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, more qualified more presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.

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.

Like to welcome everyone to the Avnet first quarter fiscal year 2024 earnings conference call.

Afternoon, Avnet released financial results for the first quarter fiscal year 'twenty 'twenty four and the release is available on the Investor Relations section of that that's website, along with a slide presentation, which you may access an advance 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 in its 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 C E O 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 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.

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.

Continue to Fisher 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 remains strong as well at 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 remain higher than pre pandemic levels.

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

But 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, so 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.

The 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 trying to 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.

Yeah.

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

In 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 the demand is holding up in 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 costs or to mitigate future risk related to older technologies.

Turning to our farnell business.

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

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 and measurement component sales.

Sales of the onboard product lines apprised 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 when do 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 Florida, all despite the disappointing near term outlook and see additional opportunity to leverage for an els and electronic components is unique and synergistic collaboration to better serve avnet customers.

But I'll also ask growth opportunities with recent bank 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 cracks will 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 to our suppliers and customer partners.

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

Ken.

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.

Farnell 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.

But 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.

Finally, our gross margin was down year over year, largely due to the unwinding of pricing premiums.

Favorable sales mix and from competitive pricing pressures 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 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 about 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. In 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.

If I now operating income was $18 million down 66% year over year.

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

For now operating margin continue 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 now we expect these actions will support its path back to high single digit operating margins in the near term and a return to 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 we 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 inventory levels remain 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 are stable and as Phil mentioned, we believe it will take multiple quarters for customers of burn off their elevated inventory levels.

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 you work 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 our 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.

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

Brighter.

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 tone locate your line is in the question queue.

Star too if you'd like some of your questions in the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing I'm just snarky.

One moment, please lollipop quick question.

Thank you.

First question is from Melissa Fairbanks.

And 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.

Operator: 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.

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.

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

Yeah Bullshit Phil.

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

Joseph 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.

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.

Joseph 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 contain forward-looking statements that involve risk uncertainties and assumptions that are difficult to predict.

Hey, we plan. This we know about this.

And.

We don't do that without all the R. I C measures in place and be sure. What's a good <unk> good for the customer 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 whatever that that level of supplement is going to be.

Joseph 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 in 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 or supply new information regarding the circumstances after the date of this presentation.

Excuse me yes.

Yeah. This was not that's S H gray.

Great question cause it wasn't a broad base, bringing inventory and go to try to find homes. It's brought.

Brought it in specific homes.

Great Great. Thanks, and then maybe just one kind of quick.

This is a quick answer, but maybe discuss some of the actions that you're taking it for now 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.

Fiscal year end or or what should we be thinking there.

You have anything specific to some of the you know.

Joseph Burke: 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.

<unk>, it's a combination of factors I think it's things like you know optimized freight.

Phil Gallagher: Phil? Thank you, Joe.

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

Phil Gallagher: 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.

<unk> stares sure streaky customer between Avnet, and farnell and 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.

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

It's a nice Muslim.

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

Phil Gallagher: Moving on to our results. Our start with the reminder that in the 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. I am pleased to share that we kicked off the new fiscal year with another quarter of solid financial results, continuing to implement them and underscoring our strength and resiliency in the current market environment.

Being with your question.

Hi, Thank you for taking my questions.

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.

And so so I guess my question would be why is that the right timeframe why not earlier or later what are some of the things that that are you know.

Phil Gallagher: In the quarter, we achieved sales of more than $6.3 billion. 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 component supply chains and by working with our suppliers to provide visibility to end customer demand and the impact our customers current inventory levels had on near-term demand.

To think that it'll be till the middle of next year and what can drive that.

Can help in that process like what are some of the factors that go into that.

Yeah. Thanks for Awhile, it's our best estimate on how you know back by what we're seeing an elite times combined with our backlog in the book the bills. So does a lot.

That goes into that not to mention some room.

So we put to the historical versus future. So.

That's just what we're seeing today, a real blue hey, it could be it could be sooner I mean, no question I just didn't think we need to be overly oh.

Overly bullish area I think that's it we're seeing the market softening a bit the book the bills have been had been below parity for awhile. Once again I think is is fine at this point cause we wanna get that backlog right. So we're making the adjustments and the backlogs, but it says what we see you know.

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, similar to lead times, continued to improve slightly, but still remained higher than pre-pendemic levels. Shortages continue 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.

