Q4 2023 Avnet Inc Earnings Call

Speaker 1: Our presentation will now begin. Welcome to the Avnet 4th Quarter Fiscal Year 2023 Earnings Conference Call.

Speaker 1: I would now like to turn the floor over to Joe Burke, Vice President, Treasury, and Investor Relations for Avnet. D presumption, t hospitality, Used to play for two years.

Speaker 1: Thank you, Paul. I'd like to welcome everyone to the Avnet fourth quarter fiscal year 2023 earnings conference call. This afternoon, Avnet released financial results for the fourth quarter fiscal year 2023, and a release is available on the investor relations section of Avnet's website.

Speaker 1: 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 our website.

Speaker 1: As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict.

Speaker 1: 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.

Speaker 1: Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent form 10Q and 10K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward-looking statements or supply new information.

Speaker 1: regarding the circumstances after the date of this presentation.

Speaker 1: Today's call will be led by Phil Gallagher, Avnet's CEO , and Ken Jacobson, Avnet's CFO . With that, let me turn the call over to Phil Gallagher. Phil? Thank you, Joe, and thank you everyone for joining our fourth quarter and fiscal year 2023 earnings conference call. I am pleased with the execution of our team throughout the year as we continue to drive growth while navigating through market uncertainty. We maintain our momentum for fiscal year 2022 to deliver robust financial results for fiscal 2023.

Speaker 1: including a record of over $8 of earnings per share. Our sales were up more than 13% year over year in constant currency.

Speaker 1: Operating income grew two times greater than sales, and our business units achieved operating leverage as electronic components delivered 4.8% operating margin and Fresnel delivered 9.5% operating margin for the fiscal year.

Speaker 1: As we look ahead with the breadth of our supplier line-guard, our diversified customer base, and the strength of the end-markets they serve, we are well positioned to capitalize on the industry growth expected over the next several years.

Speaker 1: Now, let's turn to four-quarter results.

Speaker 1: In the quarter, we grew 3% year-over-year in constant currency, and we delivered adjusted EPS of $2.06, which is 6 consecutive quarters of adjusted EPS of $2 or greater.

Speaker 1: Similar to last quarter, we continue to drive efficiency in our operations while still making the necessary investments in our business.

Speaker 1: These efficiencies, coupled with the stronger than expected sales in our Americas and immediate businesses, helped us achieve a 5.1% operating margin at electronic components in the quarter.

Speaker 1: It's notable that this is the second consecutive quarter of 5% or greater operating margin at EC and 4.8% adjusted operating margin for Avnet overall, delivering on the margin targets we communicated our investor day in June last year.

Speaker 1: During the quarter, we saw continued year-over-year sales growth in the Americas and EMEA regions, partially offset by expected sales declines in Asia, which was a continuation of the slowdown in demand in certain Asian end markets.

Speaker 1: From an overall demand perspective, we experienced continued strength in key verticals, most notably transportation, automotive, and industrial. We also saw continued solid demand at Defense and Aerospace.

Speaker 1: Average lead times for many components continue to come down, although lead times are still elevated for certain product categories such as high-end microcontrollers, some power, and many of the components that go into the automotive segment.

Speaker 1: Lead times for these constrained categories have improved, but more modestly than other categories.

Speaker 1: As a result of the current demand and lead time conditions, our book to build ratio remains below parity in all regions.

Speaker 1: Similar levels to last quarter.

Speaker 1: Our backlog remains relatively steady and consistent with last quarter as well. While cancellations are elevated, the impact on our backlog has been minimal to date.

Speaker 1: The pricing environment also remains stable during the quarter, with the client in some standard product pricing. We are hearing from some of our supplier partners that they don't expect input costs to come down anytime soon, which was a big driver of price increases over the past few years.

Speaker 1: As we value our customer relationships, our historical approach in our EC business was to merely pass a long pricing increase to our customers without marking them up. We believe this approach is the reason we've seen stable gross margins in our EC business year over year, including this past quarter.

Speaker 1: Turning to our operating group highlights, Electronic Components had a strong year reaching nearly $25 billion in sales.

