Avnet, Inc.

Please stand by. Our presentation will now begin. Welcome to the AVNET Fourth Quarter Fiscal Year 2024 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President, Treasurer, and Investor Relations for AVNET.

Thank you, Operator. I'd like to welcome everyone to the AVNET Fourth Quarter Fiscal Year 2024 Earnings Conference Call. This morning, ABNET released financial results for the fourth quarter and 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 risk, 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, 10Q and 10K, 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, Avnet's CEO, and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil? Phil?

Thank you, Joe, and thank you, everyone, for joining us on our fourth quarter and fiscal year 2024 earnings call. For fiscal year 2024, we've delivered $23.8 billion in revenues and $5.43 of diluted earnings per share. Looking back on fiscal year 2024, we began the year with great momentum for fiscal year 2023, which was a record year both for revenues and earnings per share. As 2024 progressed, we faced a softening demand environment, and I want to thank our team for their execution and perseverance in these challenging market conditions. Their continued efforts will allow us to emerge from the correction stronger as the market recovers. Turning to the completed fourth quarter, I'm pleased we delivered another quarter of financial results that exceeded our top line in EPS guidance. In the quarter, we achieved sales of $5.6 billion, and adjusted operating margins of 3.5%, highlighted by a 4.1% operating margin in our electronic components business. With the structural improvements we've made over the past few years, our EC business has now delivered 10 consecutive quarters of greater than 4% operating margin. We also had another good quarter of cash flow generation, primarily the result of executing sound working capital management as we navigate through the market corrections. Sequentially, demand declined across most of the end markets we served. On a year-on-year basis, aerospace and defense was the only end market with increased demand globally. Semiconductor lead times have continued to decrease and remain relatively low for most technologies. And as I mentioned last quarter, the growth in data center build-outs surrounding cloud and artificial intelligence is driving longer lead times for certain products, and we would expect this to continue. On the IP&E side, lead times are generally stable and have returned to what I would characterize as a normal range. And we are seeing increasing demand for some interconnect products and capacitors for certain applications. Our global book-to-bill ratio improved modestly over the last quarter, led by our Asia and America's regions, both finishing the quarter approaching parity. Our EMEA business, which has a large portion of its business driven by the industrial and transportation and markets, is seeing softer bookings and billings due to lower demand. 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. I'm really pleased with the progress our team has made in improving our inventory position. This is a key focus area for our organization, and we still have some work to do. While we have more inventory than we need to support near-term demand in some areas, there are other areas where we want to make strategic investments. Having the right inventory is still a key growth enabler and is an important part of our value proposition at the center of the technology supply chain. Now with that, let me turn to the fourth quarter results. At the top line, our electronic components business declined on a global basis. In EMEA, demand in the aerospace and defense end market increased sequentially and year-on-year as military budgets have increased across Europe. In the Americas, demand increased sequentially for aerospace and defense and industrial end markets, and aerospace and defense was strongest on a year-on-year basis. I mentioned on our last earnings call we were seeing signs of a bottoming in our Asia region, giving us reasons to be optimistic that the market correction may be nearing its final phase in Asia. So it is notable that our Asia revenues increased sequentially as demand in the industrial, transportation, and consumer end markets all increased, with transportation showing the best growth on a year-on-year basis. We expect a return to overall year-on-year growth in Asia in either the September or December quarter. On the demand creation side, our engineering teams continue to engage with our customers and suppliers on design wins and registrations. This stroke increases in revenues on a sequential basis and validates the value proposition we can deliver in any type of market. Before we get into Farnell's results, I would like to highlight that Rebecca Obregon has been recently named President of Farnell. In her time at Avnet, Rebecca has demonstrated the ability to develop and execute strategy and drive cultural alignment, not only with our employees, but with our customers and suppliers globally. I'm confident that her experience, relationships, and collaborative approach will drive important synergies to accelerate Farnell's profitable growth. Farnell is not immune to overall market softness, and the fourth quarter sales were down sequentially and year on year, similar to the sales trends in our EMEA EC business. Sales were lower sequentially, mostly due to lower demand for semiconductors. Gross margins at Farnell have stabilized and with the previously announced cost reductions, which are proceeding as planned, we expect margins to improve over the course of fiscal year 2025. We continue to expect Farnell's high service offerings to enhance the synergistic collaboration between Farnell and Avnet. The combination allows us to serve our customers from new product introduction to mass production as one Avnet. Avnet is positioned as one of the only broad-line global distributors that also has a global high-service distribution business. As a key player in the global technology supply chain, we continue to leverage our value proposition in other areas, such as demand creation, IP&E, and embedded computing. I've already mentioned our demand creation engineering capabilities. IP&E continues to be a key focus for our team, and in Q4 we saw a nice increase in this area, particularly in Asia, much of which is related to the build-out of data centers. In addition to IP&E and demand creation, we're also focused on driving value for our embedded solutions offerings. OEMs are increasingly looking to move from chip-down manufacturing to using modular compute solutions into their products. Because of this trend, we recently announced the launch of the TRIA brand for our business unit that designs and manufactures embedded compute modules and systems. The new distinct brand will improve our ability to compete with other standalone brands in the embedded solutions business. The market opportunity we targeted through TRIA is just another example of how we have adapted to the changing needs of our customers and the technology offering of our suppliers over the past 103 years. So stay tuned for future updates on our progress in embedded space. To conclude, I continue to feel optimistic about the long-term trends in the demand for technology and the pervasiveness of electronics in so many applications today and in the future. This includes those driven by AI adoption as companies explore innovative ways to leverage its capabilities in both the data center and ultimately edge computing applications. We are participating in the AI growth trends through sales of components into data centers as well as providing supply chain services surrounding the data center. This participation is expected to grow over the next several quarters and should positively impact sales across several verticals. I'm excited that AdNet's position at the Center of the Technology Supply Chain will allow us to continue to deliver increasing value to our customers and supplier partners. As we enter fiscal year 25, the prevailing belief is that the market correction seems to be in its last stages. Our Asia region appears to have bottomed, and we're awaiting signs for a similar bottoming or reflection point to manifest in the Americas and Europe. Until then, we will continue to navigate through this market and control what we can control in anticipation of a brighter demand environment in the quarters to come. Now, with that, I'll turn it over to Ken to dive deeper into our fourth quarter results.