Based on those factors I I shared and a different vertical that we we study.

The good news is.

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.

You said before this is.

My 40, some years, it's a different market and there's so many mixed signals. So there's still some lead times that are out there tied to certain certain products or something.

A 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 and with a regents, we we get the roll up in the forecast.

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, hope to build ratios continue 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 ending inventory levels were aligned with those expectations, which Ken will discuss in his comments.

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

Okay. Thanks for the details Sir.

I can ask you a question on margins.

You know I think overall, you've said that as long as revenues can stay above 6 billion than the operating margin for for the company can stay up about 4%.

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 uncompetitive pricing. There are you also seen competitive competitive pricing and the core business and does that range till till still hold valid.

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're always working to ensure we have the right mix and right levels. Our suppliers continue to work with us on inventory, and I want to thank them for their partnership and support as we work through the correction together.

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: 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.

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

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

Phil Gallagher: Although demand across and markets for the main 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.

Premium pricing as well as non traditional customers kind of swooping in large volumes and you'll get the lifting and both margin and and and revenues. So we <unk>.

Done whining and the pricing pressure some of those customers have gone away and and the margins are kind of just normalizing, particularly in semi doctor and I T. N E. Okay, well right now as we look at it and we talked about in the script.

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.

Not seeing as much of that ASP pricing pressure on the components side when he seat and we've we've we've said that before we we don't believe we're gonna see the the pressures or deflationary pricing. It's always competitive Rupel you know in commodities standard products, there's always up and down and I was just talking to us as an overall view.

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

Yeah, I think the guidance you know obviously is is above 6 billion I think the four per cent really you know if you if you dial it back to a couple of quarters ago. It was really an E C focused kind of commentary clearly with Parnell.

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, Amida sales were down 5% sequentially, and up 2% year over year in constant currency. In the quarter, Amida continues to see strength in transportation, industrial, and the aerospace and defense in markets. Markets. 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.

Galaxy from eight to four you know causes some pressure on the overall corporation margin, but I think the E. C is is very healthy 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.

Are seeing like get in Asia. For example, you know we we would expect in the in the first half of FY 24, first half calendar 2024 to kind of start to think about year over year growth because of how you know early age is starting to seeing some of the softness.

Phil Gallagher: We believe that our diversification and focus on high growth vehicles is helping 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 componentally time-stabilized, 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 valuating more redesigns as they look to optimize costs or to mitigate future risk related to older technologies.

Okay. Okay I appreciate the details Sir if I can sneak one more and.

Once.

House in Europe has done and and I think.

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 in free cash flow.

Over the next couple of quarters any any thoughts on that then you're Capex me coming down ear on your next year.

Because.

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

Phil Gallagher: Turning to our Furnile business. As expected, Furnile sales and profitability were impacted by product mix and competitive pricing pressures. Furnile 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 single-board product lines, a prize of semi-letters and IP&E products, so the greatest decline in sales driving the unfavorable sales mix.

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 cash flow standpoint, as Phil said.

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

And and some you know collection of receivables from the sales decline. So so we'd expect cash flow over the next couple of quarters. You know 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.

Phil Gallagher: Operating margins for Furnile 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 seasonality standpoint. We remain excited about Furnile despite the disappointing near-term outlook and see additional opportunities to leverage Furniles and Electronic Components' unique and synergistic collaboration to better serve adnet customers. Furnile also has growth 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 base at Furnile, which Ken will touch on in his remarks.

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

Thank you for all the details appreciate it.

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 kinda 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 the low end of your your Guy who the December quarter.

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 industry-specific backdrop is difficult to gauge when the correctional finish, but our best estimate is it will last with 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 who share the view that the crack-tools subside sometime in the middle of 2024.

Take that as you kind of doing things bouncing along the bottom here should we think about the potential further correction as we get into the first half of next year.

Yeah. Thanks show.

Quite that thinks 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 roof blew the.

The mixed signals and the marketing interview.

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

Phil Gallagher: We continue to believe our diversified end markets and our broad customer base positions us 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 team's ability to execute in a challenging and uncertain environment and to continue to deliver value to our suppliers and customer partners.

But again parts of your industrious O'brien parts of that customer base still really good in other parts of a little bit softer yeah, and 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 frustrating America's so.

Sooner or later I guess, the wildcard as China in 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 and what were shares what we're getting from them and looking at the.

