I think we're live. For our track today, we are rounding out the day with Avnet. First, I should introduce myself. I'm Melissa Fairbanks. I am the analog semi and IT supply chain analyst here at Raymond James. Welcome to the conference. We are really excited to have Ken Jacobson, CFO from Avnet, with us today. We also have, hiding in the audience, Lisa Mueller, who handles IR for the company. You know, it's been a pretty full day. Full room, looks like, full day of meetings, that's good. It's been an interesting time in analog semis and distribution, certainly recently. Ken, if you would like to do just kind of a brief introduction of who Avnet is. I don't know if you need to do a Safe Harbor statement. Maybe give us kind of like some background on the company just to get us started. Yeah. Well, thanks, Melissa, for having us out here, and thanks everyone for your interest in Avnet. Avnet's a global, value-added distributor. We connect the world's top technology manufacturers, primarily semiconductor and interconnected passive and electromechanical, manufacturers to customers that use electronic components in everything they design and create. You know, our two areas of expertise at the center of the technology supply chain is design chain and design support, helping customers choose the right electronic components to make into their design. Supply chain, you know, we've talked about a lot of supply chain since COVID times and the shortages and we're experts in supply chain. We've got global scale. We do business in over 140 countries worldwide, we can help customers design or have supply chains anywhere in the world where they need it. You know, as of the last few years, you know, supply chain capabilities are becoming more and more important to making sure you can sustain your operations and have a resilient company. Okay. Maybe go over the two separate businesses. You do have two separate reporting, your reporting structure is two separate businesses. Talk about the difference between the components business and then Farnell. Yeah. Our first segment, Electronic Components business, is what we refer to as a broad line distributor. We've got a broad line card, and we're supporting primarily high-volume customers that are already in production. We're typical customers are the procurement groups of manufacturers, and that business is global, represented in Asia, which is roughly 50% of our business last quarter. The Americas is roughly 20%, and then Europe's roughly 30%. That business effectively supports, you know, production volumes, and we help customers design and support supply chains throughout the world. Our second segment is what we call the high service business called Farnell. That's one of speed and convenience, where you have design engineers and R&D activities going on. They need small quantities. They need it overnight to finish their design and product and, you know, with that, we yield a higher margin. As the EC or Electronic Components business runs around, you know, 10%-12% gross margin, the Farnell business runs closer to 30% gross margin. Definitely a premium there. The mix makes a difference for sure. I would like to kinda go over current trends because you guys do tend to follow the leader in terms of the semiconductor supply chain. Maybe go over some of what you're seeing by the geographic mix. You know, Asia typically leads us out of a correction, followed by North America and then Europe. That would be very helpful to kinda review that. Sure. Maybe the first thing to point out is we're very diverse, so, you know, we've got a very robust line card, but no single supplier technology represents over 10% of our business, and no customer represents, you know, over 4% or so of our business. You know, have a really good breadth of the market. Our key focus areas in terms of end markets would be industrial, transportation, aerospace and defense, networking and communication, as well as, you know, some in the data center and consumer side. You know, really this cycle, you know, I would say the recovery started in Asia. We've got six quarters in a row of recovery and growth in Asia, and, you know, that business now is at record revenue levels as of this last quarter. Now, a little bit of that's driven by the data center and the AI phenomenon, but it's more broadly in terms of the recovery. When we look at our Asia business, it's led by Taiwan, roughly 40% of the business, a lot of strength in Taiwan. Then, you know, next biggest market would be China, followed by Southeast Asia and then Japan. What we've seen is, you know, broad-based recovery and, you know, the growth rates, accelerating. You know, some of that is replenishment from the customer base because they've bled down inventories, but a lot of it's really the increase in broader demand. Feeling really good about that. Just for color, you know, our Asia business was 40% of our total business just five quarters ago, and now it's 50% because of that growth. While in the West, you know, we just got back to growth in Europe this last quarter. Europe's been the slowest region. You know, it's more our most profitable region in terms of gross margin percentage as well as operating margin. You know, that business is heavy industrial for us, followed by transportation and then networking comms. We saw, you know, pretty significant declines. We're about 35%+ off peak revenue levels in Europe, but got back to growth, you