and continue to see opportunities of leverage for NELs and electronic components unique and synergistic collaboration, which is a key differentiator for AdNet. Our near-term milestone is driving Furnell to over $2 billion of annual sales at double-digit operating margins. While we are pleased with the sales and earnings results for our third quarter,

Speaker 5: We're closely monitoring market conditions and the impact of component lead times on our backlog and inventory levels has products become more available.

Phil Gallagher: We also continue to manage through the impact of inflation and higher interest rates on our overall business, which we have successfully done over the past few quarters. In the same way that demand outstripped supply over the past 2 years, supplier product has begun to exceed overall demand. Our current view, supported by our supply chain industry tracking metrics, is that we're experiencing an inventory correction that will take a few quarters to play out. As we manage through this correction phase, we will continue to work with both our supplier partners and customers to regulate incoming orders and prioritize getting the right inventory levels to support sales and improve our turns. Although the market correction is underway, we are not overly concentrated to any supplier or end market.

Speaker 5: We also continue to manage the impact of inflation and higher interest rates on our overall business, which we have successfully done over the past few quarters.

Speaker 5: In the same way that demand assets supply over the past two years, supplier product has begun to exceed overall demand. Our current view, supportive of our supply chain industry tracking metrics, as that we're experiencing an inventory correction that will take a few quarters to play out.

Speaker 5: As we manage through this correction phase, we will continue to work with both our supplier partners and customers to regulate incoming orders and prioritize getting the right inventory levels to support sales and improve our terms. Although the market correction is underway, we are not overly concentrated to any supplier and market.

Phil Gallagher: We continue to believe that due to our balanced line card, combined with the diverse end markets we serve, we are well positioned to outperform the overall components market, to gain market share, and expand our operating margins when market conditions normalize. With that, I'll turn it over to Ken to dive deeper into our Q3 results.

Speaker 5: We continue to believe that due to our balance line card combined with a diverse and market we serve We're well positioned to outperform the overall components market the gay market share and expand our per-earny margins when market conditions normalize

Ken Jacobson: Thank you, Phil. Good afternoon, everyone, and thank you for your interest in Avnet. With another quarter of year-over-year sales and operating income growth, we believe our third quarter financial performance demonstrates further progress toward achieving our medium-term financial targets, led by the 5% operating income margin achieved in our electronic components business. Our sales for the quarter were $6.5 billion, modestly higher year-over-year and exceeding the top end of our guidance range. In constant currency, sales growth was 3% year-over-year. On a sequential basis, sales were down 5% in constant currency, which is lower than our historical seasonal trend of sequential sales growth. Sales grew year-over-year, led by EMEA with nearly 10% growth and the Americas with 5% growth. This sales growth was offset by a decline in Asia of 10%.

Speaker 5: With that, I'll turn it over to Ken to dive deeper into our third quarter results.

Speaker 2: Thank you Phil. Good afternoon everyone and thank you for your interest in AbNet.

Speaker 6: With another quarter of your-over-year sales and operating income growth, we believe our third quarter financial performance demonstrates further progress toward achieving our medium-term financial targets led by the 5% operating income margin achieved in our electronic components business.

Speaker 6: Our sales for the quarter were $6.5 billion, modestly higher year over year, and exceeding the top end of our guidance range. In constant currency, sales growth was 3% year over year. On a sequential basis, sales were down 5% in constant currency, which is lower than our historical seasonal trend of sequential sales growth. Sales grew year over year, led by a Mia with nearly 10% growth and the emergency.

Ken Jacobson: In constant currency, year-over-year sales grew 15% in EMEA, 5% in the Americas, and declined 8% in Asia. From an operating group perspective, electronic component sales grew 1% year-over-year or 4% in constant currency. Quarter-over-quarter, electronic component sales were 6% lower in constant currency. Farnell sales declined 3% year-over-year, but were up 1% from the prior year in constant currency and 9% higher sequentially in constant currency. Excluding sales of Single-board computers, Farnell sales grew 2% year-over-year in constant currency. For Q3, gross margin of 12.5% improved 79 basis points quarter-over-quarter and was relatively flat year-over-year. The sequential improvement in gross margin was primarily due to higher gross margins across all of our regions and from the seasonal shift in sales mix from Asia to the Western regions experienced every Q3.

Speaker 6: in currency. Quarter over quarter of electronic component sales were 6% lower in constant currency.

Speaker 6: For our NL sales declined 3% year over year, but we're up 1% from the prior year in constant currency and 9% higher sequentially in constant currency.

Speaker 6: Excluding sales of single-board computers, Farnale sales grew 2% year-over-year in Fountain, Currently.

Speaker 6: For the third quarter, gross margin of 12.5% improved 79 basis points quarter over quarter and was relatively flat year over year. The sequential improvement in gross margin was primarily due to higher gross margins across all of our regions and from the seasonal shift in sales mix from Asia to the Western regions

Ken Jacobson: We continued to maintain discipline around SG&A expenses as adjusted operating expenses were $497 million for the quarter, down 2% year-over-year and up 3% sequentially. Foreign currency negatively impacted operating expenses by $12 million in Q3 as compared to Q2. As a percentage of gross profit dollars, adjusted operating expenses were 61% in the quarter, 138 basis points lower than a year ago and 41 basis points lower than last quarter. For Q3, we reported record adjusted operating income of $315 million, which increased 4% year-over-year and grew more than 2 times greater than sales in constant currency. This is the ninth consecutive quarter of operating income growth, exceeding our sales growth by more than 2 times.

