Q1 2024 Avnet Inc Earnings Call

Greetings and welcome to the Avnet first quarter fiscal year 'twenty 'twenty four earnings call. At this time all participants are in a listen only mode. A brief question and answer et cetera will follow up formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keep.

Pat.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Joe Burke, Vice President of Investor Relations.

Thank you Joe you may begin.

Thank you Paul I'd like to welcome everyone to the Avnet first quarter fiscal year 'twenty 'twenty four earnings conference call.

Afternoon, Avnet released financial results for the first quarter fiscal year 2024, and the release is available on the Investor Relations section of Avnet website, along with a slide presentation, which you may access an advanced at your convenience.

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.

Such forward looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements.

Factors that could cause or contribute to such differences are described in detail in that that's most recent Form 10-Q, and 10-K and subsequent filings with the SEC.

These forward looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward looking statements or supply new information regarding the circumstances. After the date of this presentation.

Today's call will be led by Phil Gallagher, Avnet, CEO and Ken Jacobson Avnet CFO.

With that let me turn the call over to Phil Gallagher.

Yeah.

Thank you Joe and thank you everyone for joining us on our first quarter fiscal year 2024 earnings conference call.

Before we get into the quarter I want to take a moment every mark our recent events in the middle East in general and specifically our operations in Israel.

Our prayers are with our employees and all of those in the region affected by recent events we.

We hope this devastating coffee will be resolved as soon as possible as of this date all of our employees in Israel are safe and accounted for and we continue to service our customers to the greatest extent possible under the circumstances.

Moving on to our results I'll start with a reminder, that in fiscal year 2023 we delivered double digit sales growth in constant currency record earnings per share and ended the year with a strong balance sheet and great momentum.

We used to share that we kicked off the new fiscal year with another quarter of solid financial results, continuing that momentum and underscoring our strength and resiliency and the current market environment.

In the quarter, we achieved sales of more than $6 $3 billion.

This was above the midpoint of our guidance down 3% sequentially and down 6% year over year.

Continued efficient management of our operations enabled us to drive solid operating margins of four 1% highlighted by a 4.6% operating margin in our electronic components business.

Our team continues to compete well in this market by working with our customers to provide the flexibility they need to manage our component supply chains and been working with our suppliers to provide visibility to end customer demand and the impact our customers' current inventory levels had on near term demand.

In the quarter demand was mixed across our diverse verticals.

Transportation remained strongest while demand in the industrial and aerospace and defense verticals were a bit more moderate.

Overall semi doctor lead times continue to improve slightly but still remained higher than pre pandemic levels.

Shortages continue in some areas, particularly M C use empower products targeting automotive and industrial applications.

While pricing has generally stabilized we do not expect overall pricing to decline in the near term due to the increased cost for producing components, including higher cost for labor raw materials in general inflationary pressures.

We continue to coordinate closely with customers and suppliers to effectively manage backlog, which is down from year ago.

As a result overall book to Bill ratios continue to be below parity, but modestly above last quarter.

We communicated on our August call that we expect inventory levels to be up this quarter as we supported a specific strategic initiatives.

Our ending inventory levels were in line with those expectations, which Ken will discuss in his comments.

I do want to emphasize that as a distributor inventory is the lifeblood of our business.

And having the right inventory as a strategic advantage, we're always working to ensure we have the right mix and rate levels.

Our suppliers continue to work with us when inventory I want to thank them for their partnership and support as we work through the correction together.

Before I move on to operating group results I wanted to provide my thoughts from recent conversations I've had with key stakeholders across the supply chain.

I was recently in the Bay area with a large group of procurement leaders from several of our customers and suppliers.

Consensus of the group is that inventory levels for certain parts across the supply chain continue to be elevated.

And that additional flexibility to delay inventory replenishment is necessary.

Although demand across end markets remain healthy customers have enough supply of many components, which will take multiple quarters to burn off.

Conversations with these procurement leaders also confirmed our belief that avnet is well positioned with our supply chain capabilities.

Our customers continue to have a need for our services as they transition from a J I T two or more resilient supply chain.

With that let me turn to the highlights for our businesses.

At the top line, what China components business saw mixed results across our regions.

I think currency electronic component sales were down nearly 3% sequentially and 8% year over year.

Sales in the Americas were down 9% sequentially and 6% year on year with transportation and industrial is our strongest end markets.

Sales in Asia were up 4% sequentially and down nearly 17% year on year coming off a record sales quarter last year.

And Asia Transportation continues to be our strongest end market in China continues to have this office demand.

Coming off a record sales quarter in Q4 EMEA.

EMEA sales were down 5% sequentially and up 2% year on year in constant currency in.

In the quarter EMEA continued to see strength in transportation industrial and the aerospace and defense end markets.

Despite some of the broader market challenges we've been facing we're encouraged by how demand is holding up some of our key markets.

We believe that our diversification and focus on high growth verticals is hoping to keep sales above the $6 billion per quarter level as previously communicated.

We continue to benefit from our unique engineering capabilities with our field application engineers and digital design tools, resulting in another strong quarter for demand creation.

As component lead times stabilize our field application engineers are now busy spending more time with product innovation and developing new design starts.

Rather than chasing down parts to maintain existing designs.

Customers are also evaluating more redesigns as they look to optimize cost or to mitigate future risk related to older technologies.

Turning to our farnell business.

As expected for Nellix sales and profitability were impacted by product mix and competitive pricing pressures.

<unk> sales were down 5% sequentially and down 4% year over year in constant currency.

In the quarter, we made progress working through the backlog for single Board computers.

But the shipments have yet to fully ramp.

We also had a good quarter for test <unk> measurement component sales.

Sales of the onboard product lines comprised of semiconductors, and I P. Any products saw the greatest decline in sales.

Driving the unfavorable sales mix.

Operating margins for now we're above 4% during the quarter.

And we expect them to be at or above similar levels in the December quarter, which is traditionally the lowest sales quarter from a seasonality standpoint.

We remain excited about farther out despite the disappointing near term outlook and see additional opportunity to leverage for in ALS and electronic components is unique and synergistic collaboration to better serve avnet customers.

But now also has growth opportunities with recent line card additions from investments in new products that should materialize over the next few quarters.

Given the recent results. However, we are taking certain cost actions to reduce the operating expense base that for now which Ken will touch on in his remarks.

To conclude as we navigate the current market environment, we continue to demonstrate our strength and resiliency.

I believe our recent results reflect that and want to thank our teams for delivering under such challenging conditions.

Given the macro and industry specific backdrop is difficult to gauge when the correction will finish.

But our best estimate is it will last through mid 2024.

This time frame is also consistent with some of the recent conversations I've had with top executives of several of our major suppliers.

Share the view that the actual subside sometime in the middle of 'twenty 'twenty four.

We continue to believe our diversified end markets and a broad customer base positions us well for profitable growth for all of our stakeholders.

I've said before while we cannot control the overall market I am confident in our team's ability to execute in a challenging and uncertain environment and to continue to deliver value for our suppliers and customer partners.

With that I'll turn it over to Ken to dive deeper into our first quarter results.

Okay.

Thank you Phil and good afternoon, everyone.

Thanks for joining our earnings call.

Phil mentioned, we had a solid start to 2024.

Our sales for the first quarter were approximately $6 $3 billion down 6% year over year and in line with guidance on a sequential basis sales were down 3% in constant currency.