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

Ken Jacobson: Thank you, Phil.

Ken Jacobson: I'm good afternoon, everyone. Thanks for joining our earnings call. As Phil mentioned, we had a follow-up start to 2024. Our sales are the first quarter of approximately $6.3 billion down 6% year-over-year and in line with guidance. On a sequential basis, sales are 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% and last quarter and 56% in the year ago quarter.

<unk> clogging Ah zero to 30 31 to 90 90, 180 day I look at it daily and see what is our backlog today versus a year ago and it's it's.

It's telling us that's about where we're gonna be again, you're gonna have to mix shifts to a joke as Ken pointed out age it's gonna be stronger this quarter, but when it comes back down in the March quarters whoever stronger.

Ken Jacobson: The sequential decline was expected due to a seasonal shift from the western regions to Asia in the first half of each fiscal year. From an operating group perspective, electronic component sales declined 7% year-over-year and 8% in constant currency. Sales declined 3% quarter of a quarter in constant currency. For now, 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 of a quarter in constant currency.

Mixing the west so.

Got it made.

[laughter] Yeah sure I appreciate that maybe just a question on the foreign outside in terms of the cost actions are taking I think in the past you had chose to to leave the lead facility open or online just given the demand you're seeing is that part of the cost actions.

Closing that and then can you <unk>. If it is can you remind us of the cost savings are related to that.

Ken Jacobson: For the first quarter, gross margin of 11.8% improved 43 basis points year-over-year and with 67 basis points lower quarter-over-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 a seasonal shift 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. For now, gross margin was down sequentially primarily due to unfavorable sales mix and from competitive pricing pressures for on-the-board components.

Yeah, I know that what we're talking about is is separate from that what you're referring to Joe would have been you know bring up a new warehouse and leads and shutting down the old warehouse and a lot of that 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 <unk>.

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

Ken Jacobson: 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 years and to be fully resources 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, but 2% higher year-over-year.

Oh, 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.

I think Matt 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.

Ken Jacobson: Operating expenses were down slightly in constant currency year-over-year. As the 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 the last quarter. For the first quarter, we reported adjusted operating income of $262 million, which decreased 11% year-over-year. Our adjusted operating margin was 4.1%, which decreased 22 basis points year-over-year, and decreased 64 basis points quarter-over-quarter.

You know I'd say, it's it's more global engagements in nature, although a lot of the global production does happen in Asia, but some of America's based in a little bit of maybe a base, but it's I think it's across the board rather than something Asia specific.

Fair to say, it's more Americans in Asia, then then you're okay, but it's not primarily it's not always.

Oh, Okay. That's helpful. So this is more of a fulfillment so lower margin, but good returns is that how we think about that.

Ken Jacobson: By operating group, electronic components operating income was $273 million up 2% year-over-year. EC operating margin was 4.6%, up 38 basis points a year-over-year, but 47 basis points lower sequentially. The year-over-year improvement was led by our ECME and EC America's businesses, each of which expanded operating margin year-over-year by more than 20 basis points. The sequentially decline was primarily due to a combination of lower sales and a seasonal mix shift of sales to Asia.

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 uh-huh.

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

Models that are 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 took carryover until March or there are other reasons why you wouldn't start cutting.

Ken Jacobson: 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 continued to be impacted by sales mixing and 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.

Inventory your your portfolio I would imagine that 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 yet you you don't seem to be doing that.

Ken Jacobson: Francis. While we anticipate Q2 to be another challenging order for Fresno, 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 interest expense of $71 million increased by $26 million a year, but decreased $40 million quarter of a quarter. Increased interest expense expense negatively impacted the adjusted deluded earnings per share by 21 cents a year over year.

Yeah.

Oh is it it's net new.

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

You know 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 and the base business in the core business.

Ken Jacobson: Our adjusted effective income tax rate was 24% in the quarter as expected. Adjusted deluded earnings per share were better than expected at a $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 receivables and a $72 million increase in payables. As a result of this working capital increase, working capital days was one and one days for the quarter, which increased four days quarter over quarter.

Yeah. It's complex match. So your questions are right on and you know I guess, if the net net is we're confident with the inventory levels. What will start that will will start to bring them down well right now the inventories fresh it's good inventory, it's not aging against 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 cutie.

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.