Speaker 1: Sales for the fourth quarter increased 3% year over year and were flat sequentially. This marks the 12th consecutive quarter of year over year sales growth in our EC business.

Speaker 1: As I mentioned earlier, EC achieved 5.1% operating margin for the quarter, noting our EMEA region achieved a second consecutive record sales quarter with a very strong operating margin, and the Americas team delivered another solid quarter of sales and market share gains.

Speaker 1: From a demand creation standpoint, once again, we have a great quarter for design and engineering activity across all regions.

Speaker 1: high levels of design registrations and wins in prior quarters resulting in yet another quarter of record demand creation sales and gross profit.

Speaker 1: Our customers are engaging our FAEs for new designs for the next generation products, as opposed to the redesign activities that were occurring in the past couple of years to overcome some component shortages.

Speaker 1: Demand creation continues to be an essential capability needed in today's technology supply chain.

Speaker 1: Our EC inventory levels were relatively flat on a sequential basis.

Speaker 1: And as I mentioned on last quarter's earnings call, we expect it will take a couple quarters for the inventory correction to play out.

Speaker 1: This quarter we will characterize our inventory levels as stabilizing. We are optimistic that as we enter calendar 2024 they will more closely align with sales.

Speaker 1: We continue to be confident in the quality of the inventory and our ability to work down inventory days in the quarters to come.

Speaker 1: Moving on to Farnell.

Speaker 1: Following a record sales and margin year in fiscal year 22, Fournelle had a solid year in fiscal 23 with sales of $1.7 billion and operating margins of 9.5%.

Speaker 1: In the fourth quarter, F&L sales were up 1% year-on-year and down 3% sequentially in constant currency.

Speaker 1: Operating margins were affected primarily due to an unfavorable sales mix of lower margin products.

Speaker 1: As constraints on components related to single board computers have now eased, Farnell is making strides in filling the backlog for single board computers, which will help their sales and operating income dollars in coming quarters.

Speaker 1: As I reflect back on fiscal year 23, I am very pleased with the progress we have made with the near-term goals we communicated at Investor Day just over a year ago. We have grown our revenues.

Speaker 1: gained market share, attained our operating margin goals, and achieved a record EPS for the year.

Speaker 1: I'm especially proud of the commitment of our team to execute and deliver in one of the most dynamic and uncertain markets I've seen in my career.

Speaker 1: But there is still more to accomplish and the future is really bright for Avnet.

Speaker 1: As we head into fiscal year 2024, we will continue to make good in our commitments to focus on reducing our inventory levels to be in line with sales, generating cash, and 2,500 for customer, not just your secures.

Speaker 1: and growing operating profits greater than sales.

Speaker 1: Our supplier partnerships continue to be one of our key strengths, which has helped lead to market share gains for several quarters. We are confident that our supplier partners see the value we bring in helping to increase both their sales and customer accounts.

Speaker 1: We are extremely well positioned for the industry growth expected over the next several years. Our line card features substantially all the key technologies our customers need.

Speaker 1: and our high performance line card is unmatched.

Speaker 1: The key end markets we serve, which include industrial, transportation, and defense, are expected to have high growth rates over the next three to four years.

Speaker 1: When combined with our supply chain as a service capabilities and the overall market need for customers to have resilient supply chains, we are really excited about our opportunities at the center of the technology supply chain.

Speaker 1: So with that, let me turn it over to Ken for a look at the financial results for Q4 and the fiscal year.

Speaker 2: 10

Speaker 3: Thank you, Phil. Hello everyone, and thank you for your interest in Avnet.

Speaker 3: We believe our fourth quarter and full fiscal year 2023 performance are a positive validation about our strategy over the past couple years to focus on efficient and effective operations while working closely with our supplier and customer partners at the center of the technology supply chain.

Speaker 3: This continued focus has helped us gain share and makes us a stronger, more profitable company.

Speaker 3: Our sales for the fourth quarter were approximately $6.6 billion, exceeding the top end of our guidance range and up 3% year-over-year. On a sequential basis, sales were up slightly in constant currency.