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avidant and for joining our fourth quarter earnings call. Our sales for the fourth quarter were approximately $5.6 billion above guidance and down 15% year-over-year or down 14% in constant currency. On a sequential basis, sales were down 1% in constant currency due to sales declines in the western regions and below seasonal sales growth in Asia. On a year-over-year basis, sales declined in constant currency 2% in Asia, 21% in EMEA, and 22% in the Americas. From an operating group perspective, electronic component sales declined 15% year-over-year and 14% in constant currency. EC sales declined less than 1% quarter-over-quarter in constant currency. Barnell sales declined 16% year-over-year and 15% in constant currency. Barnell sales declined 8% sequentially in constant currency. For the fourth quarter, gross margin of 11.6% was 92 basis points lower year-over-year and 28 basis points lower sequentially. Our fourth quarter gross margin benefited from the impact of some of the strategic inventory opportunities we mentioned last quarter. EC gross margin was down sequentially and year-over-year. The sequential decline was primarily due to a lower mix of sales from the western regions. Fresnel gross margin was down sequentially and year-over-year, largely due to continued weak market demand for on-the-board components. Turning to operating expenses, SG&A expenses were $450 million in the quarter, down $56 million, or 11% year-over-year. and down $17 million of 4% sequentially. As a percentage of gross profit dollars, SG&A expenses were flat sequentially at 70%. In the fourth quarter, we incurred additional restructuring, integration, and other costs for our previously communicated cost reduction actions at both Farnell and our EC business. These actions included a combination of permanent and temporary cost reductions across all regions. We saw some impact from these actions during the fourth quarter, including at Farnell. Moving into fiscal 2025, we expect to realize further benefits from those cost reduction actions. However, some of the impact will be offset by operating expense headwinds driven by the start of the new fiscal year. For the fourth quarter, we reported adjusted operating income of $193 million, and our adjusted operating margin was 3.5%. By operating group, electronic components operating income was $210 million, and AC operating margin was 4.1%. Farnell operating income was $15 million, and Farnell operating margin remained at 4%. Farnell's expenses were lower this quarter by approximately $10 million, but this benefit was offset by the sequential sales decline driven by the overall market correction, as most of Farnell's business is in EMEA and the Americas. Turning to expenses below operating income, fourth quarter interest expense was $64 million, decreased by $11 million year over year, and was down $9 million sequentially, primarily due to lower debt levels throughout the quarter. Our adjusted effective income tax rate of 15% was lower than expected in the quarter, driven by various factors, including truing up the full year adjusted effective tax rate of 22% during the fourth quarter. Adjusted diluted earnings per share of $1.22 exceeded our expectations for the quarter due to a combination of higher sales, lower interest expense, and a lower tax rate. The adjusted EPS benefit from the lower than expected interest expense and tax rate was approximately 18 cents. Turning to the balance sheet and liquidity, during the quarter, working capital decreased $228 million sequentially, including a decrease in reported inventories of $283 million, a $71 million increase in receivables, and a $16 million increase in payables. Working capital days decreased six days quarter over quarter to 110 days. Our return on working capital was essentially flat quarter over quarter. Our inventories were down 5% during the quarter, reflecting decreases in the Americas and EMEA regions of EC and to a lesser