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spk03: Our presentation will now begin. Welcome to the AFNET Third Quarter Fiscal Year 2024 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President, Treasury and Investor Relations for AFNET. Thank you, Operator. I'd like to welcome everyone to the AFNET Third Quarter Fiscal Year 2024 Earnings Conference Call. This morning, ABNET released financial results for the third quarter fiscal year 2024, and the release is available on the investor relations section of ABNET's website, along with a slide presentation, which you may access at your convenience. As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Such forward-looking statements are not 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 ABNET's most recent form, 10-Q and 10-K, and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to 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. Today's call will be led by Phil Gallagher, AFNET's CEO, and Ken Jacobson, AFNET's CFO. With that, let me turn the call over to Phil Gallagher. Phil?
spk01: Thank you, Joe, and thank you, everyone, for joining us on our third quarter fiscal year 2024 earnings conference call. I am pleased to share that we delivered another quarter of financial results in line with our guidance. In the quarter, we achieved sales of $5.7 billion and adjusted operating margins of 3.6%, highlighted by a 4.1% operating margin in our electronic components business. And we generated nearly $500 million of cash flow from operations. This demonstrates that we can maintain reasonable profit margins even during the challenging cycles we face. As I've mentioned on previous calls, we've been working through an inventory correction on a global basis over the past couple of quarters. And while we've made progress in working out our inventory levels, we, like many in the industry, still have a ways to go. Our customers are facing a variety of factors that are contributing to the current challenging business environment, including elevated inventory levels, Some cash flow constraints diminish customer visibility and shorten lead times. These market conditions are among the most challenging in recent memory. At times like this, I am proud to have one of the most experienced and dedicated teams on the field. As you all know, the economic conditions evident in the second quarter continued in the third quarter. Sequentially, demand declined across most of the end markets we served. However, defense and data center markets showed improvement. On a year-on-year basis, transportation was a bright spot, with increasing demand globally. Semi-doctor lead times have continued to decline over the last several months and are generally stable, although the growth in data center build-outs is driving longer lead times for certain products, and we would expect this to continue. On the IP&E side, lead times and pricing are generally stable, and we are seeing increasing demand for interconnect products and capacitor families, most notably TANL. Our backlog is lower as a result of shorter lead times and customers working through their inventory on hand. Cancellations have remained at normal levels. As expected, our global book-to-bill ratio remains below parity at the end of the third quarter, though modestly above last quarter, led by our Asia region, which finished the quarter approaching parity. I'm really pleased by the work of the team in improving our inventory position. It is worth noting that we reduced inventory and reduced our receivables at the same time, demonstrating sound working capital management. This is a key focus area for our organization, and we expect to see further progress in the current quarter, which should drive solid cash flow from operations. I am proud of our position as a key enabler of healthy, more reliable supply chains in the semiconductor and electronic components ecosystem, and it's only getting stronger. Our position at the Center of Technology Supply Chain allows us to pursue opportunities with our longstanding customers and suppliers who increasingly rely on Adnet to meet their needs. With that, let me turn to the third quarter results. At the top line, our electronic components business declined in revenues across all the regions. But I will note that the third quarter fiscal year 23 in EMEA was a record revenue quarter. So they're going against some tough comparisons. In EMEA, we're glad to see that demand in the transportation end market increased sequentially and the defense end market increased on a year-on-year basis. In the Americas, demand in the transportation and market increased on a year-on-year basis. And in Asia, demand in the transportation, compute, and consumer end markets all increased on a year-on-year basis. We continue to move successfully up the value chain. In the quarter, our engineering teams continue to engage with our customers and suppliers on design wins and registrations, which drove increases in revenues and margins, and further validates the value proposition we deliver in any type of market. Before we get into Fresnel's results, I want to let you know of a leadership change in that business. Chris Breslin, our Fresnel president, is leaving Advent. I want to thank Chris for leading the Fresnel team over the past six years. Given their close proximity, industry knowledge, and proven track record, I've asked two of our veteran EMEA core business leaders to temporarily assume executive oversight for the Fresnel organization. I want to reiterate that Fresnel remains a critical part of Adnet's overall success and value proposition, so stay tuned for upcoming announcements on the Fresnel leadership transition. In the third quarter, Fresnel sales were up