From a regional perspective sales from the western regions were 61% of sales in the first quarter compared to 64%.

Last quarter and 56% in the year ago quarter.

The sequential decline was expected due to the seasonal mix shifts from the western regions to Asia in the first half of each fiscal year.

From an operating group perspective, electronic components sales declined 7% year over year and 8% in constant currency.

Sales declined 3% quarter over quarter in constant currency.

Parnell sales declined 1% year over year and 4% in constant currency for now sales were 5% lower sequentially in constant currency.

Excluding sales of single board computers for now sales declined 8% year over year, and 7% quarter over quarter in constant currency.

For the first quarter gross margin of 11, 8% improved 43 basis points year over year, and was 67 basis points lower quarter over quarter E.

Do you see gross margin improve year over year, primarily due to a greater mix of sales from our western regions. You see gross margin declined sequentially, primarily due to a seasonal mix shift to Asia.

<unk> gross margin was down year over year, largely due to the unwinding of pricing premiums on them.

Favorable sales mix and from competitive pricing pressures right now gross margin was down sequentially, primarily due to unfavorable sales mix them from competitive pricing pressures for on the board components.

Turning to operating expenses, we continue to focus on controlling and reducing costs in specific areas, but we aren't currently planning any broad based cost reduction actions, while we navigate through this market correction.

We want to build on the momentum we created over the past couple of years and to be fully resource to take advantage of the opportunities, we see coming out of the correction.

During the quarter adjusted operating expenses were $486 million down 4% sequentially by 2% higher year over year.

Operating expenses were down slightly in constant currency year over year.

As a percentage of gross profit dollars adjusted operating expenses were 65% in the first quarter 320 basis points higher than a year ago, and 323 basis points higher than last quarter.

For the first quarter, we reported adjusted operating income up $262 million, which decreased 11% year over year. Our adjusted operating margin was four 1%, which decreased 22 basis points year over year and decreased 64 basis points quarter over quarter.

By operating group electronic components operating income was $273 million up 2% year over year.

E C operating margin was four 6% up 38 basis points year over year by 47 basis points lower sequentially.

The year over year improvement was led by our E. C. M N E C Americas businesses, each of which expanded operating margin year over year by more than 20 basis points. The sequential decline was primarily due to a combination of lower sales and a seasonal mix shift of sales to Asia.

Now operating income was $18 million down 66% year over year for.

Operating margin was four 2% in the quarter down 389 basis points quarter over quarter.

We're now operating margin continued to be impacted by sales mix and competitive pricing pressures related to on the board components.

In order to improve margins Farnell has implemented a series of expense management activities to reduce operating expenses, while we anticipate Q2 to be another challenging quarter for for now we expect these actions will support its path back to high single digit operating margins in the near term and it returned double digit operating margins in the medium term.

Turning to expenses below operating income first quarter interest expense of $71 million increased by $26 million year over year, but decreased $40 million quarter over quarter increased interest expense negatively impacted adjusted diluted earnings per share by 21 cents year over year.

Our adjusted effective income tax rate was 24% in the quarter as expected.

Adjusted diluted earnings per share were better than expected at $1 61 for the quarter.

Turning to the balance sheet and liquidity during.

During the quarter working capital increased by $134 million.

Including unexpected increase in inventories of $290 million, partially offset by an $84 million decrease in receivables and a $72 million increase in payables.

As a result of this working capital increase working capital days was 101 days for the quarter, which increased four days quarter over quarter. Our return on working capital decreased accordingly, but remains well above our cost of capital.

Inventories grew during the quarter due to two factors the largest what's the expected increase in inventories for E. C business due to the strategic opportunity. We had communicated last quarter. The second was an increase in inventory investments made at Farnell Nope, We don't expect any further investments in farnell as they have sufficient inventory to support current business conditions.

As he move into our second quarter, we are seeing a ramp in our supply chain services, which will result in an increase in inventories for Q2, we expect the inventory levels remained flat to up slightly as a result of the inventory growth for those engagements, which are expected to be cash flow and working capital neutral.

We continue to characterize our inventories as stable and as Phil mentioned, we believe it will take multiple quarters for customers that burn off their elevated inventory levels. While we continue to focus on improving inventory turns and generating cash flow. Our top priority is to ensure we continue to support our customers and suppliers needs as he works through these challenges together.

Turning the guidance for the second quarter of fiscal 2024 regarding sales on the range of 6.1 billion to $6.3 billion and diluted earnings per share in the range of $1.35 to $1.45 or.

Our second quarter guidance is based on current market conditions and applies a sequential sales decline of one per cent of five per cent. This.

This guidance assumes a seasonal decline in sales from the western regions, primarily due to holidays.

This guidance assume similar interest expense compared to the first quarter, an effective tax rate of between 22 per cent and 26% and 92 million shares outstanding on a diluted basis.

In summary, we're pleased with my performance in execution during the quarter within this current market environment. We will continue to focus on execution managing through the correction and achieving our state of financial goals.

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

Thank you will now be conducting a question and answer session. If you would like to ask you. A question. Please press star one on your telephone keypad.

A confirmation telling them on vacate your line is in the question queue.

Star too if you'd like to move your questions in the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the snarky.

One moment, please lollipop quick question.

Thank you.

First question is from a list of Fairbanks.

James Please proceed with your question.

Hi, guys. Thanks, so much uhm, great congratulations on another great quarter, and a little bit of a challenging time I was wondering if we could dig in the strategic.

Investment and inventory that you made are you able to give us a little more color on maybe is that targeting a specific and market or specific customer sets or or just kind of understand what's going on there.

Yeah, Melissa Phil.

Thanks for the comments appreciate that it's really for specific aj's a specific supplier.

With a handful of customers, okay, and so it's very it's very limited and and I think it's important that's why we notice on the last call.

Hey, we plan. This we know about this.

We don't do that without all the R. I C measures in place and be sure. It's good for Avnet. Good for the costs will go for the supplier. So it's very specific in nature.

Okay, Great is it safe to assume that that's already in the backlog whenever that that level of fulfillment is going to be.

Unknown Executive: Greetings and welcome to the Avnet First Quarter fiscal year 2024 earnings call. At this time, all participants are in a listen only move. A brief question and answer session will follow formal presentation.

Excuse me yes.

This was not that's anti itch, great question, because it wasn't a broad base, bringing inventory and go don't try to find homes. It's brought it in specific homes.

Unknown Executive: If anyone should require operator systems during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Great Great. Thanks, and then maybe just one kind of quick I don't know if this is a quick answer but maybe discuss some of the actions that you were taking it for now.

Joe Burke: It is now my pleasure to introduce your host, Joe Burke, Vice President of Investor Relations. Thank you, Joe. You may begin. Thank you, Paul.

You mentioned returned to high single digit operating margin within the near term just wondering if you could give a little bit more detail on is near term.

Joe Burke: I'd like to welcome everyone to the Avnet First Quarter fiscal year 2024 earnings conference call. This afternoon, Avnet released financial results for the first quarter fiscal year 2024. And the release is available on the Investor Relations section of Avnet's website, along with a slide presentation, which you may access and advance at your convenience. As a reminder, some of the information contained in the news release and on this conference call contained forward-looking statements that involve risk, uncertainties, and assumptions that are difficult to predict.

By fiscal year end or or what should we be thinking there.

You have anything specific to some of the.

