Avnet Inc (AVT) Q2 2021 Earnings Call Transcript

Welcome to the Avnet Second Quarter Fiscal Year 2021 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.

Thank you, operator. Earlier this afternoon, Avnet released financial results for the second fiscal quarter of 2021. The release is available on the Investor Relations section of the company's website. 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 Avnet's website. Lastly, some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict, in particular, the scope and duration of the COVID-19 outbreak and its impact on global economic systems and our operations, employees, customers, and supply chain. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet'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. Today's call will be led by Phil Gallagher, Avnet's CEO; and Tom Liguori, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Joe and thank you everyone for joining us for our second quarter of fiscal year 2021 earnings conference call. I hope everyone is safe and healthy and that your 2021 is off to a good start, all things considered. 2020 was a challenging year to say the least. And, of course, we continue to manage some lingering COVID-related headwinds. But speaking for myself, I can say it's nice to have some momentum moving into the New Year. Despite the challenges, we persevered and produced solid second-quarter results. Our success is in small part due to the hard work and dedication of our incredible employees. Our team's ability to continue to provide uninterrupted service at a global scale and supply chain visibility is remarkable. This demonstrates the invaluable role Avnet continues to play for our customers and our suppliers. As I've highlighted in past calls, our employees' continued hard work has been supported by a renewed commitment to our primary value proposition here at Avnet, bridging the worlds and accelerating the success of our suppliers and customers. Our efforts have been focused on streamlining the business, leveraging our core and Farnell and investing in our value-added businesses, including IoT and Avnet Integrated. We've continued to add SKUs to the Farnell inventory, add salespeople and FAEs in selected geographies, invest in employee development programs, strengthen our supplier engagement teams and embrace digital capabilities. All of these actions put us on track to grow revenue streams, capture market share, enhance our global digital footprint and extend existing customer and supplier relationships. While it's still early innings, our efforts are driving tangible results across the board. I am heartened by the performance this quarter and excited to tackle the challenges and opportunities in 2021, by the way, our 100th year in business—pretty amazing, a 100-year anniversary in 2021. Now, turning to slide five, you'll see evidence of this progress. Our continued emphasis on execution, coupled with strong market conditions across Asia and improving conditions in the Americas and EMEA, enabled us to drive revenue and adjusted diluted EPS well above guidance. We are well-positioned today to execute even in volatile conditions. In the quarter, revenues were $4.7 billion, up year-over-year and up sequentially if we exclude sales from the additional week in the prior quarter. Revenue grew 9.3% year-over-year and 9.7% sequentially when excluding TI revenues from the prior quarters and adjusted to reflect constant currency and the additional week of sales in the first quarter. Our adjusted operating income increased 22% from the prior quarter, and our operating margin also increased sequentially, even with Asia being heavy in the revenue mix. We're pleased with how we did in the Americas and EMEA and are encouraged by the early results we were seeing at Farnell with improved operating margins. To top that off, the Asia region, and I do mean the whole Asia region, produced record sales in the quarter. It will be a surprise to no one on this call that we saw strong demand in the automotive and industrial sectors in Asia and frankly globally. Tom will discuss our financial performance in further detail a bit later. We truly are hitting on all cylinders and competing favorably across the board. While we were proud of the results that we achieved this quarter, we must remain vigilant and humble in the face of the continued uncertainty associated with the pandemic. So, before we take a deeper look at our core business lines, let me take a minute to speak about the widely reported chip shortages. Regarding