sequentially, led by strength in IP&E products and single-board computers. However, margins are not where they need to be. As a result, we are making cost reductions primarily related to warehousing costs, freight, marketing costs, and headcount. We are well on our way to achieving our previously disclosed savings target, which should be substantially implemented by the end of June, so improvement should be apparent in the second half of the calendar year. As a key player in the supply chain, we continue to leverage our value proposition in areas such as demand creation, IP&E, and embedded computing. With our global sales force and our technical capabilities, I believe we have all the right resources to grow our top and bottom lines over the long term. While it's difficult to say just when this correction will have run its course, I'm encouraged by a number of signs I see at Adnet and in the market. Current business activity in our Asia region is indicating that we are likely near to the bottom and may potentially see some sequential growth as we move through the balance of calendar 2024. Second, we are seeing a nice pickup in bookings in our IP&E business and at Farnell as well. Finally, the industry sources we follow, as well as the customer supplier executives I meet with regularly, are projecting a return to growth as we move into calendar year 2025. To conclude, we remain focused on bringing our considerable experience and relationships to bear as we navigate this choppy period. We are managing the things we can control, delivering increasing value to our customers and supplier partners, reducing working capital, especially inventory, aligning costs, and driving shareholder return. I believe we have the right strategy and team members in place to both drive and benefit from the market recovery. Again, I want to thank our team for bringing their unmatched expertise to work every day. It is important to ABNET, and it's important to the industry. With that, I'll turn it over to Ken to dive deeper into our third quarter results.
spk06: Thank you, Phil. Good morning, everyone. We appreciate your interest in ABNET and for joining our third quarter earnings call. Our sales for the third quarter are approximately $5.7 billion in line with guidance and down 13% year over year. On a sequential basis, sales were down 9% in constant currency due to expected sales declines in the western regions and a seasonal decline in Asia due to Lunar New Year. On a year-over-year basis, sales declined in constant currency 7% in Asia, 15% in EMEA, and 18% in the Americas. From an operating group perspective, electronic component sales declined 13% year-over-year and 10% quarter-over-quarter in constant currency. Farnell sales declined 10% year-over-year and 11% in constant currency. Farnell sales grew 3% sequentially in constant currency. For the third quarter, gross margin 11.8% with 62 basis points lower year-over-year but up 46 basis points sequentially. EC gross margin was down year-over-year primarily due to a lower mix of sales from the western regions. EC gross margin increased sequentially primarily due to the seasonal mix shift to the western regions. Farnell's gross margin continued to be down year-over-year, but was higher sequentially, largely due to pricing stability and an improved demand for IP&E products. Turning to operating expenses, selling general and administrative expenses were $467 million in the quarter, down 6% year-over-year and largely flat sequentially, with a slight increase due to differences in foreign currency exchange rates. As a percentage of gross profit dollars, selling general and administrative expenses were 70% in the third quarter. For the third quarter, we reported adjusted operating income of $203 million, and our adjusted operating margin was 3.6%. By operating group, electronic components operating income was $217 million, and EC operating margin was 4.1%. This was the ninth consecutive quarter of EC operating margin being above 4%. For now, operating income was $16 million, and for now, operating margin remained at 4%. As we communicated last quarter, we have initiated cost reduction actions at Farnell, which, when completed, will provide annual expense reductions of between $50 million to $70 million. We had completed approximately two-thirds of the reductions as we exited the third quarter. The remainder of the reductions are expected to be completed over the next couple quarters. Additionally, due to our current sales outlook and demand environment, we are taking action to reduce total avid operating expenses by $40 million to $60 million per year. These actions include a combination of permanent and temporary cost reductions across all regions. We will continue to make operating expense investments where needed, but the current market conditions require some incremental cost actions. Turning to expenses below operating income, third quarter interest expense of $73 million increased by $2 million year-over-year and was down approximately $1 million sequentially. Our adjusted effective income tax rate was 24% in the quarter as expected. Adjusted diluted earnings per share was in line with our expectations at $1.10 for the quarter. Turning to the balance sheet and liquidity, during the quarter, working capital decreased $574 million sequentially, including a decrease in reported inventories of $364 million, $194 million decrease in receivables, and a $16 million increase in payables. Working capital days increased eight days, quarter over quarter, to 115 days. Our return on working capital decreased accordingly on the lower operating income. Our inventories were down 6 percent during the quarter, reflecting decreases across all regions within EC and, to