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spk06: Welcome to the AFNET Fourth Quarter Fiscal Year 2023 Earnings Conference Call. I would now like to turn the floor over to Joe Burke, Vice President, Treasury and Investor Relations for AFNET.
spk07: Thank you, Paul. I'd like to welcome everyone to the AFNET Fourth Quarter Fiscal Year 2023 Earnings Conference Call. This afternoon, Avnet released financial results for the fourth quarter of fiscal year 2023, and a copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of our website. As a reminder, some of the information contained in the news release and on this conference call contain... 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 presentation. 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's CEO, and Ken Today's call will be led by Phil Gallagher, Avnet's CEO, and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?
spk09: Thank you, Joe, and thank you, everyone, for joining our fourth quarter and fiscal year 2023 earnings conference call. We maintain our momentum for fiscal year 2022 to deliver robust financial results for fiscal 2023, including a record of over $8 of earnings per share. Our sales were up more than 13% year-over-year in constant currency. Operating income grew two times greater than sales, and our business units achieved operating leverage as electronic components delivered for fiscal year. As we look ahead with the breadth of our supplier line card, our diversified customer base, and the strength of the end markets they serve, we are well positioned to capitalize on the industry growth expected over the next several years. Now, let's turn to fourth quarter results. In the quarter, we grew 3% year over year. Now, let's turn to fourth quarter results. In the quarter, we grew 3% year over year in constant currency, and we delivered adjusted EPS of $2.06. Similar to last quarter, we continue to drive efficiency in our operations while still making the necessary investments in our business. These efficiencies couple with the stronger than still making the necessary investments in our business. These efficiencies, coupled with the stronger-than-expected sales in our Americas and immediate businesses, helped us achieve a 5.1% turnover. This is the second consecutive quarter of 5% or greater operating margin at EC and 4.8% adjusted operating margin for AdNet overall, delivering on the margin targets we communicated our investor day in June last year. Partially offside, by expected sales declines in Asia, which was a continuation of the slowdown in demand in certain Asian end markets. From an overall demand perspective, we experienced continued strength in key verticals, most notably transportation, automotive, and industrial. We also saw continued solid demand in defense and aerospace. Average lead times for many components continue to come down, although lead times are still elevated for certain product categories, such as high-end microcontrollers, some power, and many of the components that go into the automotive segment categories. As a result of the current demand and lead time conditions, our book-to-bill ratio remains below parity in all regions, Similar levels to last quarter. Our book-to-bill ratio remains below parity in all regions. Similar levels to last quarter. Our backlog remains relatively steady and consistent with the minimal to date. The pricing environment also remains stable during the quarter, with declines in some standard product pricing. We are hearing from some of our suppliers with declines in some standard product pricing. We are hearing from some of our supplier partners that they don't expect input costs to come down anytime soon. Our historical approach in our EC business was to merely pass along price increases to our customers without marking them up. We believe this approach is a reason we've increased our customers without marking them up. We believe this approach is a reason we've seen stable gross margins in our EC business year over year, including this past quarter. Turning to our operating group highlights, electronic components had a strong year, reaching nearly $25 billion in sales. Sales for the fourth quarter increased 3% year-over-year and were flat sequentially. This marks the 12th consecutive quarter of year-over-year sales growth in our extent operating margins for the quarter, noting our EMEA region achieved the second consecutive record sales quarter with very strong operating margin, and the Americas team's second record sales quarter with very strong operating margin, and the Americas team delivered another solid quarter of sales and market share gains. Formidity across all regions. High levels of design registrations and wins in prior quarters, resulting in yet another quarter of record demand creation sales and gross profit. Resulting in yet another quarter of record demand creation sales and gross profit. Our customers are engaging our FAEs for new designs for the next generation products with component shortages. Demand creation continues to be an essential capability needed in today's technology supply chain. Our EC inventory needed in today's technology supply chain. Our EC inventory levels were relatively flat on a sequential basis. And as I mentioned on last quarter's earnings call, this quarter we will characterize our inventory levels as stabilizing. And we're optimistic that as we enter calendar 