<unk>, it's a combination of factors I think it's things like you know optimized freight you know looking at warehouse footprint as well as some people some people actions right, but it's trying to look at where we have you know some areas for improvement that we'd been planning you know for a couple of quarters, but hadn't really pull the trigger and now need to accelerate.

Joe Burke: 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. And Avnet's most recent form, TENQ, and TENK, 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 for supply new information regarding the circumstances after the date of this presentation.

Some of those things there's also opportunities in terms of you know new supplier lines and and.

<unk> stares share streaky customers between Avnet, and farnell and and I do think that timeline is you know exiting the fiscal year and that you know mid to high single digits is the expectation.

Okay, great. Thanks, so much that's all for me now.

Most of them.

Our next question is from <unk> with Bank of America. Please proceed with your question.

Hi, Thank you for taking my questions.

Phil Gallagher: Today's call would 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?

I want to start with a higher level question I think I heard you say that you know the industry inventory correction, you think it'll take till the middle of next year.

So so I guess my question would be why is that the right timeframe why not earlier or later.

Phil Gallagher: Thank you, Joe, and thank you everyone for joining us on our first quarter fiscal year 2024 earnings conference call. Before we get into the quarter, I want to take a moment to remark a recent event in the Middle East in general, and specifically our operations in Israel. Our thoughts and prayers are with our employees, and all those in the region affected by recent events. We hope this devastating conflict will be resolved as soon as possible. As of this date, all of our employees in Israel are safe and accounted for, and we continue to service our customers to the greatest extent possible under these circumstances.

Some of the things that are leading you to think that it'll be until the middle of next year and what can drive that what what can help in that process like what are some of the factors that go into that.

Yeah, Thanks root for awhile.

Best estimate on how you know backed by what we're seeing in lead times combined with our backlog in the book the bills. So.

There's a lot <unk>.

That goes into that not that much so room analytics. So we put to the historical versus future. So that's just what we're seeing today, a root blue hey, it could be it could be sooner I mean, no question I just didn't think we needed to be overly.

Phil Gallagher: Moving on to our results. Our start with the reminder that in fiscal year 2023, we delivered double-digit sales growth in constant currency, record earnings per share, and end of the year with a strong balance sheet and great momentum. I am pleased to share that we kicked off the new fiscal year with another quarter of solid financial results. Continuing that momentum and underscoring our strength and resiliency in the current market environment. In the quarter, we achieved sales of more than $6.3 billion.

Overly bullish area I think that's what we're seeing the market softening a bit that book the bills have been I've been below parity for awhile, which again I think is is fine at this point, because we wanna get that backlog right. So we're making the adjustments in the backlog, but it says what we see you know and based on those factors I shared ended up.

Verticals that we we study I. Thank the good news is we're <unk>.

Phil Gallagher: This was above the midpoint of our guidance, down to 3% sequentially, and down to 6% year over year. Continued efficient management of our operations enabled us to drive solid operating margins of 4.1% highlighted by a 4.6% operating margin in our electronic components business. Our team continues to compete well in this market by working with our customers to provide the flexibility they need to manage their components supply chains, and by working with our suppliers to provide visibility to end customer demand, and the impact our customers' current inventory levels had will near turn to demand.

We're so diversified that were not any too over the.

Top heavy on any one vertical which I think helps us get give a pretty good view to the market.

As I've said before this is a.

47 years.

Different market I mean, there's so many mixed signals. So there's still some lead times that are out there tied to certain certain products or something.

Vertical some customers still doing really well of others not so well. So it's just it's definitely a bit of a mixed bag, but that's just how how we see it we don't we don't press a with a regents, we we get the roll up in the forecast.

Phil Gallagher: In the quarter, the man was mixed across our diverse verticals. Transportation remained strong as while the man in the industrial and aerospace and defense verticals were a bit more moderate. Overall, semi-electric lead times continued to improve slightly, but still remained higher than pre-pendemic levels. Shortage is continued in some areas, particularly MCUs and power products targeting automotive and industrial applications. While pricing has generally stabilized, we do not expect overall pricing to decline in the near term due to the increased cost for producing components, including higher costs for labor, raw materials, and general inflationary pressures.

Rolling for quarter, and that's about what we see.

Okay. Thanks for the details Sir if I can.

Ask you a question on margins you know I think overall, you've said that as long as revenues can stay about 6 billion than the operating margin for the company can stay up a 4% when.

When you look at the operating environment. Today, I think you said that you saw unwinding of pricing premium set for now and and he says and competitive pricing. There are you also saying competitive competitive pricing and the core business and does that range till till still hold valid.

As long as revenues are above 6 billion can you every quarter to keep the margins about 4% can you can you just give us your thoughts on that.

Phil Gallagher: We continue to coordinate closely with customers and suppliers to effectively manage backlog, which is down from year ago. As a result, overall both the bill rate has continued to be below parity, though modestly above last quarter. We communicate on our August call that we expect inventory levels to be up to this quarter, as we supported a specific strategic initiative. Are any inventory levels were aligned with those expectations, which Ken will discuss in his comments?

Yeah, Let me touch on the first part with with Farnell and Oh, It can't touch on the 6 billion of 4% E. C. The difference there and for now versus what we're seeing in the Corps and we'll talk this over the last several years the cat of our guys in general get a a natural lift in.

And tight times, everyone extended lead times, where they'll get.

Premium pricing as well as non traditional customers kind of swooping in your large volumes and you'll get the lifting and both margin and and revenues. So we say the unwinding of the pricing pressure some of those customers have gone away and and the margins are kind of just normalizing, particularly.

Phil Gallagher: I do want to emphasize that as a distributor, inventory is the lifeblood of our business, and having the right inventory is a strategic advantage. We are always working to ensure we have the right mix and right levels. Our suppliers continue to work with us when inventory, and I want to thank them for their partnership and support as we work through the correction together.

Send me your Doctor and I T N E. Okay.

Right now as we look at it and we can talk about it in the script.

Phil Gallagher: Before we move on to operating group results, I wanted to provide my thoughts on recent conversations I've had with key stakeholders across the supply chain. I was recently in the Bay Area with a large group of procurement leaders from several of our customers and suppliers. The consensus of the group is that inventory levels for certain parts across the supply chain continue to be elevated, and that additional flexibility to delay inventory replenishment is necessary.

We're not seeing as much of that a S. P pricing pressure on the components side when E C.

And we've we've said that before we we don't believe we're going to see the the pressures or deflationary pricing. It's always competitive rupel you know in commodities standard products, that's always up and down and I was just talking to us as an overall view.

That's that's our take off that can comment on the 6 billion in for.

Phil Gallagher: Although demand across and markets remain healthy, customers have enough supply of many components, which will take multiple quarters to burn off. The conversations with these procurement leaders also confirmed our belief that admin is well positioned with our supply chain capabilities. Our customers continue to have a need for our services as they transition from a JIT to a more resilient supply chain.

Yeah, I I think the guidance you know obviously is is above 6 billion and I think the four per cent really you know if you if you dial it back to a couple of quarters. It goes really an E. C focused kind of commentary clearly with Parnell being down let's say from eight to four you know causes some pressure on the overall corporation margin, but I think the E. C is is very healthy.

Uhm implied in the guidance and remember you know when we get into the Martian in June quarters, we go into our seasonal mix shift, where we get a little bit more out of the west and less from Asia and the only other comment I would give US you know what I think we are seeing like in in Asia. For example, you know we we would expect in the in the first half of FY 24.