some of the comments in the market about lead times and shortages of certain products, remember Avnet has a broad and diverse portfolio across franchises, and we're not overly exposed to any one product category. As we always have and we'll continue to do so, we're managing our backlog tightly and staying close to our customers and suppliers. Continuity of supply and supply chain visibility are key assets of Avnet's value proposition. Our teams have established relationships unmatched in this industry by remaining in constant contact with our customers and suppliers, working collaboratively upstream and downstream with both to manage forecasts and mitigate supply chain risk. We remain committed to putting customers first and are pleased to see that focus reflected in our improving net promoter scores, which is our customer engagement scores. Additionally, we're seeing that suppliers are responding favorably to our approach as we continue to gain traction where—or what I like to call winning with the winners. It's worth noting our relationships with our top suppliers extend several decades across the board, clearly demonstrating the value Avnet brings to these partnerships. We also announced early this month that we have rejoined the Electronic Components Industry Association known as ECIA as a distribution member. I'm very excited to take part and contribute more directly to enhancing the efficiency and effectiveness of our industry. I look forward to furthering our industry relationships through that partnership. Looking at our core Electronic Components business on side six, revenues were up year-over-year in the quarter to $4.3 billion. As mentioned earlier, we realized record results in Asia, our largest segment, which posted 9% growth sequentially. We're confident our China growth plan is working and that we are gaining share in the entire APAC region, which is encouraging. Despite the Americas revenues being down this quarter, we're encouraged by the incremental improvement driven by cost-saving initiatives and initial recovery in the region. Revenues were down in the EMEA region as well, which was largely impacted by Brexit and lockdowns in the U.K. Overall, we were pleased with the gross margin improvement we saw across both regions. We exited the quarter with strong book-to-bills in every region. We're continuing to tightly manage our backlog and our teams are working closely with our customers to extend visibility, which we are sharing with our supplier partners. We continued to see strong design activity coming off record registrations in the first quarter. Turning to Farnell on slide seven. We're encouraged by the improvement we're seeing with Farnell. While Farnell sales were down sequentially and year-over-year, we had higher gross margins and reduced operating expenses in the quarter, enabling us to increase our operating margins to 4.5% from 3.5% in the prior quarter, tracking well toward our goal of 10%. We're continuing to invest, adding 49,100 SKUs through the first half of the fiscal year, progressing on our plans to add up to 250,000 SKUs through fiscal year 2022. Earlier this month, we also announced that Farnell was appointed as National Instruments' Authorized Distributor, significantly expanding its product portfolio to include NI software and connected test and measurement solutions for customers of all sizes. Amidst ongoing lockdowns in the U.K., we continue to carefully manage the ramp-up of the Leeds distribution center. We know it will take time, but over the fully operational Leeds facility, we have the potential to realize $19 million of cost savings per year. That number alone speaks to the value we see in this business. Turning to slide eight. Before I turn over to Tom, I just want to reiterate how proud I am of our team. They've truly demonstrated resilience, adaptability, and perseverance, a tenant of Avnet's core and ability to evolve and deliver value over the past 100 years. As I mentioned last quarter, 2021 kicks off Avnet's 100-year anniversary celebration, which is a rare accomplishment for any company, but Avnet has proven time and time again its ability to adapt and grow. I've certainly seen that in my going on 40 years with the company, and I think many of you are watching that story unfold today. I'm confident the steps we're taking will continue to deliver value. And we have the right team, experience, and strategy to build on our recent momentum. With that, I'll turn it over to Tom to walk you through the financials for the quarter. Tom?