2024, they'll more closely align with sales. We continue to be confident in the quality of the inventory and our ability to work down inventory days in the quarters to come. Moving on to Farnell. Following a record sales and margin year in fiscal year 22, Farnell had a solid year in fiscal 23 with sales of $1.7 billion and operating margins of 9.5%. Sales of $1.7 billion and operating margins of 9.5%. In the fourth quarter, Parnell sales were up 1% year-on-year and down 3% sequentially in constant currency. Operating margins were affected primarily due to an unfavorable sales mix of lower margin products. I joined the backlog for single board computers, which will help their sales and operating income dollars in coming quarters. As I reflect back on fiscal year 23 in coming quarters, as I reflect back on fiscal year 23, I'm very pleased with the progress we've made with the near-term goals we communicated, attained our operating margin goals, and achieved a record EPS for the year. I'm especially proud of the commitment of our team to execute and deliver in one of the most dynamic and uncertain markets I've seen in my career. But there is still more to accomplish, and the future is really bright for Avnet. As we head into fiscal year 2024, we will continue to make good in our cash and growing operating profits greater than sales. Our supplier partnerships continue to be one of our key strengths, which has helped lead to market share gains for several quarters. We are confident that our supplier partners see the value we bring in helping to increase the growth expected over the next several years. Our line card features substantially all the key technologies our customers need, and our high-performance line card is unmatched. The key technologies our customers need and our high-performance line card is unmatched. The key end markets we serve, which include industrial, transportation, and defense, are expected to have high growth rates over the next three to four years. When combined with our supply chain as a service capabilities and the overall market need for customers to have resilient supply chain, supply chain. So with that, Let me turn it over to Ken for a look at the financial results for Q4 and the fiscal year.
spk08: Ken? Thank you, Phil. Hello, everyone, and thank you for your interest in Avnet. We believe our fourth quarter and full fiscal year 2023 performance are a positive validation about our strategy over the past couple years to focus on efficient and effective operations, while working close focus has helped us gain share and makes us a stronger, more profitable company. Our sales for the fourth quarter were approximately $6.6 billion, exceeding the top end of our guidance range and up 3% year-over-year. On a sequential basis, sales were up slightly in constant currency. Sales growth year-over-year was led by a record quarter for EMEA with nearly 19% growth, and the Americas with 7%. In constant currency, year-over-year sales grew 17% in EMEA, 7% in the Americas, and declined 11% in Asia. From an operating group perspective, electronic component sales grew 3% year-over-year, both as reported and in constant currency. Quarter-over-quarter, electronic component sales were 1% higher in constant currency. Quarter-over-quarter, electronic component sales were 1% higher in constant currency. Farnell sales grew 1% year-over-year, both as seen. For the fourth quarter, gross margin of 12.5% improved 25 basis points year-over-year and was relatively flat quarter-over-quarter. Gross margin improved year-over-year primarily due to a greater mix of sales from our western regions. Farnell gross margin was down both year-over-year and sequentially. primarily due to a combination of the unwinding of both year-over-year and sequentially, primarily due to a combination of the unwinding of pricing premiums, as on-the-board component lead times have improved, and from unfavorable. We continue to remain focused on maintaining efficient and effective operations. Our operating expenses continue to be well-controlled as we have been able to grow our sales without any significant increase. Operating expenses continue to be well-controlled as we have been able to grow our sales without any significant increase in overall expenses. During the quarter, adjusted operating expenses were $505 million. Currency negatively impacted operating expenses by $3 million sequentially. As a percentage of gross profit dollars, adjusted operating expenses were 62% in the fourth quarter, 132 basis points lower than a year ago, and 53 basis points higher than last quarter. For the fourth quarter, we reported adjusted operating income of $313 million, which increased 9% year-over-year and grew three times faster than sales income by more than two times. Our adjusted operating margin was 4.8% in the fourth quarter, which improved 26 basis points year-over-year and was flat quarter-over-quarter. By operating group, electronic components operating income was $310 million, up 21% year-over-year. EC operating margin was 5.1% up 77% year-over-year. EC operating margin was 5.1% up 77 basis points year-over-year and essentially flat quarter-over-quarter. The improvement was led by our year-over-year by more than 80 basis points. Parnell operating income was $36 million down 43% year-over-year. Parnell operating margin was $86 million down 43% year-over-year. For now, operating margin