know, roughly 1% year-over-year growth this last quarter, and seeing traction there. The Americas is kinda somewhere in between. Had a couple quarters in a row of growth, a little bit more robust than Europe, but still closer to where Europe's at than compared to Asia. You know, what gives us some amount of, you know, confidence, what I would say, you know, very encouraging signs that through all the regions we're seeing, you know, robust book-to-bill ratios. We're seeing our backlog replenish, you know, over the past four quarters. We've been encouraging customers to give us visibility. You know, the more visibility we get, the more forecast we get, we can provide that information to our supplier partners, so they know what to load the fabs in making their semiconductor choices. A lot of it's, you know, based on our visibility, we give them, you know, demand outlook. We're seeing really good signs there in terms of backlog building back up again and getting some of the visibility we had pre-COVID. I would also point to, you know, we called out this last quarter a lot more mismatches and so we're seeing the last few quarters customers ordering within lead times. What that means to us is, you know, customers have depleted some of their excess inventories, and they're ready to buy product now, and they're ready to replenish. When they order within lead times, you're not necessarily able to get that product unless we have inventory on the shelves. What we saw this last quarter is now more signs of suppliers delivering product outside of lead times. If a stated lead time is 12 weeks, maybe the supplier's delivering in 15 or 16 weeks. That mismatch is creating, you know, an imbalance between supply and demand, which, you know, is good for us, but challenging for our customers if they wanna make sure they keep their lines running. We continue to encourage customers to give us visibility. You know, let us help with our supply chain capabilities to pipeline product for you, so you can keep your lines running and avoid, you know, having shortages in certain areas. Okay, great. I'm sure that does help with the visibility longer term. Do you feel as though your customers, even the broad-based customers in Europe, are now shifting more toward real consumption rather than under-shipping demand? I know for many quarters, the suppliers themselves were under-shipping what true demand was, we didn't have a very good representation of what actual consumption was. Do you get a sense that, you know, this is still just shipping to consumption rather than inventory builds? I don't wanna use the word stockpiling because that, you know, that's a bad word. Just curious what you're kind of seeing from your customers there? Yeah, maybe I'll start with our own inventory. I mean, I think, you know, it's important we're a distributor, so inventory is, you know, kinda the lifeblood of our business, and so we gotta make sure we have the right inventory. We've, you know, had our own challenges working down our inventory levels or getting rid of some of the areas of excess, so we can invest in areas of need. Clearly in an environment where there's more demand, with the short interval orders within lead times and then deliveries outside of lead times, you know, if you're well-positioned on inventory, you can capture more of the market. Right. I would say the customers, you know, in particular Europe, but I think as a general statement, you know, are in pretty good shape. I think it took a little longer to consume those excess inventory levels, but I would say, you know, if anything, they're probably too leaned out on inventory. Okay. You know, I think that's a broad statement. There's always some pockets of customers, depending on your end market or vertical that might have, you know, some areas of excess. I think in general, we feel the customer inventory levels are healthy and, you know, we need to make sure we're getting the visibility to make sure they don't come up short. I'd say what you're seeing right now is probably true demand. You know, I think there's areas where things are getting tighter. Mm-hmm. What you tend to see is customer behavior of wanting to order more to think, "If I order more, then maybe I get in line or I get premium access," right? I think we're trying to encourage responsibility is, you know, making sure that, you know, what you're ordering is what you really need for your near term, so we can help, you know, spread those products that are, you know, high in demand across multiple customers. One of the questions that I get quite frequently, there's a little bit of a misunderstanding, and I think some of it was driven during COVID, during the supply chain crisis, when, you know, we saw kind of an explosion in your revenue levels and then also the margin profile, is how does pricing impact your margins? Rising costs that we're seeing on the component level, particularly, you know, I'm thinking of course in memory and storage, are you able to just pass that through to your own customers, or is there some, you know, kind of, elasticity there? I would say when we hit the peak of the shortages, we were seeing, you know, broad-based price increases maybe even multiple times a year. At our peak, you know, I'll use rough numbers, but we were maybe growing 30% in a given year, and we would attribute, you know, roughly 25% of that growth or 7.5% to, you know, pricing increases. A typical scenario