Phil Gallagher: With that, let me turn to the highlights for our businesses. At the top line, electronic components business saw mixed results across the regions. In constant currency, electronic components sales were down nearly 3% sequentially, and 8% year over year. Sales in the Americas were down 9% sequentially, and 6% year over year, with transportation and industrial as the strongest in markets. Sales in Asia were up 4% sequentially, and down nearly 70% year over year, coming off a record sales quarter last year.

First out calendar 2024 to kind of start to think about year over year growth because of how you know early age are starting to seeing some of the softness.

Okay. Okay. I appreciate the details Sir if I can sneak one more and once a warehouse in Europe has done and and I think this corner you said that inventories you would expect it to be up because of certain because of a specific program. So then how should we think about you know the cash conversion cycle and then.

Phil Gallagher: In Asia, transportation continues to be our strongest in market, and China continues to have this office demand. Coming off a record sales quarter in Q4, and the sales were down 5% sequentially, and up 2% year in year in constant currency. In the quarter, Amir continued to see strength in transportation, industrial, and the aerospace and defense in markets. It's, despite some of the broader market challenges, we've been facing, we're encouraged by how the man is holding up in some of our key markets.

Cash flow.

Over the next couple of quarters any any thoughts on that then.

Capex me coming down ear on your next year.

Because.

Already have you'll have that warehouse already factored in thank you yeah. Thank.

Thank you you'll see another quarter next quarter should be another elevated quarter of cache of of Capex similar to this past quarter at that at that warehouse gets constructed and and then you start to see a taper off in the first half of 2024 I got similar to what I would say, it's historical levels you know from a free cashless standpoint, as Phil said.

Phil Gallagher: We believe that our diversification is focused on high growth miracles. It's helping to keep sales above the $6 billion for quarter-level as previously communicated. We continue to benefit from our unique engineering capabilities. With our field application engineers and digital design tools resulting in another strong quarter for demand creation. As componently times favorise, our field application engineers are now busy spending more time on product innovation and developing new design starts, rather than a chase down parts for maintain existing design. Customers are also evaluating more redesigns as they look to optimize costs or to mitigate future risk related to older technologies.

Said, you know going to be challenging on the inventory side to really work it down over the next couple of quarters. So he would expect cash flow from you know our earnings.

And and some you know collection of receivables from the sales decline. So so we would expect cash flow over the next couple of quarters trailing 12 month casual I think I mentioned was about $110 million usage. So I think there's another bad quarter falling off of cash flow usage from a year ago.

So that's how I think we should think about it.

Okay. Thank you for all the details appreciate it.

Phil Gallagher: Turning to our Fernel business, as expected Fernel sales and profitability were impacted by product mix and competitive pricing pressures. Fernel sales were down 5% sequentially and then a 4% year-over-year in constant currency. In the quarter, we may progress working through the backlog for single board computers, but the shipments have yet to fully ramp. We also had a good quarter for test measurement upon the sales. Sales of the onboard product lines, apprised of semi-luckters and IP and e-products for the greatest decline in sales, driving the unfavorable sales mix.

Thanks <unk>.

Thank you. Our next question is from <unk>, Turkey with Wells Fargo. Please proceed with your question.

Yeah. Thanks for taking the questions I just wanted to kind of understand you know talking about it maybe a cycle correction kind of last name until mid 2024 and in the context of kind of you know.

Maintain revenue about 6 billion in you know that's kind of the low end of your your guy for the December quarter, or we can take that as you're kind of doing things bouncing along the bottom here should we think about the potential further corrections, we get into the first half of next year.

Phil Gallagher: Operating margins for Fernel were above 4% during the quarter, and we expect them to be at or above similar levels in the December quarter, which is traditionally the lowest sales quarter from a season out East hand point. We remain excited about Fernel despite the disappointing near-term outlook and the additional opportunity to leverage Fernel's and electronic components is unique and synergistic collaboration to better serve adding that customers. Fernel also has both opportunities with recent line-card additions and from investments in new products that should materialize over the next few quarters. Given the recent results, however, we are taking certain cost actions to reduce the operating expense space at Fernel, which can push on in his remarks.

Yeah. Thanks show.

Good quite I think it's going to be more bouncing along the bottom I mean.

Can I think it's just because it was just shared I think with bullish or maybe it was root blew the.

The mixed signals into marketing energy.

Still seeing as of today it was still seeing transportation overall pretty positive. The industrial segment you know they haven't had a few bumps in it.

But again parts of your industrious O'brien parts of that customer base still really good in other parts of a little bit softer.

You know defense Arrow. Unfortunately, what's going on in the World is going to continue to be a pretty strong market for us and that's sizable precedent America's so.

Phil Gallagher: To conclude, as we navigate the current market environment, we continue to demonstrate our strength and resiliency. I believe our recent results reflect that, and want to thank our teams for delivering under such challenging conditions. Given the macro and the industry's specific backdrop is difficult to gauge when the correctional finish, but our best estimate is it will last with May 2024. This time frame is also consistent with some of the recent conversations I have had with top executives of several of our major suppliers who share the view that the correctional subside sometime in the middle of 2024.

Sooner or later I guess, the wildcard is China and Asia pack right. I mean, so you know what happens there that pops back sooner than people think that could have a greater lift. So right now we're just rolling up what we see we do a rolling forecasts with our teams what were shares what we're getting from them and looking at the.

[noise] backlog in Ah zero to 30 31 to 90 90, 180 day I look at a daily and see what is our backlog today versus a year ago and it's it's.

That's about where we're gonna be again, you're gonna have to make shifts to a joke as Ken pointed out ages could be stronger this quarter, but when it comes back down in the March quarter saliva or.

Phil Gallagher: We continue to believe our diversified end markets and our broad customer-based positions as well for profitable growth for all of our stakeholders. As I've said before, while we cannot control the overall market, I am confident in our teams ability to execute and the challenging and uncertain environment and to continue to deliver value to our suppliers and customer partners.

Mixing the west so.

Got it.

[laughter] yeah.

Yeah sure I appreciate that maybe just a question on on the foreign outside in terms of the cost actions are taking I think in the past you would chose to to leave the lead facility open or online just given the demand you're seeing is that part of the cost actions are closing that and then can you <unk>.

Ken Jacobson: With that, I'll turn over to candidate deeper into our first quarter results. Thank you, Phil.

Ken Jacobson: Good afternoon, everyone. Thanks for joining our earnings call. As Phil mentioned, we had a solid start of 2024. Our sales for the first quarter are approximately $6.3 billion down 6% year over year and in mind with guidance. On a sequential basis, sales were down 3% in constant currency. From a regional perspective, sales from the Western regions were 51% of sales in the first quarter compared to 64% last quarter and 56% in the year ago quarter.

It is can you remind us of the cost savings are related to that.

Yeah now that while we're talking about is is separate from that what you're referring to gel would've been you know bring up a new warehouse and leads and shutting down the old warehouse and a lot of that's behind us, Although I'd say some of the now with that warehouse online there's more optimization on the broader warehouse club friends. So it's maybe more adjacent warehouses you know not primary warehouses that provide some of the cost.

Ken Jacobson: The sequential decline was expected due to seasonal mixtures from the Western regions to Asia in the first half of each fiscal year. From an operating group perspective, electronic components sales declined 7% year over year and 8% in constant currency. Failed decline 3% quarter of a quarter in constant currency. For now sales decline 1% year over year and 4% in constant currency. For now sales were 5% lower sequentially in constant currency. Excluding sales of single board computers, for now sales decline 8% year over year and 7% quarter of a quarter in constant currency.