Speaker 6: experience every third quarter.

Speaker 6: We continue to maintain discipline around S-GNA expenses as adjusted operating expenses were $497 million for the quarter, down 2% year-over-year, and up 3% sequentially. Foreign currency negatively impacted operating expenses by $12 million in the third quarter as compared to the second quarter.

Speaker 6: As a percentage of gross profit dollars adjusted operating expenses were 61% in the quarter, 138 basis points lower than a year ago, and 41 basis points lower than last quarter.

Speaker 6: For the third quarter, we reported record-adjusted operating income of $315 million, which increased 4% year-over-year, and grew more than two times greater than sales and constant currency.

Ken Jacobson: Our adjusted operating margin was 4.8% in Q3, which improved 15 basis points year-over-year and improved 36 basis points quarter-over-quarter. By operating group, electronic components operating income was $305 million, up 15% year-over-year. EC operating margin was 5%, up 64 basis points year-over-year and up 34 basis points quarter-over-quarter. All three EC regions saw year-over-year operating margin expansion, led by our EC Americas business, which expanded operating margin by more than 80 basis points. Farnell operating income was $41 million, down 41% year-over-year. Farnell operating margin was 9% in the quarter, down 589 basis points year-over-year, but held steady quarter-over-quarter. Farnell operating margin continued to be impacted by the expected unwinding of pricing premiums experienced due to component shortages and from unfavorable changes in foreign currency exchange rates.

Speaker 6: This is the ninth consecutive quarter of operating income growth exceeding our sales growth growth rate more than two times.

Speaker 6: Our adjusted operating margin was 4.8% in the third quarter, which improved 15 basis points year over year and improved 36 basis points quarter over quarter.

Speaker 6: By operating group, electronic components operating come with $305 million, up 15% year over year.

Speaker 6: EC operating margin was 5% up 64 basis points year over year and up 34 basis points quarter over quarter. All three EC regions saw year over year operating margin expansion led by our EC America's business which expanded operating margin at more than 80 basis points.

Speaker 6: For now, operating income was $41 million down 41% year over year.

Speaker 6: For now, operating margin was 9% in the quarter, down 589 basis points year over year, but health steady quarter over quarter. For now, operating margin continued to be impacted by the expected unwinding of pricing premiums experienced due to component shortages and from unfavorable changes in foreign currency exchange rates. During the quarter, the for now operating margin was also impacted by certain non-recurring expenses.

Ken Jacobson: During the quarter, the Farnell operating margin was also impacted by certain non-recurring expenses recognized in the quarter. Farnell continues to be the highest margin business within Avnet, and overall operating margins continue to benefit from our focus on their growth and continued investment in their inventories, systems, and distribution centers. We expect Farnell operating margins to remain at similar levels for the fourth quarter of fiscal 2023, with improvements in operating margin beginning when certain components impacting the completion of single-board computers become more available. Turning to expenses below operating income, third quarter interest expense of $72 million increased by $46 million year-over-year and $13 million quarter-over-quarter, primarily due to a combination of increases in interest rates and from higher average borrowings to support working capital increases. This increase in interest expense negatively impacted adjusted diluted earnings per share by 37 cents year-over-year.

Speaker 6: at similar levels for the fourth quarter of fiscal 2023, with improvements in operating margin beginning when certain components impacting the completion of single board computers become more available.

Speaker 6: Turning to expenses below operating income, third quarter interest expense of $72 million increased by $46 million year-over-year and $13 million quarter-over-quarter. Primarily due to the combination of increases in interest rates and from higher average borrowings to support working capital increases.

Ken Jacobson: Our adjusted effective income tax rate was 24.5% in the quarter. Adjusted diluted earnings per share were $2 for the quarter, which decreased 7% year-over-year, but were flat quarter-over-quarter. Differences in foreign currency exchange rates negatively impacted adjusted diluted earnings per share by $0.09 year-over-year. Turning to the balance sheet and liquidity. During the quarter, working capital increased by $232 million, including a $381 million increase in inventories. Foreign currency negatively impacted the increases in working capital by $62 million overall, of which $45 million impacted inventory. As a result of this working capital increase, working capital days were 96 days for the quarter, which increased 12 days quarter-over-quarter. Our inventory days increased by approximately 9 days, and our receivable days increased by approximately 2 days quarter-over-quarter.

Speaker 6: This increased and interest expense negatively impacted adjusted diluted earnings per share by 37 cents a year over year.

Speaker 6: All right, just an effective income tax rate was 24.5% in the quarter.

Speaker 6: Adjusted diluted earnings per share were $2 for the quarter, which decreased 7% year over year, but were flat quarter over quarter. Differences in foreign currency exchange rates negatively impacted adjusted diluted earnings per share by $0.9.

Speaker 6: During the quarter, working capital increased by $232 million, including at $381 million increase in eminence.

Speaker 6: for an emergency negatively impacted the increases in working capital by $62 million overall of which $45 million impacted inventory.

Speaker 6: As a result of this working capital increase, working capital days were 96 days for the quarter, which increased 12 days quarter over quarter. Our inventory days increased by approximately 9 days and our receivable days increased by approximately 2 days quarter over quarter. Our inventory is grew during the quarter and as Phil mentioned in his remarks.