was 8.1% in the quarter, down 90 basis points quarter over quarter. For now, operating margins continue to be impacted by the unwinding of pricing premiums, foreign exchange rate impacts, and from an unfavorable sales mix of lower margin products. Our combined operating groups, when excluding our corporate expenses, delivered on our targeted margin goals by achieving a 5.1% operating income margin for fiscal 2023 with a fourth quarter exit operating income margin of 5.3%. Turning to expenses below operating income, fourth quarter interest expense of $75 million increased by $45 million year-over-year and $3 million quarter-over-quarter. The sequential increase was primarily due to increases in market interest rates. Increased interest expense negatively impacted adjusted diluted earnings per share by 39 cents year-over-year. Our adjusted effective income tax rate was 21.6% in the quarter and was 26 cents for the quarter, which decreased one penny year-over-year but was $0.06 higher quarter over quarter. A better than expected effective income tax rate benefited adjusted diluting earnings per share by approximately $0.06 in the quarter. Turning to the balance sheet and liquidity. During the quarter, working capital. Turning to the balance sheet and liquidity. During the quarter, working capital decreased by $33 million, including an increase in payables of $237 million. Days increased by one day quarter over quarter to 97 days. Our inventory days increased by approximately four days, and our receivables days decreased by approximately one day, increased by approximately four days, and our receivables days decreased by approximately one day, quarter over quarter. Our return on working capital continues to be two times our cost of capital, increases at far now, largely for replenishment and continued investment in inventory breadth. As Phil mentioned, we believe our inventory levels have stabilized in inventory breadth. As Phil mentioned, we believe our inventory levels have stabilized. Near term, we expect inventory levels to be generally consistent with the fourth quarter levels when adjusting for the effects of any strategic initiatives which would create temporary increases in inventory levels. We continue to work collaboratively with customers to purchase the inventory ordered on their behalf in our related inventory days over the next few quarters. Looking to the first quarter, we expect to see a temporary increase in inventories for our EC business due to a strategic opportunity We expect to see a temporary increase in inventories for our EC business due to a strategic opportunity for which inventories will come in towards the end of the first quarter and are expected to ship out during the cash flow from operations, and we expect to generate cash flow from operations in the first quarter. Our debt decreased by approximately $51 million during the quarter with a gross leverage of 2.2 times, which was a sequential improvement. At quarter end, we had approximately 800 patients. In the near term, we continue to evaluate all opportunities to drive shareholder returns, including dividends, share buybacks, and M&A. But the priority remains to support the needs of our business. During the fourth quarter, cash used for capital expenditure were elevated due to investments in a new warehouse in Europe. In the fourth quarter, we paid our quarterly dividend of 29 cents per share, or $27 million. In the fourth quarter, we paid our quarterly dividend of 29 cents per share, or $27 million. We have $319 million left on our current share repurchase authorization. For the long term, we remain committed to our roadmap of delivering a reliable and increasing dividend and share repurchases to increase our shareholder value when we believe our shares are undervalued by the market, which continue to be the case in the fourth quarter. book value per share improved to approximately $51 a share or a sequential increase of approximately $1 per share, a range of $6.15 billion to $6.45 billion, and adjusted diluted earnings per share in the range of $1.45 to $1.55. Our first quarter guidance is earnings per share in the range of $1.45 to $1.55. Our first quarter guidance is based on current market conditions and implies a sequential sales growth rate of down 2%, with Western regions declining more and Asia sales increasing less than a typical first quarter. For for now, we expect near-term reduced operating margin first quarter. For for now, we expect near-term reduced operating margin due to a combination of factors, including seasonal sales declines, which includes due to similar factors that impacted fourth quarter gross margins. In response to the expected decline in Farnel operating margins, we are evaluating the acceleration of previously identified opportunity decline in Farnel operating margins. We are evaluating the acceleration of previously identified opportunities related to Farnel operating expenses. This guidance also assumes similar interest expense compared to the fourth quarter on effective tax rate of between 22% and 26% and 93 million shares outstanding on a diluted basis. In closing, in the fourth quarter. And for their hard work in closing out a record year for the company. With that, I will turn it back over to the operator to open it up for questions. Operator? With that, I will turn it back over to the operator to open it up for questions. Operator?