Savings. So I think it was a subcomponent of of some of those numbers we've talked about before.

Okay. Thank you.

Thanks, Joe.

Thank you. Our next question is from that share with people. Please proceed with your question.

Yes, Thank you and Hello, everyone.

Fill it just another question regarding the the inventory that you're building in the supply chain engagements that you're you're talking about for for queue for the December quarter, Here's that mostly Asia business.

Ken Jacobson: For the first quarter, gross margin 11.8% improved 43 basis points year over year and with 67 basis points lower quarter of a quarter. EC gross margin improved year over year primarily due to greater mix of sales from our Western regions. EC gross margin declined sequentially primarily due to seasonal mixtures to Asia. For now gross margin was down year over year largely due to the unwinding of pricing premiums, an unfavorable sales mix and from competitive pricing pressures.

I think that it depends this is ken it depends on on on the engagement. Some of its global you know a lot of it's physically in Asia, but I would I wouldn't characterize it as something predominantly Asia, you know I'd say, it's more global engagements in nature, although a lot of the global production does happen.

And Asia, but some of America's based in a little bit maybe a base, but it's I think it's across the board rather than something agents specific fair to say, it's more Americans in Asia. Then then you're okay, but it's not primarily with okay. That's helpful. So this is more of a fulfillment so lower margin, but good returns is that how we think about.

Ken Jacobson: For now gross margin was down sequentially primarily due to an unfavorable sales mix and from competitive pricing pressures for on the board components. Turning to operating expenses, we continue to focus on controlling and root using costs in specific areas, but we aren't currently planning any broad base cost reduction actions while we navigate through this market correction. We want to build on the momentum we created over the past couple years and to be fully resources to take advantage of the opportunities we see coming out of the correction.

Yeah, and and and some of it's you know maybe buffer stock and some of it may be fast turning it's it's kind of a mixed bag.

And I think that the returns are there to imagine that's your point of view.

Model, there Yep Yep, and then and I think you said that inventories will remain elevated in the December quarter is that because you expect some of those supply engagements to to carry over into March or there are other reasons why you wouldn't start cutting inventory your portfolio I would imagine.

Ken Jacobson: During the quarter, adjusted operating expenses were $486 million down 4% sequentially but 2% higher year over year. Operating expenses were down slightly in constant currency year over year. As a percentage of gross profit dollars, adjusted operating expenses were 65% in the first quarter 320 basis points higher than a year ago and 323 basis points higher than last quarter. For the first quarter, we reported adjusted operating income of $262 million which decreased to 11% year over year.

Some of your your products with really times in you know, where you can prune where others. He said there was elevated lead time, so I'm trying to figure out why you're you're not you're talking about you know more and more significant cuts to your inventory when a lot of suppliers are basically blaming all the distributors for cutting orders.

Ken Jacobson: Our adjusted operating margin was 4.1% which decreased 22 basis points year over year and decreased 64 basis points quarter over quarter. By operating group, electronic components operating income was $273 million up to 2% year over year. EC operating margin was 4.6% up 38 basis points year over year but 47 basis points lower sequentially. The year over year improvement was led by our EC and me and EC America's businesses each of which expanded operating margin year over year by more than 20 basis points.

Yeah, you you don't seem to be doing that.

Yeah, a man I would say, it's it's net new.

Inventory coming in specific for these supply chain engagements as they begin to ramp and that would be offsetting.

Anything we're doing organically to get inventories down so that the cat that's kind of how how were trying to signal that is theirs net new coming in not let's say normal normal course of business by specific to some supply chain engagements that than having a a flattening effect of of overall you know work, we're doing an inventory.

Ken Jacobson: The sequentially decline was primarily due to a combination of lower sales and a seasonal makes shift to sales to Asia. For now operating income was $18 million down 66% year over year. For now operating margin was 4.2% in the quarter down 389 basis points quarter over quarter. For now operating margin continues to be impacted by sales makes think competitive pricing pressures related to on the board components. In order to improve margins, for now has implemented a series of expense management activities to reduce operating expense.

And the base business in the core business Yeah. It's complex man. So your question to write on and you know I guess if the net net is we're confident with the inventory levels. What we'll start with what will start to bring them down but right now the inventories fresh it's good if it's where it's not aging <unk> point.

The newer stuff is what we're talking about stopping it from coming down.

Okay. Okay. Thank you for that and I appreciate that the visibility behind a Q.

Ken Jacobson: While we anticipate Q2 to be another challenging quarter for Fresnel, we expect these actions will support its path back to high single digit operating margins in the near term and in return double digit operating margins in the medium term. Turning to expenses below operating income, first quarter inches expense of $71 million increased by $26 million year over year, but decreased $40 million quarter of a quarter. Increased interest expense negatively impacted adjusted diluted earnings per share by 21 cents year over year.

Q2 is difficult, but you did talk about this inventory correction, taking at least a couple more quarters and traditionally in your March quarter, you're sequentially up in the western markets in North America and in Europe in past cycles that hasn't happened because of some of the issues that you're facing now so.

The question is how we how should we think about how the rest of the year plays out to the bus that you can tell us.

Ken Jacobson: Our adjusted effective income tax rate was 24% in the quarter as expected. A jetted diluted earnings per share were better than expected at $1.61 for the quarter. Turning to the balance sheet and liquidity, during the quarter, working capital increased by $134 million, including an expected increase in inventory of $290 million, partially offset by an $84 million decrease in residuals and a $72 million increase in payables. As a result of this working capital increase, working capital days was 101 days for the quarter, which increased 4 days quarter of a quarter.

Yeah.

Guess, what I would say that I think will will still get to mix shift to the west now whether it'll be normal seasonality or or let's say normal pops and I still think that's to be determined you know, we still feel confident about 6 billion and we'll get a little bit of gross margin left from from mix shifts that sounds. So yeah, I think a lot of what fills commentary on the mid 2024 is really about inventory.

Levels right that inventory stable, but we're not going to see the inventories really come down meaningfully you know through that timeframe, because there's still plenty of work to do there Yeah man I wouldn't want to have an inventory levels are tired of the market.

Ken Jacobson: A return on working capital decreased accordingly by remains well above our cost of capital. Inventories grew during the quarter due to two factors. The largest with the expected increase in inventory is for easy business due to this strategic opportunity to communicate a last quarter. The second was an increase in inventory investment made it far now. No, we don't expect any further investments in far now as they have sufficient inventory to support current business conditions.

We track like you do all the all the inventory levels by you know M S us and markets et cetera, and that's that's our estimate based on current poll and demanded inventory at the inventories burn off out there and customer inventory.

Sum it up.

We estimate that mid 2024.

Ken Jacobson: As a movement to our second quarter, we are seeing a ramp in our supply chain services which will result in an increase in inventory. For Q2, we expect inventory levels are in flat to up slightly as a result of the inventory growth for those engagements, which are expected to be cash flow and working capital neutral. We continue to characterize our inventory as stable, and it's still mentioned we believe it will take multiple quarters for customers to burn off their elevated inventory levels.

It could be shown it like you know it could it could come could come quicker.

Oh, Okay. Thank you and just lastly relative to the interest expense.

Which was down sequentially, but still up significantly from where it was a few quarters ago and I would think that would be one area, where you can drive.

Profitability growth has you.

