Q2 2025 Avnet Inc Earnings Call
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Please standby our presentation will now begin.
Speaker Change: Welcome to the Avnet second quarter fiscal year 2025 earnings call I would now like to turn the floor over to Joe Burke, Vice President Treasury and Investor Relations traveling.
Speaker Change: Thank you operator, I'd like to welcome everyone to the Avnet second quarter fiscal year 2025 earnings Conference call. This morning, I've never released financial results for the second quarter fiscal year 2025, and the release is available on the Investor Relations section of Avnet website, along with the slide presentation, which you may access it.
Speaker Change: For convenience.
Speaker Change: 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.
Speaker Change: Several factors that could cause or contribute to such differences are described in detail in our most recent Form 10-Q, and 10-K and subsequent filings with the U S E C.
Speaker Change: 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.
Speaker Change: Please note unless otherwise stated all results provided will be non-GAAP measures. The full non-GAAP and GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website.
Speaker Change: Today's call will be led by Phil Gallagher, Avnet, CEO and Kevin Jacobsen Avnet CFO.
Speaker Change: With that let me turn the call over to Phil Gallagher Phil.
Speaker Change: Thank you Joe and thank you everyone for joining us on our second quarter fiscal year, 'twenty 25 earnings call.
Speaker Change: First earnings call in the new calendar year.
Speaker Change: Before we begin I wanted to take a moment to acknowledge the unimaginable devastation in Los Angeles County.
Speaker Change: And ongoing challenges in North Carolina.
Speaker Change: Our Hearts go out to all those affected by these catastrophes, including our employees customers and suppliers and we are committed to providing support to the communities affected through our Avnet cares program.
Speaker Change: As of now all of our employees in these locations are safe.
Speaker Change: And to date, there has been no impact on our operations from these tragedies.
Speaker Change: With that said, let me turn to the second quarter results.
Speaker Change: In the quarter, we achieved sales of $5 $7 billion and adjusted EPS of <unk> 87, both above the midpoint of our guidance.
Speaker Change: Similar to last quarter, our results were primarily driven by stronger than expected performance in Asia offset by weakness in the west with Europe, presenting the most challenging market conditions.
Speaker Change: Our team continues to compete well and manage the factors within our control.
Speaker Change: We're making good progress on optimizing inventory and managing costs while.
Speaker Change: While at the same time, making investments in our business and operational capabilities.
Speaker Change: These efforts by our team helped us to generate over $300 million of cash flow from operations in the quarter.
Speaker Change: I want to thank our team for their perseverance during the prolonged and challenging cycle their efforts position us well for when the market recovers.
Speaker Change: Taking a look at the market today and with the exception of a slight uptick in the memory space semi doctor lead times continue to be stable across technologies.
Speaker Change: Pricing is mixed with some decreases and commoditize commoditize products and increases from certain suppliers, providing more complex technologies, who are looking to pass along higher input cost.
Speaker Change: On the I P and east side lead times and pricing continued to be stable.
Speaker Change: Our global book to Bill ratio remains below parity.
What are their Asia region, showing the strongest in Europe, having the weakest book to Bill ratio.
Speaker Change: Our backlog continues to be under pressure due to a combination of shorter lead times the current demand environment.
Speaker Change: And customers still being in that Destocking mode. However, cancellations have remained at normal levels.
Speaker Change: From a demand perspective sales increased sequentially in the aerospace and defense vertical led by the Americas, and the comms and transportation verticals led by Asia.
Speaker Change: Industrial computing and consumer verticals were lower on a sequential and year over year basis.
Speaker Change: Even with the muted demand as customers continue to work through their elevated inventory levels I'm pleased we made the expected progress on reducing inventory.
Speaker Change: Our team will continue their efforts to optimize the composition and quality of our inventory over the coming quarters.
Speaker Change: We expect to continue to reduce core inventory levels were needed in the coming quarters, but we'll balance the reductions with inventory investment opportunities we are seeing in the market.
Speaker Change: Now turning our attention of electronic components results.
Speaker Change: At the topline electronic components sales increased slightly on a sequential basis and declined on a year on year basis.
Speaker Change: Asia continues to be the bright spot for our ESG business with sales, increasing both sequentially and year on year.
Speaker Change: We saw sequential and year on year growth in the industrial communication and transportation end markets.
Speaker Change: We saw a slight benefit in Asia from customers ordering due to the uncertainty of potential regulatory changes in the United States.
Speaker Change: In EMEA, we continue to experience weak demand across the region due to the economic backdrop and certain geopolitical factors, which are all having a dampening effect on the business and consumer confidence.
Speaker Change: In the region, the aerospace and defense end markets showed moderate growth on a sequential and year on year basis.
Speaker Change: In the Americas, we saw sequential growth in the aerospace and defense end markets.