extent across Farnell. Declines in EC inventories were net of increases in inventories due to strategic opportunities we saw this quarter. Inventory days decreased five days sequentially to 104 days. Our near-term goal is to get inventories below $5 billion. As Phil previously mentioned, although our inventories are elevated in certain areas, we will be looking to invest in other areas where it makes sense for our business. Our goal continues to be to ensure we are well positioned to take advantage of the market recovery. We expect to make continued progress heading into fiscal 2025 by adjusting our inventories lower in the areas where they remain elevated. Our decrease in working capital led to a decrease in debt of $56 million. We generated $274 million of cash from operations in the quarter, $773 million over the past two quarters, and $690 million for the full fiscal year. We ended the quarter with a gross leverage of 2.7 times, and we had approximately $759 million of available committed borrowing capacity. With regards to our capital allocation, we continue to prioritize our existing business needs. During the quarter, cash used for CapEx was $26 million, as expected. We expect CapEx to remain at historical levels in fiscal 2025 of approximately $25 million to $35 million per quarter. In the fourth quarter, we paid our quarterly dividend of 31 cents per share, or $28 million. We also repurchased approximately $79 million worth of shares, which represented nearly 2% of shares outstanding. As we entered the new fiscal year, we have so far repurchased an additional $46 million of shares in July 2024, as our share price continues to trade below book value, which was $54 a share in the fourth quarter. Our capital allocation priorities have continued to include returning cash to shareholders. Since the start of fiscal year 2019, we have returned nearly $2 billion to shareholders with nearly $600 million in dividends and nearly $1.4 billion of share repurchases. We have repurchased 32 million shares over that timeframe, which has reduced our diluted share count by an average of 5% per year. Share repurchases will continue to be an important part of our capital allocation priorities in fiscal 2025 and beyond, We are targeting a reduction of shares outstanding by at least 5%, as well as increasing our dividend during fiscal 2025, thereby continuing our commitment to provide consistent and dependable shareholder returns. Turning to guidance, for the first quarter of fiscal 2025, we are guiding sales in the range of $5.25 billion to $5.55 billion and diluted earnings per share in the range of $0.80 to $0.90. Our first quarter guidance assumes current marketing conditions persist, and implies a sequential sales change of flat to down 5%, with the greater than seasonal sales declines in the western regions and the lower than seasonal sales growth in Asia. On a year-over-year basis, this guidance implies flat sales in Asia as we are close to returning to year-over-year growth in that region. Assumptions for the first quarter operating expenses include some headwinds specific to variable compensation resets and seasonal increases in stock-based compensation, which will offset some of the cost reduction initiatives we have implemented at Farnell on the EC level. This guidance also assumes similar interest expense compared to the fourth quarter, an effective tax rate of between 21% and 25%, and 90 million shares outstanding on diluted basis. Despite our near-term outlook, we still have momentum entering our new fiscal year. We are well-positioned and remain focused on capitalizing on growth opportunities once the market improves, which we expect to happen in the coming quarters. Our focus remains on execution of the things we can control as we continue to demonstrate the value that Avnet provides to our customer and supplier partners at the center of the technology supply chain. With that, I'll turn it over to the operator to open up for questions. Operator?