Ken Jacobson: Our inventories grew during the quarter, and as Phil mentioned in his remarks, this is consistent with a broader trend across the supply chain and our customers. The quality and freshness of our inventory continues to be good. Consistent with last quarter, inventory turnover slowed in Q3 as customers' requests for rescheduling of product shipments continued as customers managed through their own inventory and production timing challenges. Our return on working capital continues to be more than 2 times greater than our cost of capital, however. In Q3, we generated $18 million of cash from operations, and we expect to generate positive cash flow from operations in Q4. Our debt decreased by approximately $80 million. We ended the quarter with a gross leverage of 2.3 times, which was an improvement from Q2.

Speaker 6: This is consistent with the broader trend across the supply chain in our customers.

Speaker 6: The quality and freshness of our inventory continues to be good. Consistent with last quarter, inventory turnover slowed in the third quarter as customers request for rescheduling of product shipments continued as customers manage through their own inventory and production timing challenges. Our return on working capital continues to be more than two times greater.

Speaker 6: than our cost of capital however. In the third quarter we generated 18 million dollars of cash from operations and we expect to generate positive cash flow from operations in the fourth quarter.

Speaker 6: Our debt decreased by approximately $80 million. We ended the quarter with a gross leverage of 2.3 times which was an improvement from the second quarter.

Ken Jacobson: At quarter end, we had approximately $750 million of available committed borrowing capacity, and our teams continue to work on selling inventory on hand and collecting receivables to provide additional liquidity. With regard to our capital allocation, in the near term, we continue to prioritize the needs of our business, including working capital and capital expenditures. During Q3, cash used for capital expenditures was $26 million.... For the long term, we remain committed to our roadmap of delivering a reliable, increasing dividend and share repurchases to increase our shareholder value when we believe our shares are undervalued by the market, which continued to be the case in Q3. In Q3, we paid our quarterly dividend of $0.29 per share or $27 million.

Speaker 6: At quarter end, we had approximately $750 million of available committed borrowing capacity, and our teams continued to work on selling inventory on hand and collecting receivables to provide additional liquidity.

Speaker 6: With regard to our capital allocation, in the near term, we continue to prioritize the needs of our business, including working capital and capital expenditures. During the third quarter of cash used for capital expenditures was $26 million.

Speaker 6: our shareholder value when we believe our shares are undervalued by the market. Which continue to be the case in the third quarter.

Ken Jacobson: We have $319 million left on our current share repurchase authorization as we enter Q4. Book value per share improved to approximately $50 a share, or a sequential increase of approximately $2 a share, due primarily to our strong earnings for the quarter. Turning to guidance. For Q4 of fiscal 2023, we are guiding sales in the range of $6.1 to 6.4 billion, and adjusted diluted earnings per share in the range of $1.60 to $1.70. Our Q4 guidance is based on current market conditions and implies a sequential sales decline of 1% to 6%. This guidance assumes below traditional seasonality in sales across all regions.

Speaker 6: In the third quarter, we paid our quarterly dividend of $0.29 per share or $27 million. We have $319 million left on our current share repurchase authorization as we enter the fourth quarter. Book value per share improved to approximately $50 a share.

Speaker 6: or a sequential increase of approximately $2 a share, do primarily to our strong earnings for the quarter. Turning to guidance. For the fourth quarter of fiscal 2023, we are guiding sales on the range of $6.1 billion to $6.4 billion and adjusted deluded earnings per share in the range of $1.60 to $1.70.

Speaker 6: Our fourth quarter guidance is based on current marking additions and implies a sequential sales decline of 1% to 6%. This guidance assumes below traditional seasonality in sales across all regions.

Ken Jacobson: This guidance also assumes similar interest expense compared to the third quarter, an effective tax rate of between 22% and 26%, and 93 million shares outstanding on a diluted basis. In closing, I want to thank our team for delivering another solid quarter of year-over-year operating income growth and margin expansion. Our team continues to deliver great results while demonstrating our value to our customer and supplier partners. With that, I will turn it back over to the operator to open it up for questions. Operator?

Speaker 6: This guidance also assumes similar interest expense compared to the third quarter, an effective tax rate of between 22 and 26 percent.

Speaker 6: and 93 million shares outstanding on a diluted basis. In closing, I want to thank our team for delivering another solid quarter of your over-year operating income growth and margin expansion. Our team continues to deliver great results while demonstrating our value to our customer and supplier partners. With that, I will turn it back over to the operator to open it up for questions.

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. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove that question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for any questions. Our first question comes from the line of Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Speaker 2: Operators. Thank you. Ladies and gentlemen, we will be now be conducting a question and answer session.

Speaker 2: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove that question from the queue.

Speaker 2: for participants using speaker equipment and maybe necessary to pick up your hands up before pressing the star keys. One moment please will we pull for any questions.

Speaker 2: In our first question comes from the line of Rupaluturia with Bank of America. Please proceed with your question. All right, thanks for taking my questions. Phil, last quarter you had expected in 3Q both Europe and America's revenues to be flat to slightly down.

Ruplu Bhattacharya: Hi, thanks for taking my questions. Phil, last quarter, you had expected in Q3 both Europe and Americas' revenues to be flat to slightly down sequentially, but they grew. So what was better than expected? Which products or what- which verticals came in better than you had thought? And then when you look at the environment-- demand environment today versus 90 days ago, do you think that the demand is, the end markets are stronger or weaker? And can you talk about the pricing environment? I mean, as things are -- as the lead times are coming down, are you seeing any change in pricing?