spk06: Thank you. Ladies and gentlemen, we will now be conducting a question and answer. The confirmation tone will indicate your line is in the question queue. You may press star 2 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 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. Bhattacharya with Bank of America. Please proceed with your question.
spk01: Thanks for taking my questions. Phil, can you talk about what surprised you in the quarter and led to the revenue outperformance? You beat the high end of the guidance. And part of that, can you talk about the linearity in the quarter? And part of that, can you talk about the linearity in the quarter? And, you know, you had talked about an inventory correction last quarter. Is the industry still experiencing that? How long do you think that's going to last? And what parts are in excess supply?
spk09: Yeah, thanks, Rupal. Yeah, let me start with the first part of your question. I wouldn't say it was a surprise. I would just say it was just, you know, terrific execution, and then we're working with the customers to get it back out, and I think the teams just did a really nice job. We saw continued strength in the markets we're very strong in. You know, industrial transportation, automotive, and, of course, defense. As the quarter went on, it's really execution by the team. And as we've been saying for quite a long time, inventory is not a bad thing when you have the right inventory. So we're able to get the inventory in and get it backed out. On the industry inventory correction, I think that's still playing out. A two- to three-quarter time frame, I think, That's basically what we saw is the inventories sequentially were up really modestly. So I think that's still playing out. And, again, the inventory is healthy. I mean, so it's not still playing out. And, again, the inventory is healthy. I mean, so it's not a bad thing. And I also want to just note, I mean, when we talk about inventory, you know, it's heavier-weighted where we're growing the inventory. There's other areas. Trust me, we like to have more inventory. So we kind of generalize inventory often as one. We like to have more inventory. So we kind of generalize inventory often as one lump sum, but not all inventory is the same.
spk01: for the details there uh phil if i can ask you about the farnell operating margins uh you mentioned a couple of things for fiscal 1q you said that rating margins uh you mentioned a couple of things for fiscal 1q you said that you know the single board computers uh they're more available so that should help mix issues that maybe persist And I think Ken talked about some opportunities to reduce costs. So net of it, if you can talk a little bit about what opportunities to reduce costs. So net of it, if you can talk a little bit about what opportunities you have to reduce costs in for now. And how should we think about segment operating margins? Do they remain below 10% over the next couple of quarters? Or how should we think about this in the near term and medium term?
spk09: Yeah, let me go to get back over to 10%, you know, Rupaloo in Fornell. Again, we had some, as we talked about, we had some FX issue in Fornell and some product mixed shipments where some of the products we were getting the upside on, which we had talked about in a previous report, Some of the products we were getting the upside on, which we had talked about in previous years, the last 18 months, you know, is flattening out or coming down and buying more product from Fresnel. So let's say the on-the-board component is coming down a little bit with some margin headwind. With things like single-board computer, which we've been talking about, with some margin headwind, a headwind with things like single board computer, which we've been talking about that were heavily backlogged. And that's starting to catch up with good business for us. It just tends to be lower calorie margin. It still drives dollars, just not percent. So long and short, it's going to take us a couple quarters or so, or just not percent. So long and short, it's going to take us... couple quarters or so to get back into that double digit, maybe two or three quarters.
spk08: Ken, on OpEx? That we have to go after. It's not all people. I want to be clear that a lot of it's you know, opportunities, freight savings, and some of those things, and just looking at the operations of this a little closer, that we've had freight savings and some of those things, and just looking at the operations of this a little closer, that we've had, you know, kind of on the radar, but we need to pull in, you know, due to the overall demand and margin environment Farnell is experiencing. But I think you could think about it as being meaningful to Farnell, but not necessarily meaningful to Avnet overall.