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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the store keys. One moment, please, while we poll for questions. Our first question comes from William Stein with Truist Securities. Please proceed with your question.

Great. Can you confirm that you can hear me?

Yeah, well, we got you.

Great. Great. Thanks for taking my question. Congrats on the good quarterly results. I wanted to ask about a couple things. Perhaps first, inventory. I think in recent quarters, I'm not sure if you use this word, but I would call it spiky or not well dispersed by supplier and maybe also by region and market. Can you provide an update as to whether that condition improved and your inventory became a bit more dispersed by supplier or if we're still in that sort of spiky situation?

Yeah, well, thanks, Will, and appreciate the comment. And this is Phil. I'll start and then Ken jump in. I think what you're referring to is when we talk about our inventory being up, and it's higher than we want it to be still, and we've got goals to continue to bring down. Even with our own team, it's not up across the board. It's not like it's up in every single commodity or every single product line. It tends to be a little bit more top-heavy, let's say, in five or six lines where maybe it's a little bit more imbalanced, if you will, that we're working down. And, of course, we had, as we noted two quarters ago, kind of a special buy that we had as well that started to come in, which was good for us and good for the customers. So, yeah, it's still a little spiky, I guess is the right word. I'll leave it at that. Ken, you want to jump in? Again, not all the inventory as well. We're still investing in inventory. That's why we – Deliberately put that in the script so our suppliers know, hey, we know we still have distribution. You've got to have inventory, right, with just a little imbalance in certain commodities or certain lines.

Well, I just say each region is making progress, but each region has its own kind of situation, even though there's some similarities that cross through it. So, again, everyone's got some progress to make, but certain regions have had better progress than others and will continue to drive it through the end of the calendar year.

Appreciate that answer. Thank you. One other, as I listened to some of your suppliers or large semi-companies that may, some of them maybe not even suppliers anymore, there were two interesting takeaways from my perspective. One was that demand conditions, both for orders and for bookings as well, were less dispersed by end market. Maybe if we take out aerospace defense, maybe that one in particular has been strong. But X that end market, it hasn't been as much of an end market story. It's been much more of a geo story. And the story that so many companies have told has been that geographically, they saw a meaningful recovery, a big snapback in China. Have you... begun to see a similar trend. It didn't sound quite like that in your prepared remarks, so I'm hoping you can clarify and if you can identify maybe the difference between what you're seeing and what your suppliers are talking about, that might help us understand the broader picture. Thanks.

Yeah, thanks, Will. And your overall statement is correct. The demand on bookings is still slower than we'd like it to be. I think Most suppliers would have said that. We track them as well. They want more visibility, right, because the lead times are down, and there's this, I would say, false assumption that everything's going to be available anytime anybody wants it, and we know what happens when the market starts to turn. So generally slower. Defense Arrow has been fast. is fine, actually good. The big down market really right now is affecting us most, and most as far as industrial. If you're in data center, hyperscalers, AI, you know, you're probably in pretty good shape. As far as Asia-Pac or China-specific, yeah, we've seen a modest, I wouldn't say robust, but a modest recovery in China. You know, we may or may not be playing in some of those suppliers and markets that you're referring to, you know, particularly the lines that we don't have. You know, they might be more consumer-based. I'm not really sure. But we're holding our own in China. We're seeing, as we talked about in Asia, we saw, just looking at the vertical markets now, we did see some increase in transportation. We did see some increase in, although modest, in consumer space as well and sequentially in industrial. So... That's our Asia PAC number in total. But Asia, as we did talk about in the script, in total now, including Japan, we're going to see sequential growth either in September or December, depending on how strong September comes, and we'll begin to see year-on-year growth in Asia PAC, which was a good sign overall as typically recovery starts in Asia PAC and works its way west. Hope that helps. Yes, thank you.