Speaker Change: And then select industrial end market applications.
Speaker Change: We did not see any meaningful increases in orders this quarter.
Speaker Change: In advance of the recent tariff increases.
Speaker Change: Demand creation revenues increased sequentially by 5% as our field application engineers continue to drive the funnel for converting design wins into revenues are.
Speaker Change: Our design registrations and wins also increase sequentially, which is a positive indicator for future demand creation revenues.
Speaker Change: Now turning to for now sales were flat sequentially and down year on year.
Speaker Change: For now sales continue to be challenged given the weak macro environment environment in Europe, where they have the highest percentage of sales.
Speaker Change: Farnell was also facing some competitive pricing pressures for on the board components.
Speaker Change: I'm confident that we will see slow and steady improvements that for now as we execute against our cost reduction initiatives and focus on those growth opportunities we have control over.
Speaker Change: Including leveraging existing customer relationships.
Speaker Change: To conclude the current market correction has been one of the most prolonged and uncertain in recent memory.
Speaker Change: I want to thank our team for their dedication and competitive spirit.
Speaker Change: While it is difficult to gauge how long the market correction will continue there are many reasons why I'm optimistic about the future of Avnet, we are a great supplier line card and a diverse customer base, we have a seasoned and stable leadership team and we have a solid balance sheet, giving us the capacity to weather these challenging market conditions and emerge even.
Speaker Change: Stronger.
Speaker Change: We also see opportunities with supplier partners to grow our share by continuing to demonstrate the value of distribution and clothing tapping into our supply chain services and digital capabilities.
Speaker Change: Additionally, our continued focus on higher margin offerings, such as embedded solutions demand creation and I P. Any products will you future growth and gross margin benefits.
Speaker Change: With that I'll turn it over to Ken to dive deeper into our second quarter results.
Ken: Thank you Phil and good morning, everyone. We appreciate your interest in Avnet and for joining our second quarter earnings call.
Speaker Change: Our sales for the second quarter were approximately $5 $7 billion.
Speaker Change: The high end of our guidance range and down 9% year over year.
Speaker Change: The sequential basis sales were higher by 1%.
Speaker Change: Regionally on a year over year basis sales increased 8% in Asia, but declined 25% in EMEA and 14% in the Americas.
Speaker Change: From an operating group perspective, electronic components sales declined 9% year over year, but increased 1% sequentially.
Speaker Change: Parnell sales declined 12% year over year in less than 1% sequentially.
Speaker Change: For the second quarter gross margin of 10, 5% was 86 basis points lower year over year, and 32 basis points lower sequentially.
Speaker Change: A portion of the year over year and sequential declines were the result of a sales mix shift to Asia.
Speaker Change: The same mix shift to Asia also impacted easy gross margin, which was down both year over year and sequentially.
Speaker Change: Gross margins for each E. C region remained relatively consistent on a sequential basis.
Speaker Change: Gross margin was also down sequentially and year over year, largely due to an unfavorable product mix and from competitive pricing pressures were on the board components.
Speaker Change: Turning to operating expenses SG&A expenses were $437 million in the quarter down $28 million or 6% year over year and down $2 million sequentially as a percentage of gross profit dollars SG&A expenses were slightly higher sequentially at 73%.
Speaker Change: Yeah.
Speaker Change: Foreign currency positively impacted operating expenses by approximately $4 million sequentially and had relatively no impact year over year.
Speaker Change: For the second quarter, we reported adjusted operating income of 105 $59 million and our adjusted operating margin was two 8%.
Speaker Change: Operating group electronic components operating income was $182 million and E. C operating margin was three 4%.
Speaker Change: The sequential and year over year decline in E. C. Operating margin was primarily due to the sales mix shift to Asia.
Speaker Change: Operating margin was 1%.
Speaker Change: 47 basis points quarter over quarter, reflecting improved expense control.
Speaker Change: Operating expenses were down $10 million year over year and down $4 million sequentially.
Speaker Change: For now operating expense reductions continue to progress as planned and we remain focused on all the areas we can control.
Speaker Change: Turning to expenses below operating income second quarter interest expense of $62 million decreased by $12 million year over year and decreased $2 million sequentially due to lower average borrowings.
Speaker Change: This lower interest expense positively impacted adjusted diluted earnings per share by <unk> 11 cents year over year and two cents sequentially.
Speaker Change: Our adjusted effective income tax rate was 23% in the quarter as expected.
Speaker Change: Adjusted diluted earnings per share of 87 exceeded the midpoint of our guidance for the quarter.
Speaker Change: Turning to the balance sheet and liquidity during the quarter working capital decreased by $554 million sequentially, including a decrease in reported inventories of $362 million $154 million decrease in receivables.
Speaker Change: And a $38 million increase in payables.