spk01: okay okay and if i can sneak one more are we now at a peak for inventory for your uh for avenue's own inventory i think you said something about ec inventory maybe going up a little bit and in the first quarters i think you said something about ec inventory maybe going up a little bit and in the first quarter so just in terms of you know your thoughts on cash conversion cycle and working capital requirements over the next couple of quarters and and free cash flow yeah so so i think
spk08: You know, easy inventory was up modestly, you know, the word stabilized, you know, so flattish inventory levels. But what we did comment on is there is an opportunity we have where we're going to inventory late in the quarter and ship it out next quarter. So there is an opportunity we have where we're going to inventory late in the quarter and ship it out next quarter. So there's likely to be a temporary delay. increase in inventory going into the first quarter. But, you know, over $200 million this quarter, you know, I think the cash flow will continue. You know, you see the sales guidance being down a little bit sequentially, you know, but it's probably still going to take a few quarters to get the cash flow generated out of the inventory is how we look at it, you know, with stable inventory levels.
spk09: Yeah, I'll add to that real quick. It's a good pickup, and thanks, Ken. Any of these opportunities we get, and they come along every now and again, whether it be for a customer or a supplier, modeling with finance involved and what's the cash flow impact and the return. So they're not just something that is happening. It's very strategic. It's positive for the company. They're not just something that is happening. It's very strategic. It's positive for the company. It'll just drive up the inventory a bit, probably neutral to working capital. It should be good returns for the company.
spk01: Okay, thanks for all the details. Appreciate it.
spk06: Thank you. Thank you. Thank you. Our next question is from Joe Quattrochi. Thank you. Thank you. Our next question is from Joe Quattrochi with Wells Fargo. Please proceed with your question.
spk05: Yeah, thanks for taking that. Are you in the Farnell business, or are you also seeing that in the electronics component of this as well?
spk09: Yeah, good question, Joe. Predominantly, it's in... Yeah, good question, Joe. Predominantly, for now, it's just the way that they, it's pretty complex, I'm going to try to explain it, but the way they won the two per year, so they just got caught upside down a little bit on the FX, and then just the natural pricing pressures where they had some, again, as we spoke of before, some additional inflation in prior 18 months or so with pricing. On the component side, as we said in the script, when we got the pricing passed on increased pricing from the suppliers, you know, we just passed that on. We didn't mark it up again to the end customer, right? So we just passed that on. We didn't mark it up again to the end customer, right? So we made these long-term arrangements. So what we're seeing is actually stable, you know, I'll call it, you know, standard products. Yeah, you're seeing a little pricing pressure there, but you always do. You know, it's multi-source. That's about how you buy and how you sell. So that's not really... You know, it's multi-source. That's about how you buy and how you sell, so that's not really unusual. But in the higher-end products, high-end micros and whatnot, as long as the input costs are continuing to stay where they are or go up, You know, we don't believe there's going to be something, as you know, Joe, that gold, silver, palladium, plate them down a little bit, silver, copper, they're still up, okay, and labor costs remain elevated. So as long as they remain elevated in the copper, they're still up, okay, and labor costs remain elevated. So as long as they remain elevated and the input costs are up, we don't see the suppliers, for the most part, bringing prices down. We'll see, but we don't think so.
spk05: Maybe as a follow-up to that, we're starting to see some reports of just price cuts from some of the foundries. It takes some time to play out to kind of get to where you are in the overall kind of distribution supply chain.
spk09: Yeah, short-term. Yeah, we're reading the same things and seeing some of the same talk of the suppliers. But short-term, we don't see that.
spk05: Fair enough. And then just maybe as a follow-up, You know, Asia, China weakness continuing. I think last quarter you talked about, you know, that last anchor. Asia, China weakness continuing. I think last quarter you talked about, you know, that last anchor, at least the next two quarters. Has anything changed, I guess, from that view from last quarter, slightly better just from maybe shipping closer to what in demand is rather than inventory reduction?
spk09: Yeah, no, great.
spk05: Rather than inventory reduction? Yeah.