Our next question comes from Matt Sharon with Stiefel. Please proceed with your question.

Yes, thanks. Hello, everyone. Just following up on Will's question regarding demand, I know and I appreciate you're just giving September quarter guidance, but it sounds like you're not ready to call the bottom yet, Phil, in North America or Europe. And so given that and what we're hearing from other suppliers, Should we expect those two markets to be below seasonal, meaning down sequentially, offset a little bit by Asia, so that your overall business may be flattened down sequentially? Is that the right way to think about it at this point?

Yeah, Matt, I think when you think about the guidance, you know, you see the sales decline from last quarter, so obviously there's an impact there. But it would be a heavy mix shift, you know, primarily Asia, you know, from EMEA. So we're seeing, you know, definitely lower than seasonal in EMEA. Now typically September is the seasonally slow quarter for EMEA. You know, the vacation period is here in August, so August is usually a pretty weak month. But this is, you know, definitely lower than we had hoped or expecting. But I don't think there's anything we necessarily see that says, you know, it's getting worse, but I don't think we're ready to call bottom yet either, right? Again, EMEA has been our strongest region, so they're having a little bit of, you know, softness industrial transportation, right? But generally speaking, that business is still very healthy.

I think if you'd call out things, Ken.

Yeah, actually, Phil, I was actually just talking about the December quarter, kind of looking past September based on your backlog. And my question was, should you expect that to be below seasonal, those two regions?

Oh, December quarter. Okay. Well, we don't have to give guidance out that far, Matt. Can you hear me okay, Matt? You can, right?

Yeah.

Yeah. Okay. All right. Well, Asia we call bottom. I mean, Asia we see and we called that last quarter that we think March was the bottom in Asia, and that's, we believe, going to hold true through the calendar year into March. America is actually – pretty stable right now, sequentially. The view into December is still foggy. And I would say the same thing for Europe. So it's really just tough. There's so many moving pieces. I would like to believe September is pretty much nearing the bottom. You've got to remember, Europe, we're coming off of June and September quarters a year ago that were all-time record quarters. So we're going to get some tough compares on the year-to-year compare as well. I think it's safe to say the industrial market in particular in Europe is down, and that's pretty consistent, and that's a big play for us and many of our suppliers, that industrial space in Europe. Got it. Okay. Thanks for that.

And then regarding your margin or backing into your margin guidance, it looks like component margins would be below that 4% target that you have. and it also looks like gross margin will be down at least 20 basis points sequentially. Is that really all mixed ribbon at this point, or are you seeing incremental pricing pressure as well?

Yeah, Matt, it's mostly mixed. I think that dip, you're right, it does dip below four. We're hoping that's the only quarter, but it may be a couple quarters. But, again, that's a big mixed shift primarily to Asia from Europe, and that's what's driving a lot of it. You know, we did mention OPEX. being up a little bit, too, from some, you know, change in the fiscal year and kind of timing difference kind of headwinds. But we feel overall really good about our expenses, but it will be up from last quarter.

Okay. And just on OpEx, Ken, looking past the September quarter, you talked about some incremental restructuring. So should we expect OpEx to work down from there or not?

Yeah, I think modestly, but not significantly, right? Got it.

Okay. All right. Thanks a lot.

Thanks, Matt. Our next question comes from Melissa Fairbanks with Raymond James. Please proceed with your question.

Hey, guys. Thanks so much for taking my question. I've got one a little related to some of your commentary on the inventories. Just wondering what we can expect moving forward either in terms of investment in end-of-life products. I know you've had some unique kind of strategic opportunities there, or maybe some expansion of your supply chain services business.

Melissa, this is Ken. Specifically to end-of-life? Uh-huh. Yeah, I mean, I think there's several suppliers that are doing some, you know, we call it last-time buyer end-of-life programs, You know, I think we don't necessarily love to hold product for those engagements for multiple years, right? You know, we can do something for one, two years. But if you start to talk about beyond that, you know, we look for alternative methods. So we do see that as a, you know, historical and current opportunity within our supply chain. You know, but a lot of stuff, you know, it's cheaper for the customers just to take it, right? So we see some of that being more temporary holds versus the longer term. But, you know, we – We are open to serving whatever the customer needs are, but, again, we've got to get a fair return for that. And with the cost of capital, it becomes more expensive to do those kind of last-time-buy holds than it was a couple years ago. But we're seeing pockets of opportunity. I wouldn't say anything meaningful. A lot of the stuff we're seeing on End of Life is back-to-back type of things where we'll hold it for a little bit to pipeline it, but it gets shipped.