Thank you Phil. Good afternoon, everyone, and thank you for attending today's call. As Phil stated, despite some sustained macro headwinds, we produced strong results this quarter and made notable progress sharpening our execution in our primary distribution operations. Revenues of $4.7 billion exceeded our guidance and grew from $4.5 billion in the prior year's quarter. At this point, we have fully implemented our $75 million OpEx reduction plan and are nearing completion of our $245 million plan. As our top line has grown, our adjusted operating expenses as a percent of revenue have continued to decline, hitting 9.25% this quarter, down from 9.55% in the previous quarter. And we achieved our goal of reducing working capital days. We started this initiative over two years ago when our days were in the mid-90s. Today, working capital days are at 75. As a refresher, each day is worth approximately $50 million of working capital. To date, we've reduced working capital by nearly $1 billion. We are very proud of our team's progress and that we've been able to use the cash over the last three years to reduce our share count by almost 20% and pay down debt. Going forward, while we expect to invest cash in inventory as the economy and revenues recover, we remain focused on our net working capital days targets. On slide 11 you can see the early progress we've achieved. As noted, revenues of $4.7 billion and adjusted EPS of $0.48 both came in above our guidance range. Cash flow from operations totaled $85 million, our ninth consecutive quarter of positive cash flow, further demonstrating our team's execution in managing cash and working capital as we continue to navigate in an unpredictable market. We use the cash flow to reduce our debt to $1.21 billion and net debt to $831 million. We also continue to support our dividend and returned $21 million to shareholders in the quarter. We're pleased with where our debt levels stand today. In fact, our debt is at the lowest level it's been since 2010. Looking at the income statement, gross margin of 11% was flat sequentially, primarily due to higher Asia revenues. By business, gross margin performed in line with our goals, increasing across the Americas, EMEA, and Farnell. Adjusted operating expenses of $432 million were down by 4% sequentially. As I highlighted earlier, our $75 million operating expense reduction plan was fully implemented in the quarter, and we are tracking well against our $245 million plan. We have about $40 million to complete on that plan, which predominantly lies with two projects already underway: an effort to outsource transactional processing performed in finance to an outside service provider and progressing on our Leeds facility. As you heard Phil state earlier, we have faced strong COVID-related headwinds in getting the Leeds facility up to full production capacity, but we're pleased with how the team has managed in light of those challenges. We're happy with both Farnell's gross margin and operating margin results in the quarter. When we announced the $245 million cost reduction program over two years ago, we had an adjusted quarterly OpEx run rate of $483 million, and today, we're at $432 million on just about the same level of revenue. So, we've reduced our quarterly operating expense run rate by about $50 million without affecting salespeople, FAEs, or any market-facing staff. This positions us well for the market recovery so we can focus on growing revenues with lower operating expenses and without the cost of adding people. Interest expense continued to decline and is now lower by $12 million or 37% compared to a year ago due to lower debt. Foreign currency expense was $5 million this quarter, an improvement from the prior quarter due to the weaker U.S. dollar. Our tax rate remains below 20%. On slide 12, we highlight results across our three geographic regions and from our two business segments. Total revenue growth was largely driven by record sales in Asia, up 16% year-over-year, while we saw signs of recovery across the Americas and EMEA. Looking at Electronic Components, we achieved revenue of $4.3 billion, increasing 3.3% versus the prior year. The Electronic Components segment operating margins were 2.4%, a 46 basis point improvement from last quarter due to our lower operating expenses. Farnell revenues for the quarter totaled $326 million, down sequentially and year-over-year, primarily due to there being one extra week in the prior quarter and due to a slow recovery from the U.K. lockdowns. The segment had an operating margin of 4.5% in the quarter, meeting expectations. We expect Farnell operating margins to continue to improve over the next six quarters as we work toward achieving a steady-state 10% operating margin. Importantly, Farnell gross margins also increased sequentially and were over 30% in the December quarter, illustrating the continued value that Farnell provides to engineers by having SKUs in stock and the ability to deliver to their desk within two days. We're optimistic that with aggressive Brexit resolution and improving economy, we'll be able to realize the full potential of the Leeds facility and continue driving Farnell forward. Turning to the cash, liquidity, and the balance sheet on slide 13. Our liquidity position remained strong and puts us in a good position to fund operations as the macro environment continues to recover. We ended the quarter with cash and equivalents of $376 million and with $1.6 billion of available lines of credit. Our gross debt leverage was 3.0 and net debt leverage was 2.1. Our net book value per share was $39, and our tangible book value per share was $30. Turning to slide 14. Before moving on to guidance, I'd like to briefly touch on the progress we've made upon implementing our strategic priorities. Let me share a few examples of how better execution in the December quarter resulted in improved financials. We are beginning to see the gross margin benefits of the Farnell team's wide adoption of the pricing analytics tools implemented earlier last year, as well as the stabilization of inventory reserves. Our Americas team implemented a number of cost-saving actions that led to expanded Americas operating margins, a key initiative for us as we work to capture market share across all three core regions. Our Asia team has replaced just about all of their Texas Instruments revenue and sales of other supplier product lines to new and existing customers. At the same time, we reduced our net working capital days in total. We've managed our customer backlogs and have added about $100 million of inventory in the first half of fiscal year 2021 to meet growing demand, despite a tight supply situation. Even with the additional inventory, our Electronics Components segment reduced working capital days to below 70. Phil said as well, there are still in the early innings here; we're pleased with the improved execution by our teams in managing our business. Turning to slide 15, I will wrap up with some comments about our expectations for the next quarter. For our fiscal Q3, we are guiding revenue in the range of $4.3 billion to $4.7 billion and adjusted EPS in the range of $0.52 to $0.58. Despite the seasonally lower revenues in Asia for the March quarter, we are guiding higher EPS. Asia tends to have a seasonal low in the March quarter due to the Chinese New Year, while our higher margin Americas and EMEA regions are expected to grow revenues sequentially. Coupled with our cost reduction programs, we expect to drive higher profitability in the March quarter. In summary, we're on pace, and we'll continue to take actions in line with our priorities. We are aligning our operations and processes to improve the top line trends and gain market share in key areas, while maintaining our commitment to enhance profitability and improve return on capital. With that, let's open the line for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question comes from Adam Tindle with Raymond James. Please proceed with your question.