spk09: Yeah, great question. So here's how I'd answer. I was just there last week. I saw the regions, spent a lot of time in Taiwan with the Taiwan team, but also the regional leaders from China, Southeast Asia, and Japan. And as you said, from China, Southeast Asia, and Japan. And as you said, yeah, the demand is definitely down a bit, no question about it. But there's a call to call because there's might be more optimism in some industrial applications versus consumer or vice versa you know um applications versus consumer or vice versa you know um but we we did hear a lot about and you're reading a lot about the wind solar we're well positioned there so as we position ourselves we're I'm not bullish by any stress, but I'm not negative either. I think there's some positive signs and China will, by any stress, but I'm not negative either. I think there's some positive signs and China will bounce back. There's no doubt we're well positioned there. But across the Asia pact, I should add also that we're not overly weighted, Joe. We're not overly weighted to China within Asia or certainly within the total core. We're not overly weighted to China within Asia or certainly within the total core.
spk05: Helpful. Thank you.
spk06: Our next question is for Matt Sheeran with Stifel. Please proceed with your question.
spk04: Yes, thank you, and hello, Phil and everyone. Please proceed with your question. Yes, thank you, and hello, Phil and everyone. Phil, just following up on the first question, just regarding expected, particularly in EMEA in North America, and particularly compared to your bigger competitor, so as you think about this, your bigger competitor, So as you think about this below seasonal guide for the next quarter, should you expect that to continue into December where that should be below seasonal with this whole correction and your down cycle and the seasonality or is the visibility too tough at this point?
spk09: Yeah, thanks, Matt. I'll let Ken jump in as well. I appreciate the compliment. Thanks, Matt. I'll let Ken jump in as well. I appreciate the compliment. Yeah, just to reiterate what you said, yeah, Europe just remained continually strong. I mean, we're just – as a company and industry, we're well positioned there with the industrial and transportation play. And then the Americas has been terrific under Dana's leadership and transportation play. And then the Americas has been terrific under Dana's leadership and the team doing a nice job. As far as seasonality beyond, you know, we don't typically guide, as you know – into December or March because it is tough to call. There's a lot of mixed signals, Matt, out there. I've been using that term, no pun, and much complexity in our industry in a long time because there's still a lot of really good things happening in transportation even still, in charging, in battery, things happening in transportation even still, in charging, in battery, in industrial that's offsetting some of the other markets. But I You know, I'm going to stick with what I said last quarter. I think it's a two- to three-quarter more of an inventory correction. And I think as we get into 2024, we're going to start seeing that in Asia. Starting September, as you know, in October, November, we start to see an uptick there. And we do think that will happen. That I can say. We do think we'll see an uptick, a modest uptick, but an uptick in Asia pack in the – well, this quarter as well in December.
spk03: In the next year, of course. Yep. Go ahead. Well, it's quartered as well in December. In the next year, of course. Yep. Go ahead.
spk08: I would just add, you know, we feel pretty good about the $6.3 billion down 4%. And, you know, it's a really big holiday period here in the summertime. So when you get into the December quarter, there's also, you know, the Christmas holiday time, and those are maybe going to be more normal than they have been. But, you know, there's also, you know, the Christmas holiday time, and those are maybe going to be more normal than they have been. But, you know, still pretty healthy about, you know, having an outlook of, you know, $6 billion per quarter kind of sales. Let me just jump in.
spk09: I think we are going to start seeing some more normal seasonality. Define normal, Matt, after the last three years, right? But I do think we're going to start to see more of a typical summer quarter in Europe the last three years, right? But I do think we're going to start to see more of a typical summer quarter in Europe where we hadn't seen that in the last several years due to COVID and whatnot. And I think we'll start seeing that.
spk04: That's helpful. And then just on the margins, you know, backing into based on your guide, it looks like gross margin and operating margin will be down. Based on your guide, it looks like gross margin and operating margin will be down sequentially. And it looks like operating margin will be down year over year in the low 4%, 4, 4, 1 range. And you talked about some of the headwinds with Farnell, but what's the other factors there? Is that just the function of the mix of business with Asia growing and EMEA and North America down? Is there anything else to read into that?
spk08: Think about half of it coming from just the sales decline, right? It's going to create less gross profit dollars, and we're not necessarily doing anything different on the cost side. gross profit dollars and we're not necessarily doing anything different on the cost side. And then you've got, you know, let's say another 25% of that approximately is coming from, you know, just over 25% is probably coming from, you know, the pressure on Farnell. So that's kind of the right way to size it. You know, there's always puts and takes on the overall gross margin on EC. But the comment I will make is, you know, there's always puts and takes on the overall gross margin on EC. But the comment I will make is, we still see year-over-year operating margin expansion in EC with the government.