Speaker 2: And can you talk about the pricing environment? I mean, as the lead times are coming down, are you seeing any change in pricing?

Phil Gallagher: Yeah, thanks, Ruplu. Appreciate that. We'll start with Europe and Americas. It was really not any one vertical. It's the few we talked about. I mean, automotive or transportation continues in our world to be very good. You know, I always say transportation, that includes your e-bikes, cars, trucks, everything, right? And industrial. The industrial market has held up, frankly, probably a little bit stronger than we had anticipated this time last quarter ago. So it's really those two. And then, of course, in more Americas-centric, the defense and aerospace has been really positive for us. So there are a handful of verticals, and it's pretty, like I said, it's pretty broad across the regions, so real positive.

Speaker 5: Yeah, thanks. We appreciate that. We'll start with Europe and America. It was really not any one vertical. It's the few we talked about. I mean, automotive or transportation continues in our world to be very good. I always say transportation. That includes your...

Speaker 5: ebikes, cars, trucks, everything, right? An industrial market is held up. Frank is probably a little bit stronger than we had anticipated this time last quarter ago. So it's really those two and then of course in more America's

Speaker 5: centric of the defense and aerospace has been really really Positive for us so they're they're to handful of articles and it's pretty like it says pretty broad across the regions So real positives. Yeah on the on the pricing trends, you know what kind of

Phil Gallagher: Yeah, on the pricing trends, you know, we're kind of holding on right now. So, we touched on that in the script, briefly. Actually, in the beginning of the quarter, you know, we had a handful of suppliers that actually raised prices, about upwards of 15 to 20. Still on certain ... Again, this is what's key, Ruplu, on certain technologies, not everything, right? Because the input costs are still there. But other than that, I would say the pricing environment right now is relatively stable. And on the overall question on demand environment, how do I see it going forward? Well, we got some typical seasonality coming into play a bit with the quarter. But I would say kind of steady.

Speaker 5: holding on right now so we touched on that in the script briefly actually to begin into the quarter you know we had the handful of supplies that actually raise prices up upwards of 15 to 20 still rate on certain again it's with key rule certain technology not everything right because the info costs are still there.

Speaker 5: But other than that, I would say the pricing environment right now is relatively stable. And on the overall question on demand environment, how do I see it?

Speaker 5: going forward. We've got some typical seasonality coming into play a bit with the quarter, but I would say kind of steady. Look, we know there's inventory out there, some build-ups and all the verticals to some degree. But right now, I would just say...

Phil Gallagher: You know, look, we know there's inventory out there and some buildups in all the verticals to some degree. But right now, I would just say steady. You know, just kind of, it's holding on right now, and thus the guidance that we gave for our June quarter.

Speaker 5: steady and just kind of it's holding on right now and thus the guidance that we we gave for our June quarter.

Ruplu Bhattacharya: Got it.

Phil Gallagher: It's, it's a very mixed bag out there, Ruplu.

Speaker 5: just kind of it's holding on right now and thus the guidance that we gave for our June quarter. It's very mixed back out there, RuPaul.

Ruplu Bhattacharya: Okay. Yeah, no, thanks for the details there, Phil. Let me ask Ken something on inventory. So it looks like sequentially, inventory was up 8%. Was there some timing issue I think you, you talked about? So when we think about inventory, working capital, and free cash flow, I mean, what's your near-term target in terms of cash conversion cycle, and how should we think about free cash flow going forward?

Speaker 2: Okay, yeah, no thanks for the details there Phil. Let me ask Ken something on inventory. So it looks like sequentially inventory was up 8%. Was there some timing issue I think you talked about? So when we think about inventory working capital and free cash flow, I mean what are, what's your near-term target in terms of cash conversion cycle and how should we think about free cash flow going forward?

Ken Jacobson: Yeah, I think that obviously, with the inventory up, the working capital rates are higher than we'd like. We'd like to get that, you know, back down into the 80s and the low 80s. I would say part of it's timing. You know, there was some stuff that we received at the end of the quarter, but a lot of it's stuff that we received during the quarter and weren't able to ship out. So I wouldn't say there's one particular factor. I mean, about 10% or so is foreign currency, 10% is Farnell, and the 80% is really the bulk of the EC business across the board between all regions. And so, you know, looking into next quarter, you know, we'd expect inventory to be flattish.

Speaker 6: I mean, about 10% or so is foreign currency, 10% is far now, and the 80% is really the bulk of the EC business across the board between all regions..

Ken Jacobson: We still think it's gonna take a couple of quarters to really get through, you know, the inventory levels being elevated.

Speaker 6: And so, you know, looking at into the next quarter, you know, we'd expect inventory to be flattish. We still think it's going to take a couple of quarters to really get through, you know, the inventory levels being elevated.

Ruplu Bhattacharya: Got it. Ken, if I can squeeze one more in, real quick. So the core components margins, even on sequentially $200 million and lower revenues, you know, it grew to 5%, so 30 basis points sequentially. So impressive performance. Can you help us break that down into how much was because of mix or versus volumes versus pricing? And as we think about this going forward, I mean, do you think that this level is sustainable, or at what revenue levels can this margin level of 5% be sustainable? Thank you so much.

Speaker 2: But then, can if I can squeeze one more in real quick. So the core components margins, even on sequentially 200 million lower revenues, it grew to 5%, so 30 basis points, sequentially. So in present performance, can you help us break that down to how much was...