a lesser extent, Farnell. The decline in EC inventories were net of increases in inventories due to strategic opportunities. Inventories for these arrangements are expected to build into the June quarter, with the underlying inventory selling through by the end of the calendar year. We expect continued overall progress on achieving inventory reductions during the fourth quarter, excluding these strategic arrangements. As Phil has mentioned many times, part of our role at the center of the technology supply chain is to play a shock absorber between our suppliers and customers. Despite the near-term challenges of the current market environment, we still want to be opportunistic as new business opportunities present themselves, even those opportunities that may require additional inventory. We take a holistic approach when evaluating any such opportunities, but are disciplined in making sure there is a proper ROI for Avnet in any such arrangements. Our decrease in working capital led to a decrease in debt of $495 million. We generated nearly $500 million of cash from operations in the quarter, and we have generated $650 million of cash from operations over the past four quarters. We expect to generate positive operating cash flow in the fourth quarter, although more modest than this past quarter. We ended the quarter with a gross leverage of 2.5 times, and we had approximately $890 million of available committed borrowing capacity. With regard to our capital allocation, we continue to prioritize our existing business needs. As previously noted, we are driving working capital reductions to be more in line with our current level of sales. During the quarter, cash used for CapEx was $42 million, primarily to support a new distribution center being constructed in EMEA. We expect CapEx to return to historical levels in the fourth quarter of fiscal 2024 of approximately $25 million to $35 million per quarter. In the third quarter, we paid our quarterly dividend of 31 cents per share, or $28 million. We have $232 million left on our current share re-purchase authorization entering the fourth quarter. As a result of our strong cash flow generation, we expect to re-purchase Avnet shares in the fourth quarter. Our shares continue to create a meaningful discount to book value as book value was $55 a share for the third quarter. Turning to guidance, for the fourth quarter of fiscal 2024, we are guiding sales in the range of $5.2 to $5.5 billion and diluted earnings per share in the range of $0.90 to $1. Our fourth quarter guidance assumes current market conditions persist and apply the sequential sales decline of 3% to 8%. This guidance assumes below seasonal sales declines in the western regions and below seasonal growth in sales in Asia. This guidance assumes similar interest expense compared to the third quarter, an effective tax rate of between 22% and 26%, and 91 million shares outstanding on diluted basis. Before we take questions, I want to echo Phil's sentiment in thanking our team for staying focused on the things that will drive success for us in the coming quarters. Most importantly, closely monitoring operating expenses, generating operating cash flow from working capital reductions, and winning new sales opportunities to drive profitable growth and continue market share gains. With that, I will turn it over to the operator to open up for questions. Operator?
spk03: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 pull up for questions. Thank you.
spk00: Our first question is from Matt Sharon with Stifel. Please proceed with your question. Yes, thank you. And hello, everyone. Phil, first question just in terms of your forecast for below seasonal again in all regions, but for sequential growth in Asia. So that would imply year-over-year declines of, I don't know, 20% to 25% year-over-year in the Americas and in EMEA. And do you expect – do you think that's sort of the last drawdown, if you will, in terms of inventory? Are you getting any signs that that may be it and that we're going to start to see at least more stability in terms of customer orders or anything else that makes you optimistic that this may be the bottom here?
spk01: Hello? Coming down. Can you hear me? Yeah, I didn't hear you the first part, Phil. Okay, let me start again. That's fine. So, thanks, Matt. I appreciate it. I said I'd start with Asia. You know, as we said in the script, we do believe we could bottom in Asia. We're seeing some moderate forecasting through 2024. But again, moderate, but that's good news. As we know, historically, a lot of times the signs start in Asian, circle around to the west, and that's kind of where you're going, I think. In Europe, I mean, part of the challenge in Europe with the year-on-year drop is we're coming off record highs. So it's compounding the image, if you will. But tough to call if that's the bottom line. It feels like it might be, Matt, but there's so many mixed signals out there. I wouldn't want to project that as absolute. But we do think it'll start bouncing back in the second half very slowly more into 2025.
spk00: Okay, thank you for that. And then on the cost cutting, I think you said it was a $40 million annual run rate. When should we think about those costs coming out? Will that start in the June quarter? And what should we think about OPEX sequentially? Will that be down or will that be up?
spk06: Yeah, Matt, this is Ken. I'd just say that, you know, a lot of those actions for the new incremental actions beyond Farnell are actually occurring kind of as we speak during the quarter. So expect it to be more of an FY25 kind of benefit and think about OPEX being, you know, down next quarter slightly due to the Farnell actions plus the volume decline.