spk04: In EC, okay, but not for the company, though. Not for the company. Got it. Okay. Okay. Got it. Okay. Okay. And just lastly, on the interest expense, which you said in the presentation. Obviously, that's been a big, you know, EPS headwind. Is that a priority in terms of your free cash mix and continued, you know, correction here as a headwind to operating margin to offset that?
spk08: Yeah, I'd say, Matt, I mean, definitely.
spk04: To operating margin to offset that?
spk08: Yeah, I'd say, Matt, I mean, definitely, you know, we will look to deploy some of our cash to pay down some debt, especially just to make sure. And we'll look at other capital allocation priorities as well, right? So, you know, we do see the cash flow starting to come in. So feel good about that. And now we've got to make sure the cash flow is starting to come in. So feel good about that. And now we've got to make sure we put it to the work in the best way as possible. But, you know, clearly paying down some interest is top of mind just because it's getting so expensive. But, you know, we also see, you know, great value in the shares right now as well, continuing to trade below book value.
spk06: Right. Okay. Thank you very much. From Melissa Fairbank with Raymond James. Please proceed with your question.
spk02: Hi, guys. Thanks very much. Most of my questions have been asked and answered, but so... Hi, guys. Thanks very much. Most of my questions have been asked and answered, but so I just had one for you. It's great to hear both Europe and the Americas margins were uprooting. If you could give us an update on closing that gap between those markets, and then maybe highlight any opportunities, if you have any opportunities to drive margin in Asia closer to the Western market.
spk09: Yeah. Hi, Melissa. Thanks. Yeah, we're really pleased with the Americas from where we were three or four or five – yeah, we're really pleased with the Americas from where we were three or four or five years ago. And what we're working doing, we're still at 80% there probably back to – we're about 80% to where we think we need to be. Closing it to Europe, Europe's, well, always strong message, but really last 10, 15 years to Europe, Europe's, well, always strong message, but really last 10, 15 years, it's been a higher margin operating business for us. We tend to get higher gross market with Europe. I'm certainly challenging America's team to do that. But I want the Americas to catch Europe, not Europe catch Americas. But I want the Americas to catch Europe, not Europe catch Americas. But that's really it on that. So we're pleased with the progress.
spk02: Any opportunities? Yeah.
spk09: Yeah, Asia – A lot of that's mixed. It's just volume. I mean, we're pleased with returns in Asia. So that's mixed. It's just volume. I mean, we're pleased with returns in Asia. So we measure Asia both on operating margins as well as return on working capital. So they'll have particular success as well in Japan, which has been really terrific, and that's getting closer to some of the models in the West. But overall, again, that's getting – you know, closer to some of the models in the West. But overall, Asia, I think we're in about the right spot in Asia based on the volume. We could shrink Asia and grow the operating margins, right, but that always isn't the most strategic thing to do.
spk08: I'll just comment, Melissa, that, you know, there are some opportunities to think about, you know, supply chain. I'll just comment, Melissa, that, you know, there are some opportunities to think about, you know, supply chain as a service type of engagement. As well as Farnell, you know, Farnell makes a really healthy margin to move the needle, you know, overnight. But we do see some good margin opportunities. And some of the markets that Phil mentioned, Japan, for example, definitely has a better margin than other markets. So there's markets that Phil mentioned, Japan, for example, definitely has a better margin than other markets. So there's some opportunity, but it's just such a big base that it's hard to move the needle.
spk06: Okay, great. Thank you. There are no further questions at this time. I'd like to hand the floor back over to Phil Gallagher for any closing remarks.
spk09: Well, I want to thank everyone for attending today's earnings call and wish you all a great rest of the summer. And I look forward to speaking to you again at our next fiscal quarter earnings report in November. Thanks, Bob. Speaking to you again at our next fiscal quarter earnings report in November. Thanks, Bob.
spk06: Ladies and gentlemen, this does conclude today's conference.
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