Speaker Change: Sequential changes in foreign currency exchange rates contributed to $211 million of the working capital reduction and $160 million of the inventory reduction.
Speaker Change: As a result of this working capital decrease working capital days decreased five days quarter over quarter to 102 days.
Speaker Change: Our return on working capital decreased from last quarter due to lower operating income partially offset by the reduction in average working capital.
Speaker Change: Although there is more work we have ahead of us to optimize inventories the reduction this quarter demonstrates additional progress toward near term reduction goals.
Speaker Change: Our inventory days improved three days sequentially to 98 days.
Speaker Change: As Phil outlined our priority remains ensuring we have the right inventory to support our customer needs and to position Avnet for growth opportunities. We continue to work down areas of Asia ex excess inventories, while we invested in inventories we need to achieve our growth objectives.
Speaker Change: We generated $338 million of cash from operations in the quarter.
Speaker Change: The cash flow generated from our working capital management allowed us to decrease debt by $385 million this quarter.
Speaker Change: We ended the quarter with a gross leverage of two nine times and we had approximately $1 $1 billion of available committed borrowing capacity.
Speaker Change: Over the past several weeks, we extended the maturities of our two primary credit facilities, which provide for $2 billion of borrowing capacity over the coming years to support any future liquidity needs.
Speaker Change: Cash used for capital expenditures was $29 million within our expected quarterly levels of approximately 25 million to $35 million per quarter.
Speaker Change: We remain committed to our roadmap of delivering a reliable and increasing dividend and making share repurchases to increase shareholder value as we believe our shares continue to be undervalued by the market and are still trading below book value.
Speaker Change: In the second quarter, we paid a quarterly dividend of <unk> 33 cents per share or $29 million. We also repurchased approximately $51 million worth of shares and have $515 million left on our current share repurchase authorization.
Speaker Change: We're on track for our goal to reduce outstanding shares by at least 5% this fiscal year.
Speaker Change: Book value per share decreased to approximately $55 a share or a sequential decrease of one dollar per share due to changes in foreign currency exchange rates.
Speaker Change: Turning to guidance for the third quarter of fiscal 2025, we are guiding sales in the range of $5 5 billion to $5.35 billion and diluted earnings per share in the range of 65 to 75 cents.
Speaker Change: Our third quarter guidance assumes current market conditions persist and applies a sequential sales decline of approximately 6% to 11%.
Speaker Change: The sales guidance implies expectations of a seasonal sales decline in Asia due to lunar new year, and a modest decline for sales in the western regions compared to typical seasonal sales growth.
Speaker Change: This guidance also assumes similar interest expense compared to the second quarter, an effective tax rate of between 22% and 26% and 88 million shares outstanding on a diluted basis.
Speaker Change: In conclusion, our team is consistently performing well in the areas within our control driving working capital reductions in cash flows and being disciplined with our operating expenses. We continue to look for areas, where we can reduce expense.
Speaker Change: While still investing in our business and our capabilities.
Speaker Change: By providing value at the center of the technology supply chain to our customer and supplier partners Avnet will be well positioned to return to growth when market conditions improve.
Speaker Change: With that I will turn it back to Phil for one last word before questions.
Phil Gallagher: Hey, Thanks can I appreciate that.
Phil Gallagher: Before we go to questions, there's gonna be one analysts it's noticeably missing on the questions are this quarter.
And I just started appropriated appropriate yeah I wanted to take a moment to congratulate Matt Sheerin of Stifel. On his recent Li announced retirement I'm not sure if he's listening today knowing him he probably is.
Phil Gallagher: But we wish him well and thank him for his dedicated his decades of coverage.
Phil Gallagher: Net and in technology supply chain, he's been a longtime friend personally and as Andy industry, Yeah, and he will be missed so best of luck, Matt in your next chapter.
Speaker Change: With that I'll turn it over to the operator, and we'll open it up for questions.
Speaker Change: Thank you well now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Speaker Change: Thank you. Our first question is from Toshi Hari with Goldman Sachs. Please proceed with your question.
Speaker Change: Hi, guys. Good morning. Thank you so much for taking the question maybe a market slash kind of cycled question for Phil I know this is a tough one but curious how you're thinking about.
Speaker Change: The overall industry beyond the March quarter, I think last quarter, you sort of hinted that you know internally. Your expectation was for you know the environment to improve and in sort of late Q1, Q2 and definitely into the second half has anything changed over the past 90 days and if so if you can sort of expand on what.
Speaker Change: It has changed that would be really helpful. And then I have a quick follow up thank you.
Speaker Change: Yeah. Thanks for the question. Obviously this question has gotten a little bit more complex over the last several quarters to a year as we were kind of I think collectively as an industry I'm missing the mark here a bit and there's just a little bit more inventory out there than maybe we had anticipated my overview. Our overall view of the market is telling me that their cycle I mean, I'm I'm still very bullish on our industry.