Speaker 3: Sales growth year over year was led by a record quarter for EMEA with nearly 19% growth and the Americas with 7% growth.

Speaker 3: This growth is partially offset by an expected sales decline in Asia of 12%.

Speaker 3: In constant currency, year-over-year sales grew 17% in EMEA, 7% in the Americas, and declined 11% in Asia.

Speaker 3: From an operating group perspective, electronic component sales grew 3% year over year, both as reported and in constant currency.

Speaker 3: Quarter over quarter, electronic component sales were 1% higher in cost and currency.

Speaker 3: Barnell sales grew 1% year over year both as reported and in constant currency.

Speaker 3: For now, sales were 3% lower sequentially in constant currency.

Speaker 3: For the fourth quarter, gross margin of 12.5% improved 25 basis points year over year and was relatively flat quarter over quarter.

Speaker 3: Gross margin improved year over year primarily due to a greater mix of sales from our western regions.

Speaker 3: Electronic components gross margin was up both year over year and sequentially, primarily due to a greater mix of sales from our western regions.

Speaker 3: For an algros margin was down both year over year and sequentially.

Speaker 3: primarily due to a combination of the unwinding of pricing premiums as on-the-board component lead times have improved, and from unfavorable foreign exchange rate impacts from when products were purchased versus when products were sold.

Speaker 3: We continue to remain focused on maintaining efficient and effective operations.

Speaker 3: Our operating expenses continue to be well controlled as we have been able to grow our sales without any significant increase in overall expenses.

Speaker 3: During the quarter, adjusted operating expenses were $505 million, up 3% year-over-year, and up 2% sequentially.

Speaker 3: foreign currency negatively impacted operating expenses by $3 million sequentially.

Speaker 3: As a percentage of gross profit dollars, adjusted operating expenses were 62% in the fourth quarter, 132 basis points lower than a year ago, and 53 basis points higher than last quarter.

Speaker 3: For the fourth quarter, we reported adjusted operating income of $313 million, which increased 9% year over year and grew three times faster than sales and constant currency.

Speaker 3: This is the tenth consecutive quarter of operating income growth exceeding our sales growth by more than two times.

Speaker 3: Our adjusted operating margin was 4.8% in the fourth quarter, which improved 26 basis points year over year and was flat quarter over quarter.

Speaker 3: By operating group, Electronic Components operating income was $310 million, up 21% year-over-year.

Speaker 3: EC operating margin was 5.1%, up 77 basis points year over year, and essentially flat quarter over quarter.

Speaker 3: The improvement was led by our EC Americas and EC EMEA businesses.

Speaker 3: which both expanded operating margin year over year by more than 80 basis points.

Speaker 3: Barnell operating income was $36 million down 43% year over year.

Speaker 3: For now operating margin was 8.1% in the quarter down 90 basis points quarter over quarter.

Speaker 3: For now, operating margins continue to be impacted by the unwinding of pricing premiums, foreign exchange rate impacts, and from an unfavorable sales mix of lower margin products.

Speaker 3: Our combined operating groups, when excluding our corporate expenses, delivered on our targeted margin goals by achieving a 5.1% operating income margin for fiscal 2023 with a fourth quarter exit operating income margin of 5.3%.

Speaker 3: Turning to expenses below operating income, fourth quarter interest expense of $75 million increased by $45 million year over year and $3 million quarter over quarter. The sequential increase was primarily due to increases in market interest rates.

Speaker 3: Increased interest expense negatively impacted adjusted diluted earnings per share by $0.39 year over year.

Speaker 3: Our adjusted effective income tax rate was 21.6% in the quarter and was 23.9% for the full year.

Speaker 3: Adjusted diluted earnings per share were $2.06 for the quarter, which decreased one penny year over year.

Speaker 3: but was six cents higher quarter over quarter. A better than expected effective income tax rate benefited adjusted diluting earnings per share by approximately six cents in the quarter.

Speaker 3: Turning to the balance sheet in liquidity.