would be, you know, a supplier announces a price increase. We tell our customers there's a price increase coming. You know, you might have some consumption of stuff you have on the shelves to be able to get in front of the price increase, going forward, you know, you're buying at the new price. You know, on average, what we would do is pass those through. We wouldn't make any more gross margin percentage necessarily-. Mm-hmm. We would still enjoy more gross profit dollars because of that growth. That helps us with our scale. You know, if we had 30% growth, 7.5% of that or 25% coming from that growth, then we would create additional leverage in the model. We think that's likely to be the scenario going forward again. Mm-hmm. When there's opportunity, when we have product on the shelves, you know, we have opportunity to get a little bit more margin. It's okay to get paid the value we provide. At the same time, you know, we understand if a customer is getting a 20% price increase, that's a lot to digest, right? We still should be enjoying our same, you know, gross margin%. Yeah. You know, in part because we're giving you terms on that. We're holding inventory at the higher price, right? Yeah. there is more value we are providing too. I think, you know, what I would say though, as a caution, everyone, is, you know, we are not anywhere near what we were seeing in that environment with. Right. with broad-based price increase. I think we're hearing some anecdotes on increases. You know, memory comes to mind as, you know, things have been announced, although some of those increases haven't taken effect. There's other price increases that we're aware of or been announced that are, you know, surrounding certain technologies or certain customer bases, but I would not say anything's broad-based, and we're still early innings. You know, the indicators seem to be there of some pricing moves. A lot of that's driven by the input costs. You mentioned that before. Mm-hmm. as, you know, we're seeing, you know, precious metals, gold, things with gold in it. Okay, connectors with gold, hey, there's a price increase, you know. Sure. Tantalum on the passives. There are, you know, true input costs that are rising that are leading to some of these, you know, talked about price increases. I think when we, when we get into periods of growth during the up cycle, typically, you know, you kind of addressed a little bit of the working capital investment that you need to make in order to support that. I'm curious on the OpEx line, like your own internal costs, it seems as though we've got a little bit better leverage in the operating model than maybe in past, you know, quote-unquote, normal cycles, excluding the supply chain crisis. How much has automation, deploying AI within your own internal processes or internal efficiencies allowed you to capitalize on some of those, you know, like drive a little bit more leverage in the operating model as we get to return to growth? I think we are focused. We brought in a Chief Digital Officer, a little over a year ago, with a lot of expertise, not only in e-commerce, but also digital tools and solutions. We think about our two kind of value propositions of design chain and supply chain. You know, there's a lot we can do with technology. You know, 2/3 of our business is comprised of, you know, people and people costs. Mm-hmm. You know, although in the warehouse, there's physical movement, you can always optimize there. I think, you know, as we look at our technical resources, we've got 2,000 technical engineers across the globe that help customers in design options. You know, we can definitely use technology and digital tools and capabilities to help them be more efficient in supporting our customers in our design chain. Same thing as supply chain, customer service, all those kind of things. You know, there's a lot we can use technology and the data we have to make better decisions and to, you know, support our customers better. I'd still say we're early innings in terms of some of those, you know, use cases and capabilities, but we have a roadmap we feel pretty good about, you know, that there is value to provide. Again, some of it's cost reduction, some of it's, you know, efficiency for the team, but it all should yield, you know, our ability to grow and not add a bunch of expense. Mm-hmm. ... you know, so we can drop more through to the bottom line. I think we feel well-positioned with our OpEx right now to be able to have a couple years of nice growth without having to add a lot of costs. Okay, great. That kind of leads us into a natural discussion about the margin targets. At your last investor meeting, which was a few years ago, you had set a target margin of getting operating margins above 5% sustainably. We were able to exceed that during the supply chain crisis. I'm just curious, what are some of the market conditions or maybe product mix that we need to see in order to get that margin target sustainably? I think or above. Yeah, I think the targets necessarily haven't changed. You know, our EC business, you know, was above 5% for a few quarters. Mm-hmm. You know, our floor this time around is roughly 3%. If you think about the last cycle coming out of it, you know, we hit as low as 1.5% of that business. I would say kind of the step-up in revenues and scale has allowed us to now have a new bottom of potentially 3% there, and we're on our way back to growth. I mean, I