Speaker 2: because of mix or versus volumes or versus pricing. And as we think about this going forward, I mean, do you think that this level is sustainable or at what revenue levels can this margin level of 5% be sustainable? Thank you so much.

Ken Jacobson: Yeah, you know, I think we need to have in the mid-$6 billion to make the 5% sustainable. You know, I will say, as we kind of look out there, we don't really foresee sales in any quarter dropping below $6 billion or really operating margin dropping below 4%, you know, as we currently see it. But getting into the current quarter, you know, we did have a favorable mix. So, you know, about half and half, half of it was a more favorable mix than we thought, but I would point out for EMEA and Americas, that was still below normal seasonal growth. So although we did better than expected in those regions, coming out of the December quarter, it was still lower in terms of growth rates than we'd expect to see in a normal environment.

Speaker 6: Yeah, I think we need to have a in the mid 6Billion to make the 5% sustainable. You know, I will say, as we kind of look out there, we don't really foresee sales in any quarter dropping below 6Billion dollars or really operating margin dropping low 4% as we currently see it.

Speaker 6: But getting into the current core, you know, we did have a favorable mix. So, you know, about half and half, half of it was a more favorable mix than we thought. But I would point out for Amir and America that it was still below normal seasonal growth. So although we did better than expected in those regions, coming out of December quarter, it was still lower in terms of growth rates than we'd expect to see.

Ken Jacobson: You know, and the rest was, you know, a little bit better margin in each of those regions, so they did drive a better mix. We talked about demand creation. So it's all those things we've been talking about, help to contribute to the little bit higher gross margin in all the regions as well.

Speaker 6: in a normal environment. You know, and the rest was, you know, a little bit better margin in each of those regions. So they did drive a better mix. We talked about demand creation. So it's all those things we've been talking about, helped to contribute to the little bit higher gross margin in all the regions as well.

Ruplu Bhattacharya: Thanks for all the details, and congrats on the strong execution.

Phil Gallagher: Thanks, Mukulu.

Operator: And the next question comes from the line of Melissa Fairbanks with Raymond James. Please proceed with your question.

Speaker 2: Thanks for all the details and comments on the strong execution.

Speaker 2: Thanks for all the details and comments on the strong education. Thanks, we will move.

Melissa Fairbanks: Hi, guys. Thanks so much. Congrats on a great quarter and guide. Really nice progress on the margins. It's really good to see in this kind of an environment. I know you're probably tired of talking about it, but I'd like to dig in on the inventory levels. Thanks for providing the color on the FX impact. I'm curious if price inflation is also impacting the new inventory you're bringing in. You've seen continued price increases in the past quarter. We've heard a few suppliers so far this quarter signal that more price increases are coming. And then separately, there's a number of suppliers that have been holding inventory back from the channel, including in distribution. As the supply continues to ease, we'd expect these suppliers to begin releasing more inventory.

Speaker 7: And the next question comes from the line of Melissa Fairbanks with Raymond James. Please proceed with your question. Hi guys, thanks so much. Congrats on a great quarter in guide. Really nice progress on the margins. It's really good to see in this kind of an environment.

Speaker 7: I know you're probably tired of talking about it, but I'd like to dig in on the inventory levels. Thanks for providing the color on the FX impact. I'm curious if price inflation is also impacting the new inventory you're bringing in. You've seen continued price increases in the past quarter. We've heard a few suppliers so far this quarter signal that more price increases are coming.

Speaker 7: And then separately, there's a number of suppliers that have been holding inventory back from the channel, including in distribution. As the supply continues to ease, we'd expect these suppliers to begin releasing more inventory. Is there potential for your inventory levels to continue to rise? Is this happened? I'm going to let's take the first part. I mean, I think...

Melissa Fairbanks: Is there a potential for your inventory levels to continue to rise as this happens?

Ken Jacobson: Hey, Melissa, I'll take the first part. I mean, I think how I'd characterize it is, you know, pricing is clearly an impact, not only to the sales growth, but also the inventory levels. But I would say it's more muted than it was a couple quarters ago. So that's a component. I wouldn't characterize the inventory increase overall, let's say 80% coming from the core business. I wouldn't characterize, let's say, more than 25% coming from pricing. And you kind of see that in our sales growth as well. You know, going back to the question about whether or not inventory levels could rise, I mean, I think that's a possibility. That's what we're aiming to resolve. I would say it rose more than we expected it to rise coming into this quarter.

Speaker 6: How I characterize it is pricing is clearly unimpact not only to the sales growth but also the inventory levels But I would say it's more muted than it was a couple quarters ago So that's a component. I wouldn't characterize the inventory increase overall It's a 80% coming from the core business. I wouldn't characterize let's say more than 25% coming from pricing

Speaker 6: And you kind of see that in our sales growth as well. Going back to the question about whether or not, you know, inventory levels could rise. I mean, I think we, that's a possibility that's where aiming to resolve, I would say it rose more than we expected to rise come into this quarter. But what I would say is, you know, if that happens with certain suppliers that are going to...

Ken Jacobson: But what I would say is, you know, if that happens with certain suppliers that are gonna give us more inventory because of, you know, our demand or our orders, you know, we're working on the other ones, the handful that did, you know, contribute to the increase this quarter. So it all kind of be puts and takes in the overall kind of, you know, ins and outs of inventory.