Okay, okay. On the supply chain services business, I think this may be going back to – the December quarter or maybe even a conference in the December quarter, you had some opportunities, you onboarded some inventory. I believe it was for an industrial customer. And then you saw potentially some opportunities longer term in the auto space. Can you give us an update on that business?

Yeah, I think just overall supply chain of the service is, you know, there's puts and takes. What I would say is, you know, we still see lots of opportunity in particular in transportation, but even more broadly. Okay. You know, and I guess the other commentary I'd give is, you know, some of the legacy supply chain engagements more for, let's say, technology-type companies that have been buying components for years. You know, that's down with the broader market being down, right? So we're optimistic that some of that will start to recover, and then that will be on top of some of the new wins. But, again, these things take a little while to ramp. But, you know, progress being made but not ready necessarily to give back. more specific financial metrics there outside of the percentage of inventory, which was roughly 8% this quarter consistent with last quarter.

Yep, yep, okay. Love to see the good progress on the inventories, by the way. Maybe if I could squeeze in just one more quick one. We've talked a lot about Asia today, but we've heard about some increasing competitive or pricing pressures in Asia. I'm wondering what you're seeing there, if that's impacting – anything. Obviously, Asia has been one of the better performing regions for you. But if you can comment on the competitive dynamics there.

Yeah. Hey, Melissa. Thanks for the questions. Appreciate it. This is Phil. You hear from a couple suppliers in certain markets, maybe even in China. You might have some more indigenous suppliers and whatnot. But overall, Asia is a competitive market all the time. So We're not seeing anything that's out of the norm affecting our business at this point. But we do hear about some of the pricing pressures and certain commodities from certain suppliers. Okay. The net effect to us has been minimal.

Okay, great. Thanks so much, guys.

Thanks, Melissa. Our next question comes from Joe Quattarochi with Wells Fargo. Please proceed with your question.

Yeah, thanks for taking the question. I'm just kind of curious on the target of being 5 billion inventory is how long do you think that could take? And then just to clarify, is that including the supply chain service inventory that you're holding as an agent for your customers or suppliers?

Yeah, Joe, I think that goal, I would say that's a net goal. I think there'll be puts and takes, you know, throughout the fiscal year. So I'd say as we, you know, get towards the end of our new fiscal year, you should see that be achieved. You know, I think we'll continue to kind of report out what percentage of supply chain. There's nothing near term that we see would be a drastic increase there that would materially change the number, but there will be, you know, puts and takes within that number, you know, and we'll update accordingly. Again, we're Don't mention the kind of pockets that are elevated. That's what we're focused on reducing, and we'll continue to give progress updates on where that's at. But clearly, I think there's capacity to invest in inventory but still reduce overall is how we're kind of thinking about it.

Okay. And then you talked about the opportunity on the data center side. Just kind of curious, how big is that from a revenue perspective for you today, and how should we think about the margin profile relative to the corporate average?

Yeah, Joe, this is Phil. We're going to quantify the number at a relative basis to our total enterprise. It's relatively small, Joe. But we see increased opportunities there. And particularly out of our Asia business, tied to some of the hyperscalers. And the margin profile has been about average to our typical margin that we're getting from those suppliers or customers. The other opportunity we talked about in the last call, which makes it a little bit more difficult to measure, is whether we're selling directly to the hyperscalers or a lot of our OEM customers sell into the hyperscalers and the AI, right? So we're, in particular in the industrial space, we've got a lot of customers that we're doing business with that we're supporting that their end customers are the hyperscalers, if you will. So we're also benefiting from that. We're working to quantify that. it gets more difficult, as you can probably imagine. But it's either way, the overall ecosystem that gets built out there as time moves on, we will certainly benefit. Helpful. Thank you.