Speaker Change: I mean, there's no question where were dealing with some challenges here.
Speaker Change: And you know some excess inventories out there that we're burning off as a as an industry. It is and it is improving on the burn off okay. We're just not seen it yet in our in our P O S.
Speaker Change: So I still think it's it's end of and June into the into the summer quarter would start to see some recovery, but you know we're we're we're kind of be on calling that at this point in time, we just need to manage what we what we do know and what we're seeing for the current bookings, which are still below parity on how we're seeing our backlog which is still good.
Speaker Change: And eaten into a bit of.
Speaker Change: And I think the real indicators. This is the second year in a row and I've been at this a long time that we did not see the west come back greater than the east in the March quarter. Okay. That's so atypical and that'll ship you know what we're just having some.
Speaker Change: Extra issues happening in our industry, whether it'd be geopolitical and other things that we all know about it is just having a has taken its toll and it's given a lot more of a great outlook.
Speaker Change: But I want to be a while.
Speaker Change: 10 of them Super positive on on what's happening out there are the applications or whats happening for technology for semi doctors you know again bullish on the long haul we just need to do what we're doing and I think we're doing it we're always managing through this.
Speaker Change: This cycle, okay, it's a little bit longer little choppy than we wanted but they were healthy and and we'll be ready when it bounces back.
Speaker Change: Great. Thanks for that Phil and then maybe my follow up for Ken on gross margins.
Speaker Change: You mentioned mix was the primary driver in the December quarter, and and you know your your implied guidance for for March as well how should we think about gross margins again beyond the March quarter. I know you guys talked about you know your focus on demand creation and how the leading indicators look good and I know you've got.
Speaker Change: You know things going on at far now that that over the medium to long term should improve profitability. There. So both the near term and the long term how should we be thinking about the puts and takes around gross margins. Thank you.
Speaker Change: Yeah, a couple of comments I think the first would be if you think about kind of the gross margin for the quarter, we attribute about 75% of the decline coming from that Asia mix right and then there's puts and takes.
Speaker Change: On the rest of it.
Speaker Change: No.
Speaker Change: We're trying to focus on margin to each business unit. So think about you know each of the regions as well as farnell and how they're doing and I think generally speaking you know, they're holding up pretty well and you know there's obviously some competitive pressures in you know in general as the demand environment gets soft. There's this pressure on gross margin, we feel pretty good about margins in each region are holding up pretty well.
Speaker Change: So that's a good sign I think as we look forward right. We would expect the mix shift to kind of normalize even in the guidance this quarter, although the west isn't you know normal seasonality, we're still getting a little bit of a normal seasonal mix shift because Asia is down more than the west right. So you'll see a little bit of gross margin accretion, but we think that mix normalizes over the next.
Speaker Change: Several quarters and then you know continue to drive those higher margin opportunities that you talked about and again I think our base cases thinking about being able to hold the margin in each region hopefully increase it some but but we think we've got enough positive gross margin product lines and opportunities to kind of keep margins flattish.
Speaker Change: Over the midterm here.
Speaker Change: Yeah. It was just a I mean, if I can just jump back on the overview of the market I would just highlight you know there's a lot of good stuff going on too I mean.
Speaker Change: If you look at Asia Pac, which we've highlighted you know its a second quarter in a row that we've seen year on year growth and in Asia Pacific. So that's so it's not all doom and gloom out there by any stretch of imagination. So I just want to highlight that as well and that's typically a good sign for what's to come in the balance of it bounce the regions.
Speaker Change: Understood. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from William Stein with Truth Securities.
William Stein: Great. Thanks for taking my questions guys. A couple of quick ones I suspect that there was a benefit in the quarter from foreign exchange can you maybe tell me if I'm right and please quantify it if if that's the case.
Speaker Change: Yeah, I would say, we didn't really get much benefit from currency if anything it was a little bit.
The difference I guess, how I'm looking at here as it was.
Speaker Change: So call it $40 million on the sales line.
Speaker Change:
So that's kind of the gist there you know currency didn't move a lot during the quarter. We mentioned it did help on the on the working capital side at the end of the quarter versus the beginning of the quarter, which is on the balance sheet gets translated.
Speaker Change: Okay, Thanks and.
Speaker Change: Maybe a different way to go with the inventory question you made some good progress this quarter, but it's still about 20 days above typical end.
Speaker Change: I Wonder if you see sort of a normal path to reduction there maybe when I say normal I mean sort of.
Speaker Change: Straight line, just a matter of <unk>.
Speaker Change: It'll burn off or maybe is there something else to talk about in inventory like I've heard I've heard some industry folks talk about what they call sludge when there's things in the.