Speaker 6: give us more inventory because of our demand or our orders. We're working on the other ones, the handful that contribute to the increases quarter. So it all kind of puts and takes in the overall kind of ins and outs of inventory. Yeah, thanks, Ken. Melissa, this is Phil. Thanks for the comments and the questions. Only inventory, I want to re-evacize. It's fresh inventory. It's good inventory. It's not aging. And.

Phil Gallagher: Yeah. Thanks, Ken. And Melissa, this is Phil. Thanks for the comments and the questions. On the inventory, I want to reemphasize, it's fresh inventory, it's good inventory, it's not aging. And it's like any Pareto, there's a handful of concentration where the inventory has really grown, so it's not across the board, right? So it's not every line or every technology. So it's really, I would say, the classic Pareto there with the concentration in a handful. And then the other thing is, you know, we're balancing the customer's requirements, kind of going back to the previous, how do we see demand, you know, and it depends on the vertical. But we're managing the customers, you know, how much can they take?

Speaker 5: If I get any Pareto, there's a handful of concentration where the inventory is really grown. So it's not across the board, right? So it's not every line or every technology. So it's really a classic Pareto there with a concentration in a handful.

Speaker 5: And the other thing is we're balancing the customer's requirements. You kind of go on back to their previous, how do we see demand, you know, and it depends on the vertical. But we're managing the customers, you know, how much can they take? Maybe they might have a little bit too much inventory. So we're trying to manage, you know, getting in that center technology supply chain that the suppliers and the customers and what the real needs are. And you know, we're in a full of all of these customers. So where they maybe can't take it this quarter, hey, can they take it next quarter? And...

Phil Gallagher: Maybe they might have a little bit too much inventory. So we're trying to manage, you know, being in that entire technology supply chain, the-

Melissa Fairbanks: Mm-hmm.

Phil Gallagher: the suppliers and the customers and what the real needs are. And, you know, we're in it for the long haul with these customers, so we're where they maybe can't take it this quarter, hey, can they take it next quarter? Then, and then maybe we have to extend a little bit of AR, as you heard, went out a little bit as well. It's, it's all, you know, kind of hand-to-hand combat on every one of these deals.

Speaker 6: And then maybe we have to extend a little bit of ARs. You heard one out a little bit as well. It's all kind of hand-to-hand combat on every one of these fields. Okay, great. Thanks very much. That's super helpful. Maybe just one really quick follow-up. This might be for 10. So this is definitely not a quote-unquote normal cycle because of some of these supply constraints.

Melissa Fairbanks: Okay, great. Thanks very much. That's super helpful. Maybe just one really quick follow-up. This might be for Ken. So this is definitely not a, quote, unquote, normal cycle, because of some of these supply constraints and, you know, changing behavior of holding more inventory on the supplier side. Does this potentially change the normal countercyclical pattern of the working capital release in your model?

Speaker 7: you know, changing behavior of holding more inventory on the supplier side. Does this potentially change the normal counter-cyclical pattern of the working capital release in your model? I guess I would most I wouldn't say we see it that way. I think, you know, it could take a few more more horrors to get that.

Ken Jacobson: I guess I would, Melissa, I wouldn't say we see it that way. I think, you know, it could take a few more quarters to get that flow going, right? Because typically that normal seasonality would be, sales go down, so therefore, my inventory goes down, and I collect the receivables from those higher sales, and that's what creates the cash. That still holds true, but the inventory hasn't gone down, right? We looked at more cash than we got this quarter, next quarter, you know, but the key is gonna be getting the inventory down to actually create that larger countercyclical effect. So, we don't believe-

Speaker 6: flow going right because typically that normal seasonality would be Sales go down so therefore my inventory goes down and I collect the receivables from those higher sales And that's what creates the cash that still holds true, but the inventory hasn't gone down, right? We look at more cash when we got this quarter next quarter, you know But but the key is going to be getting the inventory down to actually

Melissa Fairbanks: Okay

Ken Jacobson: ... it's changed. Have not seen the inventory, whereas you've seen in other cycles, the inventory goes down a couple quarters after the sales go down.

Speaker 6: create that larger counter-circuable effect. So we don't believe it's changed, have not seen the inventory, whereas you've seen other cycles. The in-mocorg goes down a couple quarters after the sales go down. Okay, great. Thanks very much. That's all for me.

Speaker 6: that larger counter-circuable effects. We don't believe it's changed, have not seen the inventory, whereas you've seen other cycles. The in-machorgue goes down a couple quarters after the sales go down. Okay, great. Thanks very much. That's all for me. Thanks, boys.

Melissa Fairbanks: Okay, great. Thanks very much. That's all for me.

Phil Gallagher: Thanks, Melissa.

Operator: The next question comes from the line of Matt Shirin with Stifel. Please proceed with your question.

Matt Sheerin: Yes. Hey, thanks, and good afternoon, everyone. Phil, just your comments regarding, I mean, I think you said that you expect that it-- the correction or inventory correction to take, a few quarters, and it seems like, you know, you're lagging, some of your suppliers because your, your business obviously is holding up. You're one of the few companies within semiconductors that were still up, year-over-year. So it seems like you're just getting started here. And in terms of your visibility and, and how long that will take. Are you expecting, you know, sequential or, or less than seasonal, trends, at least through the rest of the fiscal year or the calendar year?