Speaker 3: During the quarter, working capital decreased by $33 million, including an increase in payables of $237 million, offset by $111 million increase in inventories. As a result, our working capital days increased by one day quarter over quarter to 97 days.

Speaker 3: Our inventory days increased by approximately four days, and our receivables days decreased by approximately one day, quarter over quarter.

Speaker 3: Our return on working capital continues to be two times our cost of capital.

Speaker 3: Our inventories increased 2% during the quarter primarily due to increases at Farnell, largely for replenishment,

Speaker 3: and continued investment in inventory breath.

Speaker 3: As Phil mentioned, we believe our inventory levels have stabilized. Near term, we expect inventory levels to be generally consistent with the fourth quarter levels when adjusting for the effects of any strategic initiatives, which would create temporary increases in inventory levels. We continue to work collaboratively with customers to purchase the inventory ordered on their behalf.

Speaker 3: We remain confident in the quality of our inventories and are focused on improving inventory turnover in our related inventory days over the next few quarters.

Speaker 3: Looking to the first quarter, we expect to see a temporary increase in inventories for our EC business due to a strategic opportunity for which inventories will come in towards the end of the first quarter and are expected to ship out during the second quarter.

Speaker 3: In the fourth quarter, we generated $235 million of cash flow from operations, and we expect to generate cash flow from operations in the first quarter.

Speaker 3: Our debt decreased by approximately $51 million during the quarter with a gross leverage of 2.2 times, which was a sequential improvement.

Speaker 3: At quarter end, we had approximately $844 million of available committed borrowing capacity.

Speaker 3: With regard to our capital allocation, in the near term we continue to evaluate all opportunities to drive shareholder returns, including dividends, share buybacks and M&A. But the priority remains to support the needs of our business, including working capital and capital expenditures.

Speaker 3: During the fourth quarter, cash used for capital expenditures was $57 million, and as a reminder, our capital expenditures during fiscal 2023 were elevated due to investments in a new warehouse in Europe .

Speaker 3: In the fourth quarter we paid our quarterly dividend of 29 cents per share or $27 million.

Speaker 3: We have $319 million left on our current share repurchase authorization.

Speaker 3: For the long term, we remain committed to our roadmap of delivering a reliable and increasing dividend and share repurchases to increase our shareholder value when we believe our shares are undervalued by the market which continue to be the case in the fourth quarter.

Speaker 3: Book value per share improved to approximately $51 a share or a sequential increase of approximately $1 per share.

Speaker 3: Turning to guidance, for the first quarter of fiscal 2024, we are guiding sales on the range of $6.15 billion to $6.45 billion and adjusted diluted earnings per share in the range of $1.45 to $1.55. Our first quarter guidance is based on current market conditions and implies a sequential chart on electric and global markets.

Speaker 3: sales growth rate of down 2% to down 6%. This guidance assumes a seasonal mix shift in sales with western regions declining more and Asia sales increasing less than a typical first quarter.

Speaker 3: For for now, we expect near-term reduced operating margins due to a combination of factors, including seasonal sales declines, which includes reduced demand in on-the-board components, and gross margin levels continuing to be pressured due to similar factors that impacted fourth quarter gross margins.

Speaker 3: In response to the expected decline in Fournelle operating margins, we are evaluating the acceleration of previously identified opportunities related to Fournelle operating expenses.

Speaker 3: This guidance also assumes similar interest expense compared to the fourth quarter on effective tax rate of between 22% and 26% and 93 million shares outstanding on a diluted basis.

Speaker 3: In closing, I would like to take this opportunity to thank the entire Avnet team around the world for their outstanding efforts in the fourth quarter and for their hard work in closing out a record year for the company.

Speaker 3: With that, I will turn it back over to the operator to open it up for questions.

Speaker 3: over to the operator to open it up for questions. Operator.

Speaker 4: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker 4: One moment please while we poll for questions. Thank you. Our first question is from Rupalu Bhattacharya with Bank of America. Please proceed with your question.

Speaker 5: Thanks for taking my questions. Phil, can you talk about what surprised you in the quarter and led to the revenue outperformance? You beat the high end of the guidance. Part of that, can you talk about the linearity in the quarter? We had talked about an inventory correction last quarter.