You got it, Joe. Our next question comes from Ruplu Hadachara with Bank of America. Please proceed with your question.

Hi. Thanks for taking my questions. First one is on Farnell. So what do you or Rebecca plan to do different to turn the Farnell business around? And Ken, you talked about margin improvement throughout the next fiscal year at Farnell. How should we think about the cadence of that? I mean, where do you think, you know, the margins in Farnell can get to by the end of the fiscal year?

Yeah, thanks, Rupal. I'll go first. I'll let Ken touch on the margin. We do have a plan there, and you can imagine we have a walk. So, yeah, just overall certainly disappointed where we are with Farnell. That said, we're also excited about the opportunity because it becomes a complete tailwind for us as the market recovers. As you know, we announced Rebecca in the role. She's a 25-year veteran of the industry but would have been 18 months and has already jumped in with the team on resetting the strategy and the structure for Farnell. We talked a couple quarters ago about the OPEX adjustments at Farnell, which we talked about in the transcripts as well. We are starting to see the net effect there. It's just that that effect of the OpEx did not show up as positive in the OI due to the further softening of the market, particularly in New York, where Farnell's largest region. So we're going to continue to look at the strategy structure, continue to leverage the best of AdNet, okay, in total with Farnell. As we talked about in the script, we have a unique opportunity there. Continue to invest in the digital front end, the e-commerce front end. We're not slowing down on that at all. because we think it's critical for the long-term value prop that we see for how it can bring Avnet and its shareholders. So stay tuned for more, and I'm sure we'll get more in the one-on-ones with you. Ken, anything on the other?

Well, I'd just say I think on the operating margin, you know, improvement when you're going to see it. I think it's pushed out a little bit. The sales obviously were softer than we anticipated going into the quarter, and that's kind of the broader impact of the EMEA market. So, you know, at the current level of sales, we're not going to see – A lot of improvement. The good news is, you know, gross margin. We feel pretty good about it being stable, you know, and that's for on-the-board components as well as overall. And the OPEX actions are taking effect, right? We saw a pretty good sequential decline there. So we feel good about those things we can control, you know, the top line softer than we anticipated, and we expect that to continue, you know, for at least the next quarter or two. But, you know, everything else is in good shape for the recovery.

Okay. Thanks for the details there. Maybe for my follow-up, if I can ask you on your capital allocation priorities, I mean, from the prepared remarks, Phil, it seems like we're nearing the end of the inventory correction in the channel. So, I mean, how many more quarters do you expect of this correction? And in this environment, where would you focus your investments? And how should we think about the tradeoff between buybacks or doing any M&A or any other type of investments that you may have. So if you can just kind of weave in, like, you know, how many more quarters of correction you expect and where do you focus your efforts in terms of investments and capital allocation? Thank you.

Rupal, I'll start off by just saying, you know, I think our With some of the market turmoil here, we dropped below 50. We've been steadily trading below book value of about 54. So we feel buying back shares is the appropriate use of our capital right now. I think we've talked about it. We're not really pursuing M&A aggressively. We're open to listen to things, and a lot of things would be capabilities or tuck-in type of opportunities, but nothing transformational. And, you know, again, we have to support the dividend. You know, we still see there's opportunity in inventory. So although it's getting better with our customers, we wouldn't say, you know, across the board, every inventory levels are, you know, where they should be at, right? So it's still going to take, you know, a few quarters to get through the inventory side of things. But, you know, we anticipate continuing to invest in ourselves. That's some combination of our own team and then also – when it comes to, you know, the capital projects, but we think that's kind of largely subsided itself with the investment in New Europe. So, again, I think it's going to be mostly buybacks and dividends, some piece of debt pay down, depending on where the debt levels are at, and continue to drive improvements in the business.

Okay. Thank you for all the details. Appreciate it.

Thank you. Excuse me. Gentlemen, there are no further questions at this time. I'll now turn it back to Phil Gallagher for closing remarks.

Great. Thank you very much. And I want to thank everyone for attending today's earnings call, and look forward to speaking to you again at our first quarter fiscal year 2025 earnings report in October. Have a great rest of the day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.