Ken Jacobson: 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 was the expected increase in inventories for EC business due to the strategic opportunity that communicated last quarter. The second was an increase in inventory investments made at Farnal. Note we don't expect any further investments in Farnal as they have sufficient inventory to support current business conditions. As we move into our second quarter, we are seeing a ramp in our supply chain services which will result in an increase in inventories.

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

Yeah.

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

Ken Jacobson: For Q2, we expect inventory levels are in flat to up slightly as the 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 to 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 we work through these challenges together.

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 what do you want to have an inventory levels retired the market you know.

Ken Jacobson: The increase in working capital leads 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. Our teams continue to work on selling inventory on hand and collecting received rules to provide additional liquidity in the coming quarters.

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 and.

Sum it up.

The what we estimate that's may 2024.

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

Ken Jacobson: 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. We have $291 million left on our current sharey purchase authorization.

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 continued.

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.

Profitability over the next few quarters.

Ken Jacobson: For the long term, we remain committed to our roadmap of delivering a reliable and increasing dividend and sharey purchases to increase our shareholder value when we believe our shares are undervalued by the market. Book value capacity per share improves to approximately $52 a share or a sequential increase of approximately $1 per share.

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.

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 and dilute 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 the season of the climate sales from the Western region's primarily due to holidays. Chris, 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.

On the debt and or an.

Increase the buybacks.

Okay, well it 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 hue.

Ken Jacobson: In summary, we'll please look at 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.

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

Operator: With that, I will turn it back over to the operator to open it up for questions. Operator? Thank you.

Yeah sure jaw go first and so thanks for that.

Operator: 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 key. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your hands up before press on the star key. One moment please, while we pull for questions. Thank you.

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 hold up pretty well it was down to your nearest we talk about in the script in general because it's such a record breaking numbers a year ago transportation was up both Q Q.

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

So it's really it's 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.

Melissa Fairbanks: Our first question is from Melissa Fairbind with Raymond James. Please proceed with your question. Hi, guys. Thanks so much. Great quarter. Congratulations on another great quarter and a little bit of a challenging time.

Feeling that he was going to start to turn a bit now you know 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 in China, but we're not overexposed. So gives us maybe a little bit more of a balanced portfolio and the Asia Pac region.

Phil Gallagher: I was wondering if we could dig in on 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 end market or specific customer sets or just kind of understand what's going on there? Yeah.

On the 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 takes care.

Phil Gallagher: Melissa, it's Phil. And the body, thanks for the comments. Appreciate that. It's really for specific as a specific supplier with a handful of customers. Okay. And so it's very limited. And I think it's important. That's why we noticed it on the last call. 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 good for AdNet, good for the customer, good for the supplier.

Oh 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 has just been highlighting headwinds either in the form of U a W strikes or you know increase competition in China around some of the new applications being deployed there.

You know just curious and it and it doesn't sound like a bed 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.

Phil Gallagher: So it's very specific in nature. 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 actually a great question. It wasn't a broad base. Hey, go bring an inventory and go, go try to find homes. It's, it's brought it in and has a set of homes. Great, great, thanks.

Yeah, well, it's not it's not noise or.

Certainly some reality.

Nature of what's going on in an automotive.

This past quarter, we just did not see that yeah, we still see it pretty positive that the.

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: 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 far now. You mentioned return to high single digit operating margin within the near term. Just wondering if you could give a little bit more detail on, you know, his near term by fiscal year end or, or what should we be thinking there? Yeah, I mean, specific to some of the, you know, cost actions, it's, it's a combination of factors.

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

Transportation beyond just automotive got it 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 laughter. So we we we kind of broaden it vertical as well.

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 of 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, and, you know, share, share strategic customers between AbNet and Farnel. 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. Okay, great. Thanks so much. That's all for me now. Thank you.

God I appreciate the color of Sky.

Thank you.

Thank you our last question Mr. Williams time with truth to Kerry's. Please proceed with your question.

Great. Thanks for taking my questions I want to offer my congratulations and.

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.

Ruplu Bhattacharya: Our next question is from Ruplu Bhattacharya, with Bank of America. Please proceed with your question. Thank you for taking my questions.

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

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

Phil Gallagher: Phil, I want to start with a higher level question. I think I heard you say that the industry inventory correction, you think it'll take till the middle of next year. So I guess my question would be, why is that the right time frame, why not earlier or later, what are some of the things that are leading you to things that it'll be till the middle of next year? And what can drive that, what can help in that process?