Speaker 6: supply.

Speaker 1: Yeah, let me start with the first part of your question.

Speaker 1: I would say it was a surprise. I would just say it was just terrific execution in the quarter by the teams. The inventory came in and as we've been saying, we're working with the customers to get it back out. I think the teams just did a really nice job. We saw continued strength in the market for a very strong end, industrial, transportation, automotive and of course defense.

Speaker 1: As the quarter went on, it just continued to stay strong. So, maybe that's a surprise, just stay strong. But I think it's really execution by the team. And as we've been saying for quite a long time, Ruth, inventory is not a bad thing, okay, when you have the right inventory, right? So, we're able to get the inventory in and get it back out.

Speaker 1: On the inventory itself, as we touched on the call, you were right last quarter, I said I think it's an industry inventory correction. I think that's still playing out in a two to three quarter timeframe. I think that's basically what we saw as the inventory sequentially were up really modestly.

Speaker 1: So I think that's still playing out and again the inventory is healthy. So it's not a bad thing. And I also want to just note, when we talk about inventory, it's not everything. There's a handful of suppliers that tend to be heavier weighted where we're growing the inventory.

Speaker 1: There's other areas, trust me, we like to have more inventory. So we kind of generalize inventory often as one lump sum, but it's not all inventories the same.

Speaker 1: So hopefully that answered your questionnaire, Blue Blue.

Speaker 5: Thanks for the details there. Phil, if I can ask you about the Farnell operating margins. You mentioned a couple of things for fiscal 1Q. You said that the single board computers are more available, so that should help sales and operating income dollars.

Speaker 5: But you also talked about some, you know, mix issues that maybe persist. And I think Ken talked about some opportunities to reduce costs. So, net of it, if you can talk a little bit about what opportunities you have to reduce cost in for now. And how should we think about segment operating margins? They remain below 10% over the next couple of quarters.

Speaker 5: Or how should we think about this in the near term and medium term?

Speaker 1: Let me go backwards and I'll turn it over to Ken on the expense. We're going to take a few quarters to get back over to 10%, Rupalu in Fournelle. Again, as we talked about, we had some.

Speaker 1: some FX issue in Fournelle and some product mix shipments where some of the

Speaker 1: Some of the products we were getting the upside on which we had talked about in the previous years last 18 months You know Is flattening out or coming down from the pricing pressure standpoint where we had some? What's called non-traditional customers coming in and buying more product from for now? So let's say the the on-the-board components coming down a little bit with some margin ahead win

Speaker 1: with things like single board computer which we've been talking about that were heavily backlogged in, that's starting to catch up with the long pole and the tent parts that we were looking for there. And those shipments are going up and that's good business for us. It just tends to be lower calorie margin. Okay, so it still drives dollars, just not percent. So, as long as sure it's going to be taking us.

Speaker 3: Couple quarters or so to get back in into that a double-digit maybe two or three quarters can on the on opex Yeah, I think roughly you should think about it as hey the opex, you know is things that we have to go after It's not all people I want to be clear that a lot of its You know opportunities freight savings and some of those things and just looking at the operations of this a little closer

Speaker 3: you can think about it as being meaningful to Farnell but not necessarily meaningful to ABNET overall.

Speaker 5: Okay, if I can sneak one more in, Ken. Inventory was up, I think, 2% sequentially. Are we now at a peak for inventory for Avnet's own inventory? I think you said something about easy inventory maybe going up a little bit.

Speaker 5: in the first quarter. So, just in terms of your thoughts on cash conversion cycle and working capital requirements over the next couple of quarters and free cash flow.

Speaker 5: So, just in terms of, you know, your thoughts on cash conversion cycle and working capital requirements over the next couple of quarters and free cash flow. Yeah. So, I think...