think, you know, again, growth in the West with the higher margins, the recovery of the West- Mm-hmm. ... I would almost say with the, you know, is gonna help a lot, 'cause that's our higher margin regions. You know, scale does matter in our business, and again, we can control the cost. I think, you know, continuing to drive those initiatives to grow the business faster than the market, you know, focus on the value we provide to get a little bit more gross margin, those are all levers that will help us. We didn't talk about Farnell much, outside of the introduction there. Oh, I was getting there. That will help a lot too. Farnell business runs at 30 points of margin versus, you know, our EC business. You know, we've got some, I think good tailwinds coming our way, and I think we're well-positioned, not only with our customers, but also with our supplier partners. Just this last quarter, we improved operating margin in the EC business by roughly 30 basis points. Our guidance for the March quarter implies another 30 basis point uplift. We're starting to see the traction as we start to recover in the West. Okay, great. I would like to talk about Farnell. You know, talk about how there are synergies between that and the components business in terms of, you know, maybe serving as a funnel for longer term opportunities, but certainly that margin profile it brings some opportunities for you as well. Discuss what's been going on there. You know, I know that we had some disruption coming out of the supply chain crisis, maybe some inefficiencies, and what you've been doing over the past year and a half, almost two years now, in order to get the margin profile back up to where you want it. Yeah. Our Farnell business, you know, thinks gives us a differentiator between our competition, that high service business, and again, the margins are very attractive. I think, you know, what we're continuing to do is get our Farnell business closer to our core business, and I'll give you a couple examples of that. You know, think about our core business. You know, roughly 30% of that business is done through, you know, EMS contract manufacturing, and, you know, there's a long tail of the EMS customers as well as the big guys. You know, we're really under-penetrated in that customer base with Farnell. Although we've got great relationships in the core, and Avnet's got a, you know, there's not a lot of business, not only for on-board components, but also the test and measurement, the maintenance and repair, all the things that, you know, an engineer would need to, you know, design products. We think there's more opportunity really just to continue to cross-sell with our existing customer base with Farnell. I think on the flip side, you know, early identification for, you know, high volume customers coming through Farnell. Mm-hmm. Farnell's got a much bigger customer base than our core business, you know, in the hundreds of thousands through their e-commerce platform. Continuing to identify leads and marketing leads and early in the process to shift those over to Avnet to be able to keep that business is good. Then going back to the Chief Digital Officer, one of the things we're focused on, we believe within our control for the Farnell revenues, is really just the e-commerce penetration. We're getting lots of website hits, lots of eyeballs coming to not only the Farnell, but also the Avnet properties. How do we convert more and capitalize more on making sure we're getting those converted to sales? There's some things we can do in terms of the e-commerce proposition, some of the functionality of the site to help drive that conversion rate better, which then is, you know, additional growth for Farnell. Is the mix of the product or the components meaningfully different between EC and the Farnell business? I think, you know, in general, the types of products that are sold by Farnell, at least for on-board components, are the same as the core business. Although Farnell tends to focus on more SKUs in terms of if a supplier has a portfolio, let's say of 10,000 SKUs, Farnell may support 9,000 of those SKUs. Okay. The core business may be only a couple thousand as an example. You know, Farnell, part of their value proposition is seeding the market with new product introductions. Mm-hmm. Making sure we've got a broad selection of parts. When an engineer goes, they can get anything they need from Farnell. There's a differentiator in Farnell's business in terms of, you know, they sell single-board computers, test and measurement. Mm-hmm. maintenance and repair products that the core business really doesn't support. That's all for the benefit of here's everything an engineer needs at their design workbench and- Mm-hmm. ... to test their products. From an on the board component perspective, we're very aligned in terms of line card and what we have there. Just for a little bit more color, you know, when we talk about a on the board component, that means a semiconductor or all the IP&E parts that are around the board. That's what we refer to as more of electronic components, and that carries a higher margin for Farnell. What you're seeing in Farnell is growth in some of those other areas, but the on the board components have been a little bit depressed and primarily 'cause Farnell is a mostly Europe but also heavy Americas business. Mm-hmm. As that market begins to recover, you'll start to see some tailwinds in Farnell's gross