Pretty significant.

Significant Mrs actually.

And.

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

Phil Gallagher: What are some of the factors that go into that? Yeah, thanks, Ruplu. Well, it's our best estimate on how by what we're seeing in lead times combined with our backlog and the book to bills. There's a lot that goes into that, not to mention some of our own analytics, so we put to the historical versus future. So that's just what we're seeing today, Ruplu. Hey, it could be sooner. I mean, no question.

You're not altering as much.

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 shot that transportation.

Transportation.

Globally was was up a modestly QM queuing up year on year as well for us.

Phil Gallagher: I just didn't think we need to be overly bullish here. I think that we're seeing the markets, softening a bit. The book to bills have been below parity for a while, which again, I think is fine at this point because we want to get that backlog right. So we're making the adjustments in the backlog, but that's just what we see, you know, and based on those factors, I shared and the different verticals that we study.

And industrial.

You know first of all I'd really abroad. So if maybe it depends how people defining 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 out will you may not a solid so we we saw a stronger strength and transportation then we did an industrial.

Phil Gallagher: I think the good news is we're sort of diversified that we're not any two over or top heavy on any one vertical, which I think helps us give a pretty good view to the market. And as I said before, this is a, you know, in my 40-some year that it's a different market. I mean, there's so many mixed signals because still there's still some lead times that are out there tied to certain certain products.

And then we caught out defense defense Arrow.

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 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 pulling the man and there's others that are just a little over inventory but.

Phil Gallagher: There's some verticals and customer still doing really well. There's 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 with our regions, we get the row up in the forecast and do a rowing for quarter, and that's about what we see. Okay. Thanks for the details there.

Will be burning that off and like I said through through the first half calendar 24.

Great Uhm and the follow up <unk>.

Recently W micro acquired future and.

Phil Gallagher: 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 six billion, then the operating margin for the company can stay about four percent. When you look at the operating environment today, I think you said that you saw unwinding of pricing premium set for now, and you saw them competitive pricing there. Are you also seeing competitive pricing in the core business?

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 changing competitive dynamics that you anticipate from that are ones that you've already seen.

Thank you.

Yeah. Thanks, Thanks for thanks for the comments I, what we don't we don't make comments on on the competition north showing that that merger.

Phil Gallagher: And does that range still, still, still hold valid that, you know, as long as revenues are about six billion? Can you every quarter keep the margins above four percent? Can you, can you just give us your thought on that? Yeah, let me touch on the first part with with Farnell, and I let can touch on the six billion to four percent EC. The difference there in Farnell versus what we're seeing in the core, and we talked about this over the last several years, the God of God guides in general get a unnatural lift in in tight times or when extended lead times where they'll get premium pricing as well as non-traditional customers kind of swooping in, you know, large volumes, and they get the lift in both margin and in revenues.

We want to focus on our execution in Arbor operation.

Operational focus and just continue to do during 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 people 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.

And balance sheet salad, and we're going to continue to drive growth with our current suppliers and customers I wish them work.

Thank you.

Thank you.

Thank you.

Further questions at this time I would like to handle it back over to fill Gallagher C O for closing comment.

Phil Gallagher: So we say unwinding and the pricing pressure here, some of those customers have gone away, and the margins have come just normalizing, particularly in semi-lector and IP&E, okay. Well, right now, as we look at it, and we talked about in the script, we're not seeing as much of that ASP pricing pressure on the component side when EC, and we've said that before, we don't believe we're going to see the pressures or deflationary pricing.

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 what to 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 always competitive ruple, you know, and come out of the standard products, it's always up and down. I'm just talking[inaudible] I think the guidance, obviously, is above 6 billion. I think the 4% really, if you dial it back to a couple quarters ago, is really an EC-focused commentary, clearly with Farnal being down, let's say, from 8 to 4, causes some pressure on the overall corporation margin. But I think the EC is very healthy, and less from Asia.

Phil Gallagher: And the only other comment I would give is, I think we are seeing, like, in Asia, for example, we'd expect in the first half of FY24, or first half, calendar 2024 to kind of start to think about year-over-year growth because of how early Asia started to see some of this offness.