Speaker 8: And the next question comes in the line of Matt Sheeran with Steeple. Please proceed with your question. Yes, hey, thanks. Good afternoon, everyone. Phil, just your comments regarding, I mean, I think you said that you expect that it's the correction or inventory correction to take a few quarters. And it seems like you're lagging some of your suppliers because your business obviously is holding up. You're one of the few companies within semi-doctors that were still up year on year. So it seems like you're just getting started.

Phil Gallagher: Yeah, thanks, Matt. Well, first of all, the seasonal trends and the typical seasonality has kind of been thrown out the window, so it's tough to. Let me just tell you what we're seeing. Our guide reflects that. As far as our estimate, based on the backlog we have, the inventory we show pipeline coming in, and the revenue forecast gave me the facts to say, yeah, I think it's about a couple quarter, maybe it's two or three quarter kind of burn off. It's just a very different cycle than we've seen, you know, before. And there's so many mixed signals, Matt. I mean, some verticals, i.e., PC, consumer, you know, are down mobile, and then other ones are up, right? So the industrial continues to be strong or steady and automotive.

Speaker 5: Our guide reflects that. As far as our estimate based on the backlog we have, the inventory we show pipeline coming in and a revenue forecast.

Speaker 5: gave me the facts to say, yeah, I think it's about a couple quarter, maybe it's two or three quarter kind of burn off. It's just a very different cycle than we've seen before. And there's so many mixed signals, Matt. I mean, some vehicles are a PC consumer, you know, are down mobile. And then other ones.

Phil Gallagher: So it's given us just so many different mixed signals this time. But that's our, that's our estimate. We think that the demand and what we see in our forecast, we're getting in from our customers, is gonna allow us to 2 to 3 quarter cycle. And I think it's a correction, Matt, more than a cycle.

Matt Sheerin: Got it. And in terms of, you know, your own inventory build, is that a function of suppliers maybe shipping ahead of their lead times because of their own, you know, maybe seeing cancellations from other customers, and then you seeing cancellations and pushouts from customers, and that's why sort of it's piling up, if you will?

Phil Gallagher: Yeah, I don't know. I don't think so. I think they're catching up. I mean, you know, because lead times in many cases are coming in, so they're catching up to the old promised dates or required dates. We're not. I mean, I really want to emphasize, and the suppliers, as noted earlier, have been working with us, that they're not shipping early, so we are not taking in products quarters early or anything along those lines. Some of it's just catching up so quickly, then you can't pass it on to the customers, because even if they were missing the goals, they can't build it all in a month, right? So they got to plan out their manufacturing if things are coming in quicker than they thought.

Phil Gallagher: So it's kind of a, like I said earlier, everyone's a bit of a one-off. But I do not believe that the suppliers want to ship early or are shipping early at this point in time. We're not seeing that.

Matt Sheerin: Got it. I know you're guiding revenues down roughly 4% sequentially. Would you expect all regions to be down sequentially?

Ken Jacobson: Yeah. I mean, I think I would say normally, Matt, Asia would be up a little bit coming off the Lunar New Year, and they're up less than we'd like, and then, you know, EMEA and Americas would be down. It's kind of, so it's a little bit more unfavorable mix than it was in Q3, I would say, with the $6.25 billion.

Speaker 6: Yeah, I think I would say normally Matt Asia would be up a little bit coming off the lunar year and they're up less than we'd like and then, you know, Amia and America's would be down. It's kind of a little bit more unfavorable mix than it was in the third quarter. I would say with the with the 6.25 billion. And that's typical in the West, Matt. Europe and America is coming down from the March quarter, Stibbler or one of our quarter quarters. Okay, and just lastly on that on that interest expense, which is obviously significantly year over year and you're still guiding to that 70 million dollar level or so. I would think that that would be a priority for you in terms of your balance sheet to try to work down those short term bar rings. Is there a plan there?

Phil Gallagher: And that's typical in the West, Matt. You know, Europe and America is coming down from the March quarters, typically are one of the largest quarters.

Matt Sheerin: Okay. And just lastly on that, on that interest expense, which is up obviously significantly year-over-year, and you're still guiding to that $70 million level or so. I would think that that would be a priority for you in terms of your balance sheet, to try to work down those short-term borrowings. Is there a plan there?

Ken Jacobson: Yeah, Matt, I mean, I think that's the priority. As cash gets generated, we pay down the debt, and I think we're kind of hit the plateau there with the, with the peak there, the $70 million. But yeah, we got to work that down as well. And clearly, you can see the headwind it's created with, with the EPS, right? Our EPS would be a lot more robust hadn't we had that, you know, additional expense to fund the working capital.

Matt Sheerin: Yep, fair enough. Okay, thanks for the answers. I appreciate it. Thanks.

Speaker 6: robust, hadn't we had that, you know, additional expense to fund the working capital. Yep, fair enough. Okay, thanks for the answers. I appreciate it. Thanks. Thanks, Matt. And ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one on your telephone keypad. A confirmation tele will indicate that your line is in the queue. You may press star two to remove that question from the queue. For participating speaker equipment, it may be necessary to pick up your hands up before pressing the star keys. Our next question comes from the line of Joe Quattrochi with Wells Fargo. Please proceed with your question.

Phil Gallagher: Thanks, Matt.

Operator: Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove that question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Joe Quattrocchi with Wells Fargo. Please proceed with your question.