Ken Jacobson: While we continue to focus on improving inventory trends in generating cash flow, our top priority is to ensure we continue to support our customers and suppliers needs as you work through these challenges together. The increase in working capital led to an increase in debt of $112 million, during the quarter we use $41 million of cash for operations. We use $110 million of cash for operations over the past 12 months. We ended the quarter with a growth leverage of 2.3 times, and we had approximately $732 million of available committed borrowing capacity.

Continued generated more cash inventory comes down you bring down your your short term borrowings. So how should we think about that as a potential driver of profitability over the next few quarters.

Yeah, I I think Matt definitely as we get back to cash flow generation paying down debt will be a part of that especially as sales are down and trying to keep leverage in the same ballpark. We've had it but then you know we'll try to be more opportunistic on buybacks as well, we think there'll be enough cash to do both but you know gotta get back to that generation before we can start to work down.

Ken Jacobson: Our teams continue to work on selling inventory on hand and collecting received rules to provide additional liquidity in the coming quarters. From a capital allocation perspective, we continue to prioritize our existing business needs, including working capital and capital expenditures. During the first quarter, cash use for capital expenditures was $76 million, primarily to support a new distribution center being constructed in the Mia. We increased our quarterly dividend by approximately 7% to 31 cents per share, and we repurchased approximately $27 million with the shares.

That and or increase.

Increase the buybacks.

Okay, well sounds good. Thank you very much and and best of luck to your baseball team Tonight.

Thanks Man [laughter].

Thank you. Our next question is from Joseph Cardoso with J P. Morgan. Please proceed with your question.

Hey, Thanks for the question guys. So the first one here is just can you provide a bit more color on what you're seeing out of Asia. You know obviously he was another quarter of softness, but just curious it sounds like you're expecting some improvement there and just wanted to touch on is that just more of a function of typical seasonality and easier comps or if you're actually seeing any green shoot.

Ken Jacobson: We have $291 million left on our current Sherry purchase authorization. For the long term, we remain committed to our roadmap of delivering a reliable and increasing dividend, and Sherry purchases to increase our shareholder value when we believe our shares are undervalued by the market. But value per share and prove to approximately $52 a share, or a sequential increase of approximately $1 per share.

It's in the region around improvement and if so aware that we had that it is materializing. If you have any color on that.

Yeah sure jaw go first and so thanks for that.

Ken Jacobson: Turning to guidance for the second quarter of fiscal 2024, we are guiding sales on the range of 6.0 billion to 6.3 billion dollars and deluter earnings per share in the range of $1.35 to $1.45. Our second quarter guidance is based on current market conditions and implies a sequential sales decline of 1% to 5%. This guidance assumes a season of the climate sales from the Western regions primarily due to holiday. This guidance assumes similar interest expense compared to the first quarter on effective tax rate of between 22% and 26% and 92 million shares outstanding on a diluted basis.

Oh for all you were competing well in Asia, which do we think we're picking up some share as well, but the if you look at it <unk> you know just looking at the numbers for you know the industrial in Asia held up pretty well it was down to your nearest we talk about in the script in general because there's such a record breaking numbers a year ago transportation was up both the queue in queue.

And your own ear. So there are some signs of positiveness in Asia, and Japan has been good Japan has been positive for us.

So it's really it's it's there's no one thing we just feel that it cannot or just over there and talking to the team and our leader there to feel.

Ken Jacobson: In summary, we'll please apply performance and execution during the quarter within this current market environment. We will continue to focus on execution, managing through the correction, and achieving our state of financial goals.

Feeling that he was going to start to turn a bit now we're not it's very important we're not overly exposed to any one vertical right now and it gets really really important and we're not overly exposed to China right, we do our business and try it but we're not overexposed. So gives us may be a bit more of a balanced portfolio and the Asia Pac region.

Unknown Executive: With that, I will turn it back over to the operator to open up for questions. Operator, thank you. 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 key. A confirmation column will indicate your line is in the question queue. You may press star two if you'd like to remove your questions in the queue. For participants using speaker equipment, it may be necessary to pick up your hands set before pressing the star key. One moment please follow the call for questions. Thank you.

Any other kind of be our team over there is really competing well in the marketplace or and so we're seeing you know very good progress there in terms of trying to kind of take care.

No I've got it that sounds <unk> that sounds great and then and maybe this is one is a little bit more random, but you know just within the automotive transportation business you know some folks across the supply chain out, but just been highlighting headwinds either in the form of U a W strikes or you know increased competition in China around with some of the new applications being deployed there.

Phil Gallagher: Our first question is from Melissa Fairbanks, with Raymond Jane. Please proceed with your question. Hi, guys. Thanks so much. Great corp. Congratulations on another great quarter and a little bit of a challenging time. I was wondering if we could dig in the strategic investment inventory that you made. Are you able to give us a little more color? Maybe is that targeting a specific end market or specific customer sets or just kind of understand what's going on there?

You know it just curious and it and it doesn't sound like it but are you guys seeing any of those headwinds at all materialize in your business or is that largely noise for you guys. Thanks for the question.

Yeah, well, it's not it's not noise or the prices of some sort with some reality to the competitive nature of what's going on in an automotive this.

This past quarter, we just did not see that yeah, we still see it pretty positive the auto strike, we really didn't see any real effect on that at least to date and it sounds like they're working to resolve some of those but again.

Phil Gallagher: Yeah. Melissa's fill. And by the thanks for comments, I appreciate that. It's really for specific as a specific supplier with a handful of customers. And so it's very limited. And I think it's important. That's why we've noticed it on last call. It's a little bit of how we plan this. We know about this. And we don't do that without all the ROIC measures in place and be sure it's a good for AdNet, a good for the customer, good for the supplier. So it's very specific in nature.

Again, when you look at an automotive you know in total it's it's just you know we're not overexpose. It's maybe 15, 16% of our businesses you know approximately or something along those lines. So it's not like 50 or 60%. So even if there is a slight tick down it's not going to have a huge effect on us and we also look at.

Transportation beyond just automotive.

We put in that bucket transportation. It's you know, it's it's golf carts dump trucks trains E. Bikes. You know so you know, which is battery and a lot of that semi left or so we we we kind of broaden it vertical as well.

Phil Gallagher: Okay, great. Is it safe to assume that that's already in the backlog, whatever that level of fulfillment is going to be? Yes. Yeah, this was not, that's that's a great question. It wasn't a broad piece. Hey, go bring an inventory and go try to find homes. It's, it's brought it in. It has specific homes. Great, thanks.

Got it appreciate the color of Sky.

Thanks, Joe.

Thank you and your last question is from Williams time.

Let's take care of these please proceed with your question.

Great. Thanks for taking my questions I went out offer my congratulations and.

Phil Gallagher: And then maybe just one kind of quick, I don't know if this is a quick answer, but maybe discuss some of the actions that you're taking it for now. You mentioned, returned the high single digit operating margin within the near term. Just wondering if you could give a little bit more detail on, you know, is near term by fiscal year end or what should we be thinking there? Yeah, I mean, specific to some of the, you know, cost actions, it's a combination of factors.

Also add onto Matt's comment I was surprised to see B abnet logo on the diamond backs, but.

[laughter] all good stuff I have a couple of questions first.

Apologize if you touched on this already but.

I think you said, it automotive or transportation as a strong and market and I even think.

He said it industrial least in Asia as a relatively stronger and market. These have been sorted the standout weakening and markets among the semi suppliers as the as we progress through earning season or you know or at least so far but enough to have said it that it's it's.