Ken Jacobson: Okay, I appreciate the details there, if I can sneak one more in. Once the warehouse in Europe is done, and I think this quarter you said that in Ventories, you had expected 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 free cash flow over the next couple of quarters, any thoughts on that? Will your capex be coming down year-on-year next year?

Ken Jacobson: Because, you know, you already have that warehouse already factored in. Thank you. Yeah, I think you'll see another quarter next quarter should be another elevated quarter of cash of capex similar to this past quarter as that warehouse gets constructed. And then you start to see a taper off in the first half of 2024. I got similar to what I would say historical levels. You know, from a free cash plus standpoint, it's Phil said, you know, going to be challenging on the inventory side to really work it down over the next couple quarters.

Ken Jacobson: So you'd expect cash flow from, you know, our earnings and some, you know, collection of receivables from the sales decline. So we'd expect cash flow over the next couple quarters, you know, trailing 12-month cash flow, 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. Thanks, we'll prove. Thank you.

Joe: Our next question is from Joe. With Wells Fargo. Please appreciate your question. Yeah, thanks for taking the questions. I just wanted to kind of understand, you know, talking about maybe a cycle correction, kind of lasting till mid 2024. And in a context of kind of, you know, maintaining revenue of both six billion and, you know, that's kind of the low end of your, your guide to the December quarter. Are we take that as you kind of viewing things bouncing along the bottom here or should we think about, you know, the potential of further correction as we get into the first half of next year. Yeah, thanks, Joe. It's a good question.

Phil Gallagher: I think it's going to be more bouncing along the bottom. I mean, and it can, I think it's just because I was just shared, I think with Melissa, maybe it was Rupert with the, the mixed signals in the market again. There, you know, we were still seeing as of today. I was still seeing transportation overall, pretty positive. The industrial segment, you know, it had a few pumps in it. But again, parts of industrial so broad parts of that customer base still really good in other parts a little bit softer and defense arrow.

Phil Gallagher: Unfortunately, what's going on in the world is going to continue to be a pretty strong market for us. And that's sizable for us in America. And sooner or later, I guess the wildcard is China and Asia-Pac, 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. Well, we see we do a rolling forecast with our teams and what we're sharing is what we're getting from them and looking at the backlog in a zero to 30, 31 to 90, 90, 180 day and look at it daily and see what is our backlog today versus a year ago.

Phil Gallagher: And it's telling us that's about where we're going to be. And again, you're going to have to make shifts, too. You know, Joe, you know, it's can't point it out ages. I'll be stronger this quarter to put things back down into March quarter. So I have a stronger mix in the West. So, got it. Maybe. Yeah, sure, I appreciate that.

Phil Gallagher: Maybe just a question on the far and outside in terms of the cost actions you're taking. I think in the past, you had chose to leave the lead facility open or online, just given the demand you were seeing. Is that part of the cost actions of closing that? And then can you remind if it is, can you remind us of the cost savings related to that? No, 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 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 that provides some of the cost savings. So I think it was a sub component of some of those numbers we talked about before. Okay, thank you. Thank you.

Matt Sharon: Our next question is from Matt Sharon with people. Please proceed with your question. Yes, thank you. And hello, everyone. I guess another question regarding the inventory that you're building and that the supply chain engagements that you're talking about for Q for the December quarter. Is that mostly Asia business? I think Matt, it depends. This is Canada depends on on the engagement. Some of its 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, I think it's more global engagements in nature, although a lot of the global production does happen in Asia, but some of the Americans 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've fair to say it's more America's in Asia than you're okay, but it's not for America. It's not always.

Phil Gallagher: Okay, that's helpful. So this is more of a fulfillment. So lower margin, but good returns. Is that how we think about that? Yeah, and some of it's, you know, maybe buffer stock and some of it may be fast turning. It's kind of a mixed bag. And I think the returns are there, no matter. That's your point. And then, and I think you said that inventories will remain elevated in the December quarter.

Phil Gallagher: Is that because you expect some of those supply engagements to carry over until March, or there are other reasons why you wouldn't start cutting inventory or your portfolio. Earlier, I would imagine that some of your products with lead times in, you know, where you can prune where others, you said, it was elevated lead time. So I'm trying to figure out why you're not, you're talking about more significant cuts to your inventory.