spk00: Okay, great. And just quickly as a follow-up, that would imply that gross margin actually holds fairly steady. And I would think that that might be down because of the mix.
spk06: Yeah, I think there's a mix offset by some opportunistic things that are kind of balancing it out. So gross margin is holding up slightly in the EC business.
spk00: Okay, great. All right. Thanks a lot. Thanks, Matt.
spk05: At Siebel, we continue to build on...
spk03: Thank you. Our next question is from Joe Quattrochi with Wells Fargo. Please proceed with your question.
spk02: Yeah, thanks for taking the question. Maybe just on that, on the ECA margin front, I guess, like, as you think about that mixed benefit, we assume that, you know, that margin can remain still above that 4% threshold for the June quarter.
spk06: Yeah, Joe, I guess I'd characterize it as, you know, it could be slightly below, it could be slightly above the 4%, right? It's kind of within that range. So, you know, it depends on how the regional mix shakes out ultimately. But it's, you know, the guidance implies it, you know, right around the 4%, but it could be slightly below, could be slightly above.
spk02: Okay, thanks. And then as a follow-up, I think last quarter you talked about, you know, discussions with your suppliers and customers kind of suggested that You know, you were thinking about inventory reductions continuing through the large percentage of this calendar year. And I guess my question is, you know, is that still the right way to think about it? Or has that maybe even pushed a little bit into 2025 as you just think about returning to growth in 2025? I guess, has there been any change really in how you think about the trajectory of inventory reductions to the base of this year?
spk06: No, I wouldn't say really a change. I think that, you know, we were happy that we started some progress. Again, we hadn't had much progress there. Flattish has been, you know, or stable has been our commentary the last couple quarters. So I feel good about the direction we're headed. You know, still a lot of work to do is how I characterize it. So think about it, you know, through the remainder of the county year, still knocking away at that, you know, because the sales levels are down as well.
spk03: Got it. Thank you. Thanks, Joe. Our next question is from William Stein with Truist Securities. Please proceed with your question.
spk04: Great. Thank you for taking my questions. First, I'm hoping you can comment on order trends in the first month of the current quarter and how they might have progressed relative to what you characterized for last quarter, and then I do have a follow-up.
spk01: Yeah, I'll take that, Will. Thanks. Yeah, in order of given, the book-to-bills have improved, but modestly. We're seeing more improvement in AsiaPAC. And as we call it out, we're seeing some improvement in Farnell, as well as in IP&E. And even within the IP&E, it's probably more iConnectors and EMEC is bound. So, we are seeing some recovery in book-to-bill. You know, the real issue, you know, is with the lead times down and the inventory out there, we're just trying to get customers to give us pipeline and more visibility is key. And, of course, we're the middle guy to help the suppliers get the visibility that they're looking for. And it's still just not happening on a wholesale basis, if you will. But that's what we're working on. But it is slightly improved beginning this quarter versus last quarter.
spk04: Great. That helps. And one end market follow-up, you know, channel checks I was doing in the middle of the quarter reflected a recovery or let's say at least some better than expected conditions in automotive. And we did see that from a few semis. And now you're citing the same thing. It's sort of still surprising and maybe a bit of a head scratcher to investors because they're looking at the tier ones and the OEs themselves and they're business doesn't seem to be really upticking. I wonder, is this because they sort of all pipelined material for EVs, demand for that didn't materialize, so they've got to go place a bunch of new orders for internal combustions and hybrids, or is there some other dynamic? Like, is it an inventory mismatch, or did they just take inventory too low? However, you might help us understand this would be really helpful. Thank you.
spk01: Yeah, well, it really is a mixed bag. I mean, you see the different report outs in the last week or so. You know, some are calling it out as negative, others as positive. I think it really depends. You kind of answered the question. It really depends on the content you have in the automobile and where that content is, and whether it be combustible or EV. The ADAS, again, the content in the EV is much higher. But, you know, even I'm looking at the numbers now, you know, yeah, we saw – you know, up year-on-year last quarter. And we call it transportation, to be fair. So, it's a little broader than just automotive, but automotive is the bulk of it. And on a three-quarter trend, you know, globally, we still saw it up year-on-year. So, not only last quarter, but, you know, over the last three quarters. So, it's kind of now that, you know, you're looking at by region, it might be a little bit different, but that's kind of how we're seeing it at this point in time. So, Okay. Thank you.