Phil Gallagher: I think it's things like, you know, optimized, freight, you know, looking at warehouse footprint, as well as some people actions, right? But it's trying to look at where we have, you know, some areas for improvement that we've been planning, you know, for a couple quarters, but hadn't really pulled the trigger and now need to accelerate some of those things. There's also opportunities in terms of, you know, new supplier lines and, you know, stairs, stairs, strictly a customer between the AbNet and Farnell.

Pretty.

Significant misses actually.

And I wonder if if you're not seeing the same trends is this a matter of you think inventory in the channel you guys <unk>.

Not ordering as much.

Phil Gallagher: And I do think that timeline is, you know, exiting the fiscal year in that, you know, mid to high single digits is the expectation. And sooner or later, if I guess the wildcard is China and Asia pack, right? I mean, so what happens there that pops back sooner than people think that could have a greater lift. So right now we're just rolling up what we see, we do a rolling forecast with our teams, and what we're sharing is we're getting from them and looking at the backlog in a 0 to 30, 31 to 90, 9 to 180 day and look at it daily and see what is our backlog today versus a year ago.

From the suppliers or is it inventory and and customers or any uhm clarification on this would be really helpful.

Yeah, why don't you give a show that transportation.

Transportation. If you look at global we was was up a modestly Q, a Q and a year on year as well for us.

Industrial.

You know first of all I'd really abroad, you know so if maybe it depends how people to finding industrial it. It's it's our largest segment you know by by a long shot. So it's really long tail and if you look at you know some reasons, it's stronger than others I think what we said in a script.

We caught out that it's my it's moderating, though we definitely see some moderation in industrial so we do call that al will you may not assault. So we we saw stronger strength and transportation then we did an industrial.

And then we call it out defense defense Arrow, when I was a little softer in September, but we don't expect that that that's going to continue to be a growth market as well, we we we separate that out from industrial but it depends it just depends on the on the market the submarkets within industrial because it's so broad and that's why I keep talking about the mixed signals because there's still some nice.

Portland demand and there's others that are just a little over inventory, but there'll be burning that off and like I said through through the first half calendar 24.

Great Uhm and the follow up.

Recently, WT micro acquired future and you know that's a pretty unusual rather large combination of competitors and I wonder if the company is any view as to whether that would increase or decrease competitive pressures in any description of the.

Sort of change and competitive dynamics that you anticipate from that are ones that you've already seen thank you.

Yeah. Thanks, Thanks for thanks for your comments I, what we don't we don't make comments on on the competition north showing that that merger, we want to focus on our execution in Arbor operation.

Racial focus and just continue doing our suppliers, who we value greatly and and our customers I think we do that we'll be fine you know so you've got we already compete with W. T in Asia and we keep compete with future you know in the west So they're gonna combined together and we'll see how that works out but in the interim were stable.

The balance sheet solid and we will continue to drive growth with our current suppliers and customers I wished them work.

Thank you.

Thank you.

Thank you.

Further questions at this time I would like to hand back over to fill Gallagher C. L for closing comment.

Thank you and Wanna. Thank you for attending today's earnings call and I look forward to speaking to all of you again at our fiscal second quarter earnings report in January and since it was noted today does Mark game five of the World series in Major League baseball in behalf of Avnet team of that Wanna say go Diamond backs, Okay have a great evergreen.

[noise] rest of the week. Thank you.

This concludes today's conference disconnect your lines at this time, thank you for your participation.

Phil Gallagher: It's telling us that's about where we're going to be. And again, you're going to have to make shifts, too. Yeah, Joe, you know, going to have kids can point it out ages. I mean, stronger this quarter to the people who comes back down into Mark's quarter, so I have a stronger that mix in the West.

Phil Gallagher: Got it. No, maybe topic. Yeah, sure. I appreciate that.

Phil Gallagher: Maybe just a question on the far now side in terms of the cost action you're taking. I think in the past, you had chosen to leave the lead to fill the open or online, just given the demand you're seeing. Is that part of the cost actions of closing that and then can you revive it is, can you remind us of the cost savings of related to that? No, that's what we're talking about is separate from that.

Phil Gallagher: What you're referring to, Joe would have been, you know, bringing up a new warehouse and leads and shutting down the old warehouse. And a lot of that's behind us, although I'd say some of the, now with that warehouse online, there's more optimization on the broader warehouse footprint. So it's maybe more adjacent warehouses, you know, not primary warehouses that provide some of the cost savings. So I think it was a sub component of some of those numbers we've talked about before. Okay, thank you. Thanks, Joe. Thank you.

Matt Sharon: Our next question is from Matt Sharon with people. Please proceed with your question. Yes, thank you, and hello, everyone. Phil, I guess another question regarding the inventory that you're building in that the supply chain engagements that you're talking about for, for the December quarter. Is that mostly Asia business? I think Matt it depends, this is Canada depends on the engagement. Some of it's global, you know, a lot of it's physically in Asia, but I wouldn't characterize it as something predominantly Asia.

Matt Sharon: You know, it's more global engagements in nature, although a lot of the global production does happen in Asia, but some of it's America's based, you know, a little bit of maybe a base, but it's, I think it's across the board rather than something Asia specific. I'd fair to stage more America's in Asia than you're okay, but it's not primary, not the song always. Okay, that's helpful, so this is more of a fulfillment, so lower margin, but good returns is that how we think about that.

Matt Sharon: Yeah, and some of it's, you know, maybe buffer stock and some of it may be faster, and it's kind of a mixed bag. And I think the returns are there, though, Matt, that's your point. And then I think you said that inventories will remain elevated in the December quarter, and is that because you expect some of those supply engagements to carry over into March or there are other reasons why you wouldn't start cutting inventory or portfolio.

Matt Sharon: I would imagine that some of your products with leatimes in, you know, where you can prune where others, you said there's elevated leatimes. So I'm trying to figure out why you're not, you're talking about, you know, more significant cuts to your inventory. Want a lot of suppliers are basically blaming all the distributors for cutting orders yet, you know, not seem to be doing that. Yeah, man, I was just, it's net new inventory coming in specific for these supply chain engagements as they begin to ramp, and that would be offsetting, and anything we're doing organically to get inventory down.

Matt Sharon: That's kind of how we're trying to signal it as there's net new coming in. Let's say normal course of business, but specific to some supply chain engagements, that's then having a flattening effect of overall work we're doing on inventory and the base business and the core business. Yeah, it's complex, Matt, so your questions are right on and I guess if the net net is reconvened with the inventory levels, we'll start to bring them down.

Matt Sharon: Right now the inventory is fresh, it's good inventory, it's not aging. Again, it's point the newer stuff is what we're talking about that's stopping it from coming down. Okay, okay, thank you for that. And I appreciate that the visibility behind Q2 is difficult, but you did talk about this inventory correction taking at least a couple more quarters and traditionally in your March quarter, you're sequentially up in the Western markets in North America and Europe in past cycles that hasn't happened because of some of the issues that you're facing now.

Matt Sharon: So the question is, how should we think about how the rest of the year plays out to the best that you can tell us. Yeah, Matt, I guess what I'd say, I think we'll still get a mix shift to the West and I whether it'll be normal seasonality or let's say normal pops. You know, I still think that to be determined, you know, we still feel confident above six billion and we'll get a little bit of gross margin left from mixed shifts.