margin because of more sales of semiconductors and IP&E products. That margin has stabilized and is, you know, pretty good margin. Great. You mentioned engineering and services a couple of times at different points in the discussion. Maybe if you could talk about how value-added services within either business are going to be accretive to margin longer term and, you know, kind of categorize what all you're able to provide for your customers? Yeah. I think from a I'll start with supply chain service. I think we're seeing more and more opportunity for customers coming to Avnet to support their supply chain needs. A unique opportunity we're seeing, and we saw some of it coming out of the pandemic, and it's really, you know, the large OEMs, you know, that have complex supply chains and, you know, they buy lots of parts. They have lots of partners that help them with their manufacturing, but they don't actually have warehouses. They don't have, you know. Mm-hmm. ... even legal entity footprints to secure product where they need it. They bring someone like Avnet in to help provide supply chain services. That could be procurement services. It could be, you know, warehouse and logistics. It could be buffer stock. And it could be kinda just-in-time delivery to their network of manufacturing partners. We're seeing a lot more opportunity with the supply chain disruptions to come in and provide services. That's part of the available market or the TAM right now, but Avnet really hasn't played a part. Those are usually the direct customers of the supplier base. We're seeing more opportunities there, you know, to provide supply chain services, and then we can take some of those solutions and provide it to our mass market customers and provide them more supply chain opportunities. We like that. It's a higher gross margin. It's not really a top-line mover, but higher gross margin. Our design capabilities, you know, the more, parts we can help customers select, then we typically get a better cost from our manufacturing partners. Okay. There's a little bit higher gross margin there. There's a few different things that we have in the portfolio to help drive gross margins. The last thing I'll talk about is. Mm-hmm. ... and embedded solutions. Mm-hmm. You know, we're seeing more and more customers eliminate time to market through choosing embedded boards and solutions. We've got a embedded board and solutions business based out of Europe that helps customers design custom boards, or we have standard boards. We, we see that as a win-win-win where the suppliers can wrap more of their technologies within a single board. We can enjoy a higher margin because we own the design, and then our customers get a quicker and cheaper, overall solution. We're seeing that business be a little depressed with what's going on in Europe 'cause it's a heavy industrial- Mm-hmm ... healthcare base, but we're seeing some of that start to come back, and the prospects over the next few years with an embedded space are good. Great. Great. How much does trade and tariff navigation play into either your value-added services or even just, you know, the broader business? You know, you touched on your locations in Asia, locations in Europe. You've got a pretty wide geographic footprint of just availability of warehouses, the distribution centers, even engineers globally. With a lot of the uncertainty in trade and tariffs, you know, has this presented an opportunity for Avnet? I mean, I would say any supply chain disruptions, tariff included, present opportunity, and I would maybe, you know, start with the positives before we get into some of the negatives is just, you know, we have been able to adapt and pivot with some of these changes and again, you know, because we have operations in 140 different countries, we can, you know, move your supply chain where you need it. You know, we saw it back when there was focus on China and China Plus One. Mm-hmm. We're seeing a lot of beneficiary in Southeast Asia, markets like Malaysia, Vietnam, India. We're also seeing more nearshoring. You know, Guadalajara, for example, is big for us. We're seeing a lot more companies move to Mexico. You know, although there was just this disruption a couple weeks ago... Mm-hmm Some of that, and we had to shut down the warehouse. I do think, you know, you never know where your supply chain disruption is going to come. Our global scale and footprint and trying to invest ahead of the curve of where that next, you know, support spot will be is important, and for the tariffs here specifically in the U.S., you know, we've been able to pivot our distribution center in Phoenix, Arizona is a free trade zone, so it allows us to mitigate tariff impacts until we know exactly where the product's going. Mexico has been another beneficiary there. You know, we try our best to mitigate where possible. Unfortunately, if you're going to be manufacturing here in the U.S. and you use a product produced in China, you're going to have to pay a tariff. And so- Mm-hmm. We have to pass it through. We've been, you know, pretty transparent to our customers. It's been a lot of work for the team, the operations team, for all the changes, and you're kind of reacting to news reports real time. Yeah. I think we've got at least some kind of process down. That would be the negative. To be able to react to everything else. Yeah. You know, and again, you know, we've talked about price increase in