Joe Quatrochi: Yeah, thanks for taking the questions. My first one, I wanted to ask about the, the change in collections that you're seeing. I think you talked about that last quarter, and maybe reference it again, this quarter. I guess, are you seeing that spread to additional customers? And then, kind of coupled with that, are there any sort of change in customer behaviors, just given kind of some of the banking issues that we've seen across several of the regional banks?

Ken Jacobson: Yeah. Thanks, Joe. I mean, I think from an overall quality of the receivables, aging of the receivables, I would actually say it improved a little bit from the end of December. Part of that blip in December was, you know, our customers' year-ends and things like that. But, you know, I think it's more of the same. You know, it's payment terms are stretched out a little bit, but we're collecting, and we don't have any near-term headwinds we're seeing from customers going bankrupt, and that's, you know, part of the inventory equation as well. So I think we feel pretty good that we're in a steady state there in terms of collections, and we're working with our customers. So feel good there.

Speaker 6: Yeah, thanks Joe. I mean, I think from an overall quality of the receivables, the Asian receivables, I would actually say it improved a little bit from the end of December . Part of that blip in December was customers year-ends and things like that. But I think it's more of the same. You know, it's payment terms are stretched out a little bit, but we're collecting. And we don't have any near-term headwinds we're seeing from customers going bankrupt. And that's part of the inventory equation as well. So I think we feel pretty good that we're in a steady state there in terms of collections and we're working with our customers. So feel good there. You know, in the banking situation, you know, we were able to and congratulations to our treasure team to close a debt deal right before some of that noise happened to give us a little bit more liquidity.

Ken Jacobson: You know, on the banking situation, you know, we were able to, and congratulations to our treasury team, to close a debt deal right before some of that noise happened, to give us a little bit more liquidity. We're glad we were able to get in before the noise. You know, we had some customers that had their banking in some of these, you know, regional institutions that were impacted, but overall, it's not been an impact to us, I would say.

Speaker 6: We're glad we were able to get in before the noise. We had some customers that had their banking and some of these regional institutions that were impacted, but overall it's not been an impact to us, I would say.

Phil Gallagher: Yeah, I just would add on the AR, AR's receivables is, you know, strategic for us, right? So, we knowingly are working with our customers, so there's no real surprises on the AR going out. And we're, as we get the inventory in, if they can't afford to take it right now, we'll hold a little bit more, or if we ship it, we extend their receivable. It's again, they're all one-on-one conversations with the customers. Because again, we're in it for the long haul. We wanna keep them viable and keep them afloat in some cases. So. But, we, I've been really proud of the credit and collections team. They've done a phenomenal job thus far.

Speaker 5: One-on-one conversations with with the customers because again, we're in for the long haul Want want to keep them viable and keep keep them afloat in some cases so Really proud the credit and questions seem to be done phenomenal job thus far Got it and then just the quick poll up and I followed as I missed it He said that the total book to bill was relatively the same as last quarter did that change at all really? By region Not really it's a below parity Joe and then some of that you know a negative book to bill is as us moving backlog as well, right? So what we're we're adjusting

Joe Quatrochi: Got it. And then just as a quick follow-up, and I apologize if I missed it, you said that total book-to-bill was relatively the same as last quarter. Did that change at all really by region?

Phil Gallagher: Not really. It's below parity, Joe, and some of that, you know, negative book-to-bill is us moving backlogs as well, right? So what we're adjusting where suppliers are allowing that, and as some of the NCNRs get kind of some relief there, we're managing that as well. So some of that's, I'll call it, self-inflicted, for the right reasons, right? To get the real... 'Cause suppliers want to know what the real pipeline is, too, right? And we want to go to our customers and say, "Hey, do you need this or don't you need it?" So it's, so most of it or much of it is on our own. And the other thing is, we're not seeing as much in the cancellations. The cancellation rates are pretty much within our range, okay?

Speaker 5: where suppliers are allowing that. And if some of the NCNRs get kind of some relief there, we're managing that as well. So some of that's, I'll call it self-inflicted for the right reasons, right, to get the real— because suppliers want to know what the real pipeline is too, right? And we want to go to our customers and say, hey, do you need this or don't you need this? So most of it, or much of it is on our own. And the other thing is we're not seeing—

Phil Gallagher: In that 25% to 30% range. We are seeing some pushouts, right? Which again is not necessarily a bad thing, but the customers are still reluctant to cancel the backlog, which is interesting.

Speaker 5: As much in the cancellations, the cancellation rates are pretty much within our range, and at 30, 25 to 30 percent range, we are seeing some pushouts, right? Which again, it's not necessarily a bad thing, but the customers are still reluctant to cancel the back cloud, which is interesting.

Joe Quatrochi: Got it. Thanks for the color.

Phil Gallagher: Thanks, Joe.

Operator: Hey, everyone, there are no further questions at this time, and I'd like to turn the floor back over to Phil Gallagher for any closing comments.

Speaker 5: Got it. Thanks for the color. Thanks, Joe. Hey, everyone. There are no further questions at this time. And I'd like to turn the floor back over to Phil Gallagher for any closing comments. Yeah, I would just thank everyone for attending today's earnings call and look forward to speaking to you again at our fourth quarter fiscal earnings report in August . Have a great day. Thanks.

Phil Gallagher: Yeah, let me just thank everyone for attending today's earnings call and look forward to speaking to you again at our fourth quarter fiscal earnings report in August. Have a great day. Thanks.

Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Speaker 4: And ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day. Thank you for your participation and have a great day.

Q3 2023 Avnet Inc. Earnings Call

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