Speaker 3: You know easy inventory was up modestly, you know This quarter compared to last quarter and you know, we would like to term the word stabilized You know so flattish inventory levels But what we did comment on is there are there is an opportunity we have Where we're going to inventory late in the quarter and ship it out next quarter. So they're likely to be a temporary

Speaker 3: increase in inventory going to the first quarter, but we still believe stabilizing is the right term. From a cash flow perspective, we were happy to generate over 200 million this quarter. I think the cash flow will continue. You see the sales guidance being down a little bit sequentially, but it's probably still going to take a few quarters to get the cash flow generated out of the inventory.

Speaker 1: is how we look at it with stable inventory levels. Yeah, I'll add to that, Rupal, because it's a good pickup, and thanks, Ken. Any of these opportunities we get, and they come along every now and again, whether it be for a customer or a supplier, they go through a pretty rigorous ROIC.

Speaker 1: modeling with finance involved and what's the cash flow impact and the return. So they're not just something that is happening. It's very strategic. It's positive for the company. It'll just drive up the inventory a bit. It's probably neutral to working capital and should be good returns to the company.

Speaker 1: Outside of that, the inventory should be stable, flatted down a little bit. Okay, thanks for all the details. Appreciate it.

Speaker 7: Thank you.

Speaker 4: Thank you. Our next question is from Joe Quattrochi with Wells Fargo. Please proceed with your question.

Speaker 8: Yeah, thanks for taking the questions. The comments on some pricing pressure that you saw, is that solely in the Sarnel business or are you also seeing that in the electronics components as well?

Speaker 1: Yeah, good question, Joe. Predominantly, it's in for now, it's just the way that they, it's pretty complex, I'm going to try to explain it, but the way that they procure product and sit on it, they have a lower inventory turns, one to two per year, so they just got caught upside down a little bit on the FX, and then just the natural pricing pressures where they had some.

Speaker 1: Again, as we spoke about before, some additional inflation in prior 18 months or so with pricing. On the component side, the

Speaker 1: As we said in the script, when we got the pricing passed on, the increased pricing from the suppliers, we just passed that on. We didn't mark it up again to the end customer. So we made these long-term arrangements. So what we're seeing is actually...

Speaker 1: stabilization in pricing. And in commodities, I call it standard products. Yeah, you're seeing a little pricing pressure there, but you always do. It's multi-source. That's about how you buy and how you sell. So that's not unusual. But in the higher end products...

Speaker 1: high in micros and whatnot. As long as the input costs are continuing to stay where they are or go up, we don't believe there's going to be the pricing pressures or ASP erosions that maybe we've seen in the past. As you know, Joe, gold, silver, palladium, copper,

Speaker 1: Put him down a little bit silver copper. They're still up. Okay, and labor costs remain elevated. So, as long as they remain elevated in the input costs are up. We don't, we don't see the suppliers for the most part, bringing prices down. We'll see, but we don't think so.

Speaker 8: Maybe as a follow-up to that, we're starting to see some reports of just price cuts from some of the foundries in Asia. I mean, I guess, how do you think about the flow-through of that? I assume that probably takes some time to play out to kind of get to where you are in the overall kind of distribution supply chain.

Speaker 1: Yeah, short term, we're reading the same things and seeing some of the same talk to the suppliers, but short term we don't see that have short to medium term any major effect on us. Probably a better question for the suppliers.

Speaker 8: Fair enough. And then just maybe as a follow-up...

Speaker 8: Asia, China weakness continuing. I think last quarter you talked about that last anchor lease, the next two quarters. Has anything changed, I guess, from that view from last quarter? Are you seeing things maybe finding a bottom or getting maybe slightly better just from maybe shipping closer to.

Speaker 8: what in demand is rather than inventory reduction? Yeah, great question.

Speaker 1: So here's how I'd answer. I was just there last week, as a matter of fact, in Asia Pacific. Ken was with me and did business reviews across all the regions, spent a lot of time in Taiwan with the Taiwan team, but also the regional leaders from China, Southeast Asia, and Japan. And as you said, yeah, the demand is definitely...