the past, and I would say customers sometimes are easier to absorb a 20% price increase from a coming from supplier versus a, you know, 2% tariff pass-through. We've worked through it, and I think we're in a pretty good spot now, although we'll continue to monitor the situation. Just for more context, perhaps, you know, our business overall, less than, you know, 2% of our revenues are from tariff billings. Oh, okay. You know, from an America standpoint, sorry. Globally, it's less than 1%. Right. It's pretty insignificant. Okay. ... in terms of the overall impact. It's that, unlike the other pass-throughs, that's a really truly a pass-through where whatever tariff we charge, we're charging the customer that, you know, as almost a tax. Okay. We've just got a few minutes left, so I wanna open it up, see if there are any questions in the audience. Before I move on, I would be remiss, we have the CFO sitting here, I need to ask him about capital allocation and, you know, some of your investment priorities. You know, typically with a cyclical recovery, we touched on this a little bit earlier, requires a significant working capital investment to support the growth. Maybe talk about where your balance sheet is today, your current inventory levels? It seems as though, you know, we're supporting better revenue growth without driving that big spike in working capital investment. Yeah. From an inventory perspective, I would say, you know, we have at least the right amount of dollars. There's still some opportunity. We've been, over the past several quarters, kind of beneath the surface. You know, although the balance sheet number might be one number, beneath the surface, there's been lots of changes in the composition of the inventory and getting some of the aged and excess inventory out and investing in inventory that's gonna turn faster and that's needed. There's still some work to do there, but I feel really good about, you know, the fact that we don't have to necessarily invest a lot of inventory dollars to continue to grow the business. Now we're gonna need to invest in the right kinds of inventory and make sure we've got the right products on the shelf. Sure. As, you know, lead times potentially extend as more demand from customers come within lead times, right? I think we're gonna start turning the inventory faster. From an enterprise perspective, you know, we dip below 90 days of inventory this last quarter, I think we got to 86 days. When you separate our businesses, you know, the Electronic Components business, you know, should be running under 70 days of inventory, so still. Okay. ... runway to go there, but this last quarter they were above or, sorry, below, 80 days. Mm-hmm. ... in the EC business, and that's just a quicker turning. You know, we're looking for, you know, four to six turns a year, so closer to six. And then from the Farnell business, they do need to have more inventory. The, the proposition is one of inventory and having that breadth of SKUs. Mm-hmm. They're gonna run closer to, you know, 200 days is our target for them. You know, this last quarter they were, you know, 220s. Mm-hmm. Some room to go there in Farnell, but again, as they start to grow, they'll have more scale and start turning some products faster. You know, we feel good about the fact that we're not gonna need a lot of cash necessarily to invest in inventory, although we'll continue to get the right kinds of inventory on the shelves. You know, where we're still gonna need some working capital, depending on the growth rates, will be on the receivable side. You know, part of the value we provide to our customers is terms. As we grow, you know, we'll have more in accounts receivable, but the cash conversion cycle overall should shorten. Okay ... in this next go around, at least for the, you know, foreseeable future here... Okay. as we continue to grow. I think from a broader capital allocation standpoint, you know, we wanna return excess cash to shareholders. We've got a dividend that's we've grown every year since we've implemented it. We've historically been aggressive on buybacks, although right now we're a little more focused on getting our leverage back into the three-ish range. We're running, you know, just above four, so we feel much more comfortable in the three-ish range to be able to have, you know, the capital we need to invest in the business. I think from our standpoint, you know, we'll get that taken care of in the next few quarters and then get back to returning excess cash flow to shareholders. Again, CapEx is generally pretty sustainable between $100 million and $150 million a year. Okay. All right. Maybe in the last few seconds, any closing remarks? Anything that we didn't address today? I think that, you know, Avnet is really well positioned to get back into a growth cycle. You know, we feel we're in a really good neighborhood in terms of just the proliferation of electronics and everything we do continues to expand. You know, we see lots of opportunity with content, you know, exciting areas like robotics, drones. Mm-hmm. You know, there's lots of applications that we see, you know, just the continued amount of content growing, so I feel pretty good about the neighborhood we're in and we're well positioned to capitalize on growth and return margins to historical levels. Excellent. I would agree. Thank you very much, Ken. Appreciate it. Thanks, Melissa. Thanks, everyone. Thanks, everyone.