Speaker Change: And the inventory.
Speaker Change: That aren't really moving or stuff that you don't have price protection or rotation rights on <unk>, maybe you can characterize it that way for us So we can.
Speaker Change: Maybe get a better idea as to when we might see things clear up and normalize on a days basis. Thank you.
Speaker Change: Yeah, Thanks, well I'll give you some comments here and then Phil can jump in I think you know there's no silver bullet.
Speaker Change: You know the answers complicate or do we still have pockets of inventory, that's becoming aged that customers you don't have committed to but they need to take and we're working through with them on how to get them to you know absorb that inventory you know we've got pockets of inventory that are really just you know kind of bought the wrong stuff, we need to work through those.
Speaker Change: And then just in general you know demand is down so it's taking more time to get through some of those broader inventory challenges you know, it's not elevated everywhere, it's not aged everywhere right. We kind of know the targets and they've been let up it's just a matter of working through them and you know we think we made good progress. This time, so I think it's going to take a few more core.
Speaker Change: To continue the progress there and clearly if demand picks up right that that'll help as well. So you know I think we're doing what we can and you know we don't view this as high risk of you know meaningful write offs in and huge you know charges related to inventory you know, it's still good inventories still.
Speaker Change: Underlying.
Speaker Change: There's demand its just lower than expected as well as our customers having you know more so we'll just continue to work through it but it's more of the same I wouldn't say anything's fundamentally changed if anything you know, we're actually seeing more opportunities to use our stock rotations in and you know work with our suppliers to get rid of some of those stuff that had been problems that maybe we couldn't have done a year ago.
Speaker Change: So we're seeing more flexibility in the overall system to help everyone get through this year.
Speaker Change: Phil It's great question, it's one of the questions right and where we're looking at this obviously very closely internally. So the short answer is yes, we're going to continue to work inventory down.
Speaker Change: Exploration that that's going to determine somewhat on the previous question. We had based on the market growth rate, but we're definitely gonna want to continue to or will continue to move the inventory down just at what pace.
Speaker Change: Other side of that coin yeah, they're younger they're all tracking sludge slob, whatever you whatever you want to caught up but we were tracking caught enema. So we're tracking our non moving inventory in and right now we're in pretty good pretty good shape. There. There's some that the aging obviously and then we're working out with the sales teams and the customers are trying to get that moved or with suppliers.
Speaker Change: On on rotation key point I want to make in addition is it's not all of the inventory I think it's very well when we put that deliberately in the script. Its a handful what's its called suppliers, that's driving it up a bit we're working with them.
Speaker Change: And I mentioned that because we're still making investments in inventory I mean, we still needed to run the business and our turns business center supply chain business.
Speaker Change: We have a lot of suppliers that joined the call then customers I get feedback after the call. We don't want them to think we're taken all of our inventory down to zero, but that's not the game rent right. So we need to have inventory and we need to have the right inventory, while we work off some of the stuff that's aging a bit so I just want to make that clear as well.
Speaker Change: Great. Thank you.
Speaker Change: Thank you will.
Speaker Change: Our next question from Joe Quattrochi with Wells Fargo. Please proceed with your question.
Joe Quattrochi: Yeah. Thanks for taking the questions maybe just a follow up to that I guess, how do we think about just that the mix of your investment in and strategic.
Joe Quattrochi: Inventory of key verticals relative to the optimization I mean do you think that is.
Joe Quattrochi: Inventory at the overall level here and contained or down or I guess it depends on how fast the cycle kind of turns to to see that that dynamic.
Joe Quattrochi: You know we don't it's a good question Joe we'd have to do some work on that that gets you down to that and that's that's tail there to buy we don't inventory by vertical that's right because if I'm looking at the burgers are verticals now because a lot of that was used in industrial is also used in comm and might be used in transportation et cetera, and so it's not necessarily.
Joe Quattrochi: Inventory by vertical are we do look at it by the supply chain and things along those lines, but it's not any one vertical that wherever we are concerned about with having excess inventory. Its just you know.
Joe Quattrochi: With the you know as you know to Bobby Your next question you know, we're we're very heavy in industrial and even in Europe, where even heavier than we are in the bounds of the world in industrial and in that segment as a vertical it has slowed now we mentioned in the in the transcripts that there are some select customers have picked up but it's not like it's across the board.
Joe Quattrochi: And that's call that need between 30, and 40% of our of our business and then the other big one that's obviously slows as transportation, Okay, and I will tell you in transportation because there are some unique technologies and.
Joe Quattrochi: Issues in transportation inventory that inventory is not a that that inventory is not overly concerning at all okay and transportation, where we have a select products. So it's really in earnest aerospace dispatched the defenses.