spk03: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Rupalu Bhattacharya with Bank of America. Please proceed with your question.
spk05: Hi, thanks for taking my questions. Maybe this time I'll start with Ken. Ken, can you remind us, like, what revenue level do you need for keeping, in order to keep the components operating margin above 4%? I know you talked about some restructuring and cost control. How much of that is split between Farnell and components?
spk06: Yeah, I mean, I think most of the cost actions that you're going to see through the remainder of the year would be more for now because the core business is in the process of executing some of those things. I would kind of say, you know, Rupa, the question I got before was, you know, does the guidance imply below 4%? Does it imply at 4%? So I'd kind of flip it and just say, hey, this level of revenue, you know, depending on regional mix, is kind of where we're at to maintain the 4%. So the guidance implies, you know, kind of right around 4%, and, you know, there's obviously put or take of plus or minus 20 basis points depending on how much is EMEA in Americas versus Asia, some of those things, but we're kind of at that level. You know, absent some other, you know, meaningful increase in demand creation mix or, you know, supply chain and service scaling a lot more than we have implied. Okay. Okay. That's helpful.
spk05: And, Ken, maybe another one for you. Can you talk about how you think about the cash conversion cycle trending over the next couple of quarters? How should we think about free cash flow? And then, you know, you laid out uses of cash. I mean, can you give us your thoughts on buybacks and any opportunity for M&A in this environment or not?
spk06: Yes. I mean, I think, you know, we'd expect positive free cash flow. We are going to be in the market in the fourth quarter buying back shares and You know, we believe they're still at a great value considering they're, you know, well below book value. You know, I would not anticipate any M&A, you know, through the remainder of this calendar year. You know, I think we're always looking, but again, looking at smaller like IP&E type acquisitions, nothing transformational. But, you know, at this point, we're probably not going to be active in M&A over the next, you know, few quarters. You know, and CapEx should return to normal levels. So think about it as, you know, $25 to $35 million a quarter as a normal run rate. Okay.
spk05: Okay, that's helpful. Maybe I can sneak one more in for Phil. You know, I mean, the operating environment is tough right now, Phil, but can you, as a high-level question, talk about what are some of your focus areas to grow revenue over the next 12 months? Where do you think, like, either which end markets or which geography do you think comes back sooner? And when that happens, like, you know, where do you see, like, have net best positioned, like which end markets, which verticals, which geographies? And is there anything you're investing, even in this climate, is there anything you're investing in right now to better position the company for the recovery? Thanks.
spk01: Yeah, thanks, Rupul. Yeah, a lot packed into that question, but I'll do the best I can to pare it down. Well, we already talked regionally, so we feel AsiaPAC is going to start to bounce back, which is positive. We're well positioned in AsiaPAC and continuing to gain share there. So at a high-level statement, you know, we've shared before on the earnings calls we're We're trying to keep the team intact. We're not trying to overreact to the market. We've had great momentum many quarters in a row now. So we're being very careful where we reduce expenses while still making investments. And we're continuing to invest in the verticals. So although industrial, and everybody knows industrial has kind of been hit harder, and that's a big play for us, we're positioned extremely well in industrial and going to continue to stay positioned there. We talked about transportation earlier with Will a bit. That is going to be a good market for us. It continues to be and will be in the future. We're continuing to invest in that space. The other vertical, the defense aerospace, you know, unfortunately with what's going on in the world today, that's going to continue to grow on many fronts. You know, so there are a handful of verticals. And then inside the company, we talked about in the script, you know, our continued focus on IP&E. We're starting to see that move back into a positive, which is good news, particularly from a book to bill. And we talked about AdNet Embedded. And again, that's a business that's continuing to grow, generates higher margins for us. That's where we're actually building, designing and building manufacturing boards that go into those same verticals I just talked about, including medical. Those would be a couple areas that we're focused on right now. And we want to continue to maintain that focus. And again, not Not overreact, okay, and have the pendulum swing that we may have seen in the past. Manage what we can, drive the inventories down, generate cash while servicing our customers and suppliers. Okay. Thanks for all the details. Appreciate it.
spk03: 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.
spk01: Great. Well, I want to thank everyone for attending today's earnings call. And I look forward to speaking to you again at our fourth quarter fiscal year 2024 earnings report in August. Have a great summer.
spk03: Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
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