Phil Gallagher: When a lot of suppliers are basically blaming all the distributors for cutting orders yet, you don't seem to be doing that. Yeah, man, I was it's net new inventory coming in specific for these supply chain engagements as they begin to ramp and that would be offsetting. You know, anything we're doing organically to get inventory down, so that's kind of how we're trying to signal it is. There's net new coming in, not let's say normal course of business but specific to some supply chain engagements that's then having a flattening effect of overall, you know, work we're doing on inventory in the base business in the core business.

Phil Gallagher: Yeah it's complex Matt, so your questions are right on. And you know, if the net net is confident with the inventory levels, we'll start to bring them down. But right now the inventory is fresh, it's good inventory, it's not aging. To Ken's point, the newer stuff is what we're talking about that's stopping it from coming down.

Phil Gallagher: 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 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 should we think about how the rest of the year plays out to the best that you can tell us.

Phil Gallagher: Matt, I guess what I'd say is I think we'll still get a makeshift to the west. Now whether it'll be, you know, normal seasonality or let's say normal pops, you know, I still think that's to be determined, you know, we still feel confident above six billion and we'll get a little bit of gross margin lift from from makeshifts. That sounds to me. I think a lot of what fills commentary on the mid 2024 is really about inventory levels, right?

Phil Gallagher: 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, we're going to have an inventory level. We're talking at the market, you know, we say, you know, we track like you do all the inventory levels by, you know, EMS, us and markets, et cetera. And that's our estimate based on current poll and demand that the inventory at the inventory is burned off out there and customers. Or inventory to sum it up. We estimate that's mid 2024 could be shown like, you know, could come, could come quicker.

Matt Sharon: 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, you know, one area where you can drive a profitability growth as you continue to generate more capital. That's the inventory comes down. You bring down your your short term borrowings. So how should we think about that? It's a potential driver of profitability over the next few quarters.

Matt Sharon: Yeah, 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, 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 team tonight. Thanks, Ben. Thank you.

Joseph Cardoso: 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 Asiya? 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 comps 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, John, go first and so thanks for that. Oh, for all, we're competing well in Asiya. I think we're picking up some shares as well, but the, if you look at it, the Q on Q, you know, just looking at the numbers for, you know, the industrial in Asiya held up pretty well. It was down year and years, we thought about it in the script in general, because it's such a record breaking in numbers a year ago.

Phil Gallagher: Transportation was up both Q on Q and year and year. So there's some signs of positiveness in Asiya and Japan's been good. Japan's been positive for us. So it's really, there's no one thing. We just feel that Ken and I were just over there and talking to the team and our leader there to, you know, feeling that it's going to start to turn a bit. Now, you know, we're not very important.

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

Phil Gallagher: No, 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 use. You know, a W 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 noise for you guys? Thanks for the question. Yeah, well, it's not noise. It's certainly some reality to the dependant 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 that the auto strike. We wrote and see 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 businesses, you know, approximately or something, all of 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. You know, it's got a we put in that bucket transportation.

Phil Gallagher: It's, you know, it's golf carts, dump trucks, trains, ebikes, you know, so, you know, which is battery and the one of that semi laughter. So we kind of broaden that vertical as well. Got it. Appreciate the colors, guys. Thank you.

William Stein: Our last question is your morning time with true securities. Please proceed with your question. Thank you. Great. Thanks for taking my questions. I want to 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 and I even think he cited industrial at least an age as a relatively stronger and market.

William Stein: These have been sort of the standout weakening and markets among the semi-suppliers as we progress through earnings season or at least so far, but enough to have said it that it's pretty significant misses actually and I wonder if you're not seeing the same trends. Is this a matter of inventory in the channel? You guys that maybe 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, I'll give you a shot of 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, said maybe depend on people to find industrial. It's our largest segment, you know, by a long shot. So it's really a 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 caught 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 and transportation than 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 into man and there's others are just a little over inventory, but I don't be burning that off. And like I said to the first half calendar 24. Great. And the follow up recently WT micro acquired future.

William Stein: 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 old ones that you've already seen. Thank you. Yeah, thanks. Thanks.

Phil Gallagher: Well, thanks for comments on what we don't we don't make comments on on the competition, nor so 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.

Phil Gallagher: So they're going to combine together and we'll see how that works out. But in your 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.

Phil Gallagher: 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, what a 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 on behalf of Avnet.

Phil Gallagher: Team Avnet want to say go Diamondbacks. Okay. Have a great rest of the week. Thank you.

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