Speaker Change: No issue really their inventory that business as we called out is continuing to grow grow nicely. Unfortunately, I guess for for many right, but that's that's increasing in particular on the defense side and we're starting to see a bounce back on the aerospace side, you and Joe I'll, just add that I think.
Speaker Change: Our overall expectation is inventory she continued to go down, but we have capacity to invest so well bring it down but still make investments in and you know so it may not come down as meaningful as someone like because of those investments, but you know I think its there's opportunity to get the pockets of inventory and we're really focused on getting the right inventory down we could just go ahead and stop there.
Speaker Change: Spigot and stop inventory coming in but that's not good for our business that's not good for our customers right. We want to make sure we're attacking where we have challenges in inventory and not just getting the total inventory line item down it's attacking those areas that are in excess or slow moving.
Speaker Change: And so we'll continue to do that and you know there may be from a quarter to quarter. There may be timing differences between those two items are the investments and the bringing the inventory down, but still plenty of capacity and opportunity to bring inventory down while still making investments in the right kind of inventory to position us well for recovery.
Speaker Change: Thanks for that and as a follow up.
Speaker Change: Can you talk about just the level of it.
Speaker Change: Inter quarter or turns or just in time demand that you saw in the December quarter, and just how should we think about that that level of the type of demand that's embedded in the March quarter guidance.
Speaker Change: Yeah, we touched on that last quarter that we started to see a slight and again I think we were careful in the world who use your Joe I said last quarter September quarter slight increase in turns we saw that continue into December but not nothing overly exciting so we.
Speaker Change: We're not building in a lot of turns.
Speaker Change: Outside the norm for the March quarter.
Speaker Change: Now that could change I mean, there are some things happening out there you know that hey, we're we're still in January I mean March is a big month and typically has been a big month right now as we're looking at it we're looking at our backlog. We look at you know what we have in supply chain background I can say, hey, that's kind of what we were forecasting we did not put a lot of turns in there that changes that would be.
Speaker Change: Good news, but right now we're being conservative on the turns number.
Speaker Change: Okay. Thank you very much appreciate it.
Speaker Change: Got it Joe.
Speaker Change: Okay.
Speaker Change: Our next question from roof blew by the Korea with Bank of America. Please proceed with your question Hi.
Speaker Change: Hi, Thank you for taking my questions.
Speaker Change: Phil and Ken I wanted to ask you a question on operating margins and the Gist of my question is what is under your control that you can do to help margin. So what are you some of the things on the Parnell trade that youre doing to improve margins and 1% operating margin. How do you see that trending over the next couple of quarters and the C.
Speaker Change: Question on the on the core business and I know mix is a big driver for margins, but are there things under your control and what I'm thinking is you recently hired a chief Digital officer I know most of the sales are not true to the website I think on the on the core side, but is that something they can.
Speaker Change: Did that can grow and can help you on the cost side. So just give us your thoughts on what's under your control and what's not and how you see margins improving on the he side as well.
Speaker Change: Okay.
Speaker Change: Yeah. Thanks, good blue yeah, but it's hard to control the regional mix and I think our our goal is to not necessarily focus on regional mix and it's Asia is growing we wanted to take advantage of all of that growth.
Speaker Change: Yeah, we do focus on the gross margin in each each region. So I'll maybe start with far now you know in addition to the expense actions, which will help operating margin you know we've got a few different things going on in terms of the overall sales organization, where things. We think we can control and part of that is you know how do we leverage the broader avnet and our customer base to kind of facilitate market share growth.
Speaker Change: In farnell with those customers you mentioned, Dave Youngblood, our Chief Digital officer and he's.
Speaker Change: Really connected with for now and I think there's more we can do in terms of just the conversion and the approach we take with the with Farnell E. Commerce proposition. So we do think that's within our control and we can move that up you know independent of where overall demand is and you know Dave was on the call. He would tell you that you know we get a lot of traffic to the farnell.
Speaker Change: And related websites as well as avnet and so we just had to unlock that you know make those visits turn into sales.
Speaker Change: And Theres some things were driving to help do that so there's a few examples on the core side or E. C side, you know listen our demand creation mix was better this quarter I P and he was actually a higher mix than sami's. This quarter. So those things we've talked about including supply chain services is the embedded business Our Korea brand.
Speaker Change: Those are all things that do have a higher margin that we believe are going to have higher growth than let's say the broader broader market. So those will help and again more scale helps as well if our.
Speaker Change: Get back on the growth pattern and you know some more market share opportunities some perhaps shift of business from our suppliers from their direct channel to the distribution channel you know all those things can help get additional scale to kind of help return that the operating leverage into the model. So so you know there is things we continue to work on and again, our focus and our investments are.