Matt Sharon: That sounds see, I think a lot of what fills commentary on the mid 2024 is really about inventory levels, right? The inventory stable, we're not going to see the inventory is really come down meaningfully, you know, through that timeframe because there's still plenty of work to do there. Yeah, Matt, we're doing some of the inventory levels, we're talking about the market, you know, we say we track like you do all the inventory levels by, you know, the MS and markets, et cetera, and that's our estimate based on current poll and demand.

Matt Sharon: The inventory, I believe it's always burned off out there and customer inventory and to sum it up. Well, we estimate that's mid 2024. Could be shown it, like, you know, good, good come, good come quicker. Okay, thank you. And just lastly, relative to the interest expense, which was down sequentially, but still up significantly, where it was a few quarters ago when I would think that would be, you know, one area where you can drive a profitability growth as you continue to generate more cash inventory comes down.

Matt Sharon: You bring down your, your certain borrowing. So how should we think about that? It's a potential driver of profitability over the next few quarters. Yeah, I think Matt definitely, as we get back to cash flow generation, paying down debt will be a part of that as such as sales are down trying to keep leverage in the same ballpark we've had it, but then, you know, we'll try to be more opportunistic on buybacks as well. We think there'll be enough cash to do both, but, you know, got to get back to that generation before we can start to work down the debt and or, you know, increase the buybacks.

Matt Sharon: Okay, well sounds good. Thank you very much and best of luck to your baseball teams tonight. Thanks, Ben.

Joseph Cardoso: Thank you. Our next question is in Joseph Cardoso with JP Morgan. Please proceed with your question. Hey, thanks for the question, guys. So the first one here is just, can you provide a bit more color on what you're seeing out of Asia? You know, obviously it was another quarter of softness, but just curious. It sounds like you're expecting some improvement there and just wanted to touch on is that just more of a function of typical seasonality and the easier comms or if you're actually seeing any green shoots in the region around improvement and if so, where that is materializing if you have any color on that.

Phil Gallagher: Yeah, sure, y'all go first and so thanks for that. Oh, for all, we're competing well in Asia. We think we're picking up some shares. Well, but the, if you look at it, the QNQ, you know, just looking at the numbers for, you know, the industrial in Asia held up pretty well. It was down here and here and he thought that in the script in general because it's such a record breaking in numbers a year ago.

Phil Gallagher: Transportation was up both the QNQ and your own here. So there's some signs of positive in Asia and Japan's been good Japan's been positive for us. So it's really, there's no one thing. We just feel that it cannot just over there and talking to the team and there are leaders there to, you know, feelin' that it's going to start to turn a bit. Now, you know, we're not, it's very important. We're not overly exposed to anyone vertical, right?

Phil Gallagher: And I think it's really, really important. And we're not overly exposed to China, right? We do business in China, but we're not overexposed. So gives us maybe a bit more of a balanced portfolio in the Asia pack region. And my only other kind of BR team over there is really competing well in the markets they serve. And so we're seeing, you know, very good progress there and trying to kind of take share.

Phil Gallagher: Now, I've got it, that sounds great. And then, and maybe this is one is a little bit more random, but, you know, just within the automotive transportation business. You know, some folks across the supply chain have just been highlighting headwinds either in the form of UAW strikes or, you know, increased competition in China around some of the new applications being deployed there. You know, just curious and it doesn't sound like it, but are you guys seeing any of those headwinds at all materializing your business?

Phil Gallagher: Or is that largely a noise for you guys? Thanks for the question. Yeah, well, that's not noise. It's sort of a some reality to the depended nature of what's going on in automotive. Again, this past quarter we just did not see that. And we still see it pretty positive. The auto strike. We wrote in the any real effect on that, at least to date, and sound like they're working to resolve some of those.

Phil Gallagher: But again, you look at an automotive, you know, in total it's just, you know, we're not overexposed. It's maybe 15, 16% of our business is, you know, approximately something all in those lines. So it's not like that they're 60%. So even there is a slight pick down. It's not going to have a huge effect on us. And we also look at transportation beyond just automotive. You know, it's got it. We put in that bucket transportation. It's, you know, it's got parts, don't trucks, trains, e-bikes, you know, so, you know, which is battery and the one of that semi-luster. So we we kind of broaden that vertical as well.

Phil Gallagher: Got it. Appreciate the color. It's got. Thank you.

William Stein: Our last question is your morning time with true secretaries. Please be seated here for me. Great. Thanks for taking my questions. I will now offer my congratulations and also add on to Matt's comment. I was surprised to see the Avnet logo on the diamond backs, but all good stuff. I have a couple questions. First, and I apologize if you touched on this already, but I think you cited automotive or transportation as a strong and market.

William Stein: And I even think he cited industrial at least in Asia as a relatively stronger and market these have been sort of the standout weakening and markets among the semi suppliers as the as we progress through earnings season or early for far, but enough to have said it that it's, you know, the pretty significant misses actually. And I wonder if you're not seeing the same trends. Is this a matter of, you think, inventory in the channel that you guys that you're not ordering as much from the suppliers or is it inventory at end customers or any clarification on this would be really helpful.

William Stein: Yeah, you give a shot at that. Yeah, transportation. If you look at globally was was up, honestly, Q and Q and up year and year as well for us. And industrial. You know, first of all, it's really a broad, you know, so maybe depend on people to find industrial. It's our largest segment, you know, by a long shot. So it's really long tail. And if you look at, you know, some reasons it's stronger than others.

William Stein: I think what we said in the script. We called out that it's moderating though. We definitely see some moderation in industrial. So we did call that out. William, I know the solid. So we we saw stronger strength in transportation. Then we did it industrial. And then we called out defense defense arrow was a little softer in September. But we don't expect that that's going to continue to be a growth market as well.

William Stein: We we separate that out from industrial. But it depends, just depends on the market, the submarkets within industrial, because it's so broad. And that's why I keep talking about the mixed signals because there's still some nice pull on the man and there's others are just a little over inventory, but I will be burning that off. And, like I said, through the first half calendar, 24.

Phil Gallagher: Great. In the follow up, you know, recently WT micro acquired future and, you know, that's a pretty unusual, rather large combination of competitors. And I wonder if the company has any view as to whether that would increase or decrease competitive pressures and any description of the sort of change in competitive dynamics that you anticipate from that or ones that you've already seen. Thank you. Yeah. Thanks. Well, thanks for comments on what we don't we don't make comments on on the competition.

Phil Gallagher: North Carolina, that that merger. We want to focus on our execution and our operation operational focus and just continue doing our suppliers who we value greatly in our customers. I think we do that. We'll be fine. You know, so you got we already compete with WTN Asian and we keep compete with future, you know, in the West. So they're going to combine together. We'll see how that works out. But in the interim work, we're stable and balance sheet solid and we want to continue to drive growth with our current suppliers and customers. I wish them luck. Thank you.

Unknown Executive: Thank you for the questions at this time.

Phil Gallagher: I would like to hand the floor back over to Phil Gallagher, CEO for closing comments. Thank you. Hey, I want to thank you for attending today's earnings call.

Unknown Executive: And I look forward to speaking to all of you again at our fiscal second quarter earnings report in January. And since it was noted today does mark game five of the World Series in Major League Baseball on behalf of Avnet. Team Avnet want to say, go Diamondbacks. Okay. Have a great rest of the week. Thank you.

This concludes today's conference. You may disconnect your lines of this time. Thank you for your participation.