Speaker 1: down a bit, no question about it. But there's some good signs around optimism over the next, let's say, several quarters. Tough to call it because there might be more optimism in some industrial applications versus consumer or vice versa. We did hear a lot about, and you're reading a lot about the wind, solar, and wind power

Speaker 1: the energy storage and charging that China is basically backing and we're well positioned there. So as we position ourselves, we're not bullish by any stress, but I'm not negative either. I think there's some positive signs that China will bounce back. There's no doubt we're well positioned there. But across the Asia pack.

Speaker 1: Overall, again, stable. Japan has been positive for us. I should add also that we're not overly weighted, Joe. We're not overly weighted to China within Asia or certainly within the total core.

Speaker 4: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.

Speaker 4: Our next question is from Matt Sheeran with Stifel. Please proceed with your question.

Speaker 9: Yes, thank you and hello, Phil and everyone. Phil, just following up on the first question just regarding this cycle, obviously things seem to be holding up better than most people expected, particularly in EMEA in North America and particularly compared to your bigger competitor.

Speaker 9: So as you think about this below seasonal guide for the next quarter, should you expect that to continue into December where that should be below seasonal with this whole correction and down cycle? And would you expect March?

Speaker 1: Thanks Matt. I'll let Ken jump in as well. I appreciate the compliment. Just to reiterate what you said, Europe just remained continuously strong. I mean, December , March, June , in fact, the Rupaul's first question, it's been pretty phenomenal. We're just, as a company and industry, we're well positioned there with the industrial and transportation play.

Speaker 1: And then the Americas has been terrific under Dana's leadership and the team doing a nice job. As far as seasonality beyond, we don't typically guide, as you know, into December or March, because it is tough to call. There's a lot of mixed signals, Matt, out there. I've been using that term, no pun intended, but there's just so many mixed signals.

Speaker 1: As I said in the script, I've seen this much complexity in our industry in a long time because there's still a lot of really good things happening in transportation even still, in charging and battery and industrial that's offsetting some of the other markets. But I...

Speaker 1: You know, I'm going to stick to what I said last quite. It gets a two to three quarter more of an inventory correction.

Speaker 1: And I think as we get into 2024, we're going to start seeing some additional growth. Do you have some of the quarters of tough on the call because the East, you know, what's going to happen in Asia with starting September , as you know, in the October of November , we start to see an uptick there. And we do think that will happen. That I can say. We do think we'll see an uptick.

Speaker 1: I modest uptick but enough tick in Asia packing the weather's quarter as well in December .

Speaker 1: I'm on a stoptick, but an uptick in Asia pack in the Mother's Quarter as well in December . And then that I would just next to the course. Yep, go ahead.

Speaker 3: I just add, we feel pretty good about the 6.3 billion down 4%. The good news is there's still seasonal growth in Asia. We talk about that. And in Europe , it's a really big holiday period here in the summertime. So when you get into the December quarter, there's also the Christmas holiday time. And those are maybe going to be more normal than they have been.

Speaker 1: but still pretty pretty healthy about having an outlook of six billion per quarter kind of sales levels. We don't see ourselves different below there stills kind of what we comment on in our last quarter. Yeah, man, I think, let me just jump. But I think we are gonna start seeing some more normal seasonality. We'll define normal Matt, if the last three years, right? But I do think we're gonna start to see more of a typical summer quarter in Europe where we hadn't seen that in the last several years, dude.

Speaker 9: COVID and whatnot. And I think we'll start seeing more of a typical season out becoming out of Asia as well. Got it. OK. That's helpful. And then just on the margins, backing into based on your guide, it looks like a gross margin, an operating margin, will be down sequentially.

Speaker 9: and it looks like Op-Auto margin will be down year-over-year and like the low 4% for 4-1. And you talked about some of the headwinds with Farnel. But what's the other factors there? Is that just the function of the mix of business with age of growing?

Speaker 3: and me in North America down. Is there anything else to read into that? Yeah, Matt, I get started to say that you've captured the things but I'll kind of frame it for you a little bit more. You know, think about a half of it coming from just the sale to client, right? It's gonna create, you know, less gross profit dollars and we're not necessarily doing anything different on the cost side.