Speaker Change: Our focused on medium to long term not just the short term you know it is a little tougher than we thought so you know where we're probably going to sharpen the pencils on our overall operating expenses considering the market hasn't recovered as quickly as we thought it might but you know there are things we continue to control they may not yield benefits today, but you know six to 10.
Speaker Change: 12 months from now we do think those things will yield benefits on margin, yes, but let me jump in thanks for the question.
Speaker Change: Maybe reemphasize a couple of points that Ken made maybe add a few yeah. So on the digital side, it's a big investment in Dave He's been on board just 90 days now barely and yeah. We can impact our online sales at Avnet, Inc. Let alone just far now online sales tends to run at a higher margin.
Speaker Change: I, it's low touch so slower cost.
Speaker Change: So that's a good thing. So he has he is chartered and working with Rebecca our president with for now to increase our percentage of sales online and that's something we can absolutely action through improvements when the when the customer experience on the website. You know fundamentally are the biggest thing we can do short term.
Speaker Change: And we've been doing that we talked about it in the transcript some of the benefit and we're not where we want to be with for now or at the very clear, but some of the benefit we've seen even as the markets continue to decline has been some of the expense actions. We've taken over the last year and again are more in the in the last quarter at four now and.
Speaker Change: And there's some more to still be a trickling in as they now have rebuilt that staff and rebuilt the strategy to go to go after driving driving increased revenues and better better mix and then Ken touched on it I'm just gonna reemphasize that I P. D runs about 400 bps higher in margin than sami's.
Speaker Change: <unk> demand creation, similar and we had good demand creation quarter continue to have a good demand creation, our story and the suppliers are all bought in on demand creation, which is exciting.
Speaker Change: And then the embedded business I can't talk to that not only is it sticky once we're in but we're actually doing turnkey design boards right that are in the industrial right in the middle of the customer base. We're focused on that again not always as sticky it runs at a.
Speaker Change: Roughly two extra margins.
Speaker Change: Or more than we were running in the core so anyway, just a few a few that I wanted to add.
Speaker Change: Okay. Thanks for all the details there for my follow up if I can ask in this environment. How are you thinking about capital returns.
Speaker Change: Phil do you see any opportunities for any rollouts or any M&A. I mean, you talked about investments that you are making to better position. The company is there any chance for inorganic growth are you taking any share organically versus competitors in this environment and Ken how do you think about free cash flow in.
Speaker Change: And by Lax and and uses of cash thank you.
Speaker Change: Well I'll go first Ken Yeah. We think we're we think we're gaining share, but we don't want to gain share D. At the.
Speaker Change: Hmm.
Speaker Change: Ladies and cost right. So we're just trying to just continuing to work and drive value in the marketplace value, our customers and suppliers being that centered in technology supply chain and back to even Will's question I think when he was one of the questions on inventory yeah, yeah. Some areas might have a little bit more inventory than we want well you're not but we'll work with those customers, where you know we don't Wanna for stuff on customers.
Speaker Change: If they can't pay for it we want to build that long term strategy with the customers and on the on the upside or the upstream as I like to say with our supplier. So it's a constant a balancing act, but we think we have the right.
Speaker Change: Balance there are not that we use the term of driving responsibility and accountability with having long term relationships with these customers and extracting more more value and more share out of those customers. Okay.
Speaker Change: What was the other part of that question in reverse.
Speaker Change: We're going to continue to maintain what I've been doing obviously, we'll prioritize the business investments we need in the business.
Speaker Change: And that we're going to need to support the dividend and it just increased this past September as well as our buying back shares and again, we had a good cash flow quarter of $1 $2 billion over the past four quarters, you know we want to keep leverage under control, but at the same time you know we view the shares is pretty attractive and and you know we're going to continue to buyback and achieve our goal.
Speaker Change: At least 5% of the share count being reduced this fiscal year. So I would say, but just more of the same and wanted to just drive some consistency there yeah.
Speaker Change: The other part of your question was M&A, so Ken touched on the capital allocation with dividends share bags.
Speaker Change: Arriving down on that their priorities.
Speaker Change: We're always in the business of M&A, Okay, but we're just gonna be very selective okay. Yes, we talk to people, yes, we have bankers, calling us we think the fastest way to grow profitably is still organic growth, okay and protect your first but if there's the right type of acquisition that would come along and and fit one of these areas and we talked about in the transcripts are just talked about.
Speaker Change: It in Q&A that are strategic in nature higher margin nature differentiate us in the marketplace brings us expertise that maybe we don't have yes, we're open to that dialog and are having some of those dialogues.
Speaker Change: Okay. Thank you for all the details appreciate it.
Speaker Change: Got it.
Speaker Change: Our next question is from William Stein of Truth Securities.
Speaker Change: Great. Thanks for taking my follow up.
Speaker Change: I wanted to ask about tariffs and the.
Speaker Change: Potential impact and even.