Okay. Thanks. Good afternoon. Phil, I just wanted to start with a strategic question. You've had a little bit of time to analyze the portfolio. I think there's kind of two paths that investors are potentially thinking about. On one path, you conclude you have the right portfolio. You're going to pursue organic margin improvement and cash preservation. Or another path could be pursuing M&A in an effort to enhance the portfolio, potentially accelerate growth and supplier relationships. Just hoping you could start by maybe opining on those two potential paths and which you're concluding is the right one to take here near-term.

Yeah. Thanks Adam. Appreciate that. Well, it might be an and versus an or. Short term, clearly we're going to be driving the organic strategies. As we've talked before, the biggest needle mover for us is right here at home in the U.S., getting the Americas to continue to stay on track with their plan, which we felt good about this past quarter and making progress and continuing to invest organically. Europe is, frankly, steady as she goes and going to continue to double down in Europe. And, of course, Asia, we're really pleased with the progress we're making in Asia, with effectively record quarters—that's in the core. Then you've got Farnell. So, they're the two major paths. And Farnell, we've made some progress this past quarter. We're expanding SKUs and mild progress in the Leeds facility. As far as M&A—and then, of course, we have Avnet Integrated, which is our embedded business, right? We're restructuring that a bit and putting that closer to the core, particularly where there's boards, software, and displays that go into many of our core customers. And then, we'll continue to invest in IoT. But as we've talked, we just kind of took the pedal off the metal there a little bit, okay, to be sure we're getting a fair ROI based on the investments. And Tom could jump on M&A if he wants. But on M&A right now, we've been pretty convinced to continue to strengthen the balance sheet and protect that as much as possible while also protecting the dividend, right? Now that doesn't mean we're not going to date and look at opportunities for M&A in the future. I'm sure that will begin again at some point in time. We're just not ready to talk about it yet. So, I think it's more of an and then maniacally focused on execution.

And Phil, let me add. Just to set expectations, any M&A would be a smaller tuck-in with a distributor that had a complimentary either supplier or customer. So, keep that in mind, Adam.

Okay. That's helpful. And maybe just as a follow-up. I know margin improvement is a key part of the story. I guess, if we were to double-click on margin improvement, Farnell is one of the big potential drivers here. I wanted to ask on that path too. I think you said 10% operating margin over a six-quarter timeframe. I think you mentioned in the quarter that gross margin was now over 30%, so that seems like it's quite healthy at present. And you're still kind of in the mid-single digits on an operating margin basis. So, maybe help me bridge the next six quarters, doubling operating margin while the gross margin correction seems already done. Is there OpEx to come out? Is there volume on the revenue side? What are the drivers to get to that number? Thank you.

Phil, should I take that?

Sure. Why don’t you start, Tom? Go ahead.

Adam, I think the main thing is getting the Leeds distribution center out. $19 million is I think close to maybe 150 basis points improvement. And the Farnell team has done a really good job on OpEx management and moving things for lower cost geographies. So, there's some of that. We're going to continue to add SKUs, which we expect will help bring people to our site—into our website and grow revenues, as well as enhance our e-commerce tools into marketing investments. But the expectations should stay the same, about 100 basis point improvement per quarter. We feel good about where we're at with that.

Yeah. Tom, last comment I'll make—yeah, Adam is that, we were there, okay? So six, seven quarters ago, we were at that 10% operating margin, and we're effectively reverse engineering the business back to get to that 10%. The math is working now, the execution has to follow, and that's what Chris and the team are working on.