Speaker 3: And then you've got, you know, let's say another 25% of that approximately is coming from, you know, just the normal seasonal shift in mix, you know, higher age, lower media, you know, and then the other 25% is probably coming from, you know, the pressure on far-n-house. That's kind of the right way to size it, you know, there's always puts and takes on the overall gross margin on EC. But the comment I will make is we still see Eurovere Operating Margin Expansion in EC with the guys.

Speaker 9: Okay, got it. Okay. Okay, and just lastly, on the interest expense, what you said in the presentation, obviously that's been a big EPS headwind. Is that a priority in terms of your free cash?

Speaker 9: used to bring down those borrowings, particularly if you see margin pressure on mix and continued your correction here as a headwind to Operating Margin to offset that.

Speaker 3: Yeah, I'd say madameen definitely, you know, we will look to deploy some of our cash to pay down some debt, especially just to make sure if sales start to go down. We want to make sure we're keeping the balance sheet strong, but then we'll look at other capital allocation priorities as well, right? So, you know, we do see the cash flow starting to come in.

Speaker 3: So feel good about that and now we gotta make sure we put it to the work in the best way it's possible, but clearly paying down some interest is top of mind just because it's getting so expensive, but we also see great value in the shares right now as well continuing to trade below book value.

Speaker 3: feel good about that and now we got to make sure we put it to the work in the best ways possible but clearly paying down some interest is top of mind just because it's getting so expensive but we also see great value in the shares right now as well continuing to trade below book value. Right, okay, thank you very much.

Speaker 10: Hi guys, thanks very much. Most of my questions have been asked and answered, but so I just had one for you. It's great to hear both Europe and the America's margins were up really nicely year on year. I think Europe is still your highest margin market. Just wondering if you could give us an update on closing that gap between those markets.

Speaker 10: And then maybe highlight any opportunities if you have any opportunities to drive margin in Asia closer to the Western markets.

Speaker 1: Yeah, I'm a list of settings on.

Speaker 1: Yeah, we're really pleased with the Americas from where we were through four or five years ago. And what we're working on, we're still at 80% there, probably back to the issues we had with the European, which is all behind us. So we're at 80% to where we think we need to be.

Speaker 1: closing it to Europe , Europe , or well, always strong message, but really last 10, 15 years, it's been a higher margin operating business for us. You tend to get higher growth margins in Europe as well.

Speaker 1: And so I don't know that we'll close the gap with your, I'm certainly challenging America's team to do that, but I want America's to catch Europe , not in Europe catch America's, but that's really it on that. So we're pleased with the progress overall. And Melissa, what was the second part of your question?

Speaker 1: Just as any opportunities. Yeah. Asia. Why do that mix? It's just volume. I mean, we're pleased with returns in Asia. So we measure Asia both on operating margins, as well as return working capital. So they have it. They'll have a higher terms model. So the returns in Asia have come up nicely.

Speaker 1: We've had particular success as well in Japan, which has been really terrific and that's getting...

Speaker 1: you know, closer to some of the models in the West. But overall Asia, I think we're in about the right spot in Asia based on the volume that that drives for us and the drop through we get with that. You know, Asia, we could shrink Asian, grow the operating margins, right? But that always isn't the most strategic thing to do.

Speaker 3: I've just come up with a list of that. There are some opportunities to think about supply chain as a service type of engagements. As well as far now, if our money makes a really healthy margin in Asia and there's plenty of opportunities to grow there. But the base is so big too, it's hard to move the needle overnight, but we do see some good margin opportunities and some of the markets I feel mentioned Japan, for example, definitely has a better margin than...

Speaker 3: then other markets. So there's some opportunity, but it's just it's such a big base that it's hard to move the needle. Okay, great. Thanks very much, guys.

Speaker 3: But it's just it's such a big base that it's hard to move the needle. Okay, great. Thanks very much guys. Thanks, folks.

Speaker 4: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Phil Gallagher for any closing remarks.

Speaker 1: Well want thank everyone for attending today's earnings call and wish you all the great rest of the summer and look forward to speaking you again at our next fiscal quarter earnings report in November . Thanks, Bob.

Speaker 4: Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.