Speaker Change: The impact that we might have seen in the quarter just closed I think in your prepared remarks, Phil you talked about.
In Asia, having received some slight benefit from anticipation of tariffs that would be I guess a pull in.
Speaker Change: Try to get ahead of any action, but but I think when you were discussing the Americas you said, there's no effect like this going on.
Speaker Change: And I'm I'm, just hoping you can maybe.
Speaker Change: Give us some idea as to how you know.
Speaker Change: When a customer orders, whether there's upside or downside how do you know if its in anticipation or not and it's in anticipation of this that that would be helpful. Thank you yeah. Thanks well.
Speaker Change: So let me start I'll turn it over to Ken on the on our revenue in fact, I think it was in.
Speaker Change: It was my transcript through his but yeah. We did we do have a number or an estimate for you. It wasn't that large and in general to just work backwards. We thought we would see more and and how we would see it as pull ins from like the March quarter ended December quarter backlog, that's there to the customer they don't want to take a chance and waiting.
Speaker Change: I want to bring this inventory and now because we don't know the uncertainty around tariffs and that's how we would measure it and we didn't see much of its surprisingly we thought we'd see more we offered our customers who went to customers and pardon me if you like.
Speaker Change: Glad we didn't cause.
Speaker Change: Okay.
Speaker Change: I Gotta do Walmart, so we're going to need the barge backlog there to raise I know since you know driving that unnecessarily to Rob Peter to pay Paul. So we just didn't see that backlog move a little bit in Asia I can touch on it.
Speaker Change: As far as tariffs in general go Yeah. It's you know, it's an everyday conversation, but it you know and I got to ask this in New York City.
Speaker Change: Our our team we had.
Speaker Change: Tons of analyst meetings in December and the actual shareholder meetings and everyone asked about tariffs and my high level responses, Hey, we'll deal with it when we know what it is and we're not we're not losing sleep over it we've handled it before.
My personal belief is it'll come down quite a bit from where the rhetoric is today, but.
Speaker Change: But we have processes in place we got free trade zones in place I think we know a lot more we talked a lot about this yesterday in the Americas Ops review.
Speaker Change: My memory I think there's like eight 8% of our business in the Americas or something along those lines is actually coming out of China and within some of those suppliers that we have they can ship to similar products out of a different region. Okay. Instead of out of China now, it's complex because the suppliers and need to move their supply chains and whatnot. So what these are all the time.
Speaker Change: <unk>, we're having with our suppliers our customers and internally we've got the processes set up it's really important to restate. This maybe it's obvious but we're.
Speaker Change: We're not paying the tariffs that I can assure our customers on the line. They know that it'll be a pass through we don't make money on terrorists are but we will make sure we pass it through so we we we can't afford obviously to absorb that and the products that were receiving.
Speaker Change: Receiving a distributed to the customers. So again, it's an issue. It is not one of the issues keeps me up at night, because I think we're well prepared for it I think our customers are well prepared well, it's not going to it's not their first rodeo either yeah, we'll just have to manage through it but.
Speaker Change: It will be okay can you make a comment on the issues of the December quarter, even though we did see some slight benefit in the topline from Asia.
Speaker Change: Asia customers pulling in in advance of potential regulatory changes right and Phil mentioned that but we also saw a couple of things you know there was a price increase.
Speaker Change: It took effect in January on some high end technology. So we saw a little bit of uptick in demand in December for you know getting out in front of those price increases independent of tariffs, we didn't see much benefit in the Americas from terrorists, but we saw some global benefit from customers buying in advance of a price increase that took effect in January as well as you know there was a end of life product.
Speaker Change: On the high end side as well that we were able to you know get some benefit from in the quarters and we kind of normalize things you know our guidance was down 6% to 11% we think at the midpoint when you normalize for those things that it goes from 8% mid point that somewhere in 4% to 5% down mid point when you kind of normalize for those those items. So it was.
Speaker Change: Something it wasn't a huge amount, but you know all those three things combined added 3% to 4% of the underlying quarter.
Speaker Change: Some of those were somewhat yep no problem, you've got well great. Thanks again.
Speaker Change: Thank you there are no further questions at this time I'd like to hand, the floor back over to Phil Gallagher for any closing comments.
Phil Gallagher: Okay. Thank you and hope a 2025 is off to a good start for everybody Ah Hey, Thanks for attending today's earnings call and we look forward to speaking to you again at our third quarter fiscal year 2025 earnings call, which will be reported in April.
One last comment I guess in advance of the Super Bowl week.
Speaker Change: Yeah. So we can have from now I just want to say go birds. Okay. I think most of you know from Philly So from Kansas City I apologize, we're going to do the best we can to upset you alright have a great rest of the day. Thanks.
Speaker Change: Ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.