Good point. Phil, I appreciate the details, and congrats on the quarter.

Thanks Adam.

Thanks Adam.

Thank you. Our next question comes from Tim Yang with Citibank. Please proceed with your question.

Hi. Thanks for taking my questions. On incremental margins, if I use the midpoint of guidance, I think you're guiding $88 million to $90 million operating profit, which means that you are guiding profit of roughly $80 million higher with sales up $200 million on a year-over-year basis. So that's roughly 9% of incremental margins. Looking forward, how should we think about the flows through margins or incremental margins given you have Farnell recovery and cost-saving?

Well, the good thing about our financial model is that we feel very good about the cost structure. We feel very good that all of our organizations are staffed properly, and that we have the proper staffing out in the field. So, we use the term drive-through. This is one of Phil's favorite terms, right, Phil.

Yeah.

And what it means is, as we get gross profit dollars, Tim, we're not going to be adding a lot of costs. It will go straight down and help with the operating income and the operating margin percent as well. Does that help answer your question?

Sure. So, firstly, so incremental dollar amount that you are generating in revenue. How much of that would have flow through to your operating profit line on a year-over-year basis? I think that's my question.

I think we've said in the past 70% to 80%. It kind of depends, but that's what we target internally, so it should be quite healthy.

Gotcha. And then on the COVID-related costs, can you maybe just remind us, like how much of that in the past quarter? And then how should we think about that going forward in the next two quarters?

We've given out a number, I think, $8 million to $10 million, that's probably about steady. Keep in mind, we're also saving money, right? Like no travel, building expense. So, I think the net impact, Tim, is probably not that material.

Gotcha. Thank you.

Thanks Tim.

Thanks Tim.

Thank you. Our next question comes from Matt Sheerin with Stifel. Please proceed with your question.

Yes. Hi. Good afternoon, everyone. Just a question team about just the current demand environment. If you could drill a little bit more, Phil, in terms of the book-to-bills that you're seeing per region. And then also just commentary—you did talk about the supply constraints out there. Are you starting to see customers looking to build inventory? Do you think what you're selling is actually selling through versus some inventory build? And then, with that, basically two to three years ago, we had a very strong cycle and you saw some benefits on the pricing side, and obviously on the margin side. Did you envision that kind of scenario, given the data points out there? And would that margin environment be beneficial to you in terms of pricing?

Sure. Matt, I'll take that. Was that one question?

That was multiple parts. Thank you.

You got it, Matt. I'm teasing you. So in the book-to-bill, yeah, we did note in the script, well above parity at this point in time in all regions. I think we noticed in the last earnings. We started to see it come out of positive book-to-bill in Europe in the September month of that quarter, and that continued strong in Europe, even through December, as it did in the Americas and Asia-Pac. So, yes. We're very positive book-to-bill. I think it leads to the kind of the next question, because that'll kind of combine. Part of it is lead times going out, Matt, right? And I'll comment on that as well. As lead times go out, customers do tend to book more out as well, right? So just for the lead time. So that's what we track really closely. The total book-to-bill bookings inside of 30, inside of 90. Anytime you get outside of 90, 120, obviously the statistical accuracy comes down a little bit, but we're tracking that. We got the mechanisms to do that. We're taking them roughly thousand plus customers MRPs every day, week, and month. So, we've got the analytics around that. So, feel good there. As far as selling through, I just know that I'm on a lot of expedite calls where customers have real demand. There's only three today, as a matter of fact. So, and with the suppliers. It's hard for us to judge if they're building inventories internally. I don't sense that talk to the customers at this point in time, and I'm assuming you're talking raw inventory buildup, as opposed to finished goods or maybe a little bit of both. It's tough for us to track that. We try to manage it with our customers, but there's no magic wand on that one. We do watch the MRPs for inflated demand, right? We get a customer that comes in and is using match yearnings, using a hundred pieces a week. All of a sudden, they want 300 or 400 a week. We try to catch that and go back and reverify that it is true demand. Our cancellation rates push outs, all that we look at are pretty consistent right now in that 25% to 30% range, which is for those that aren't aware, that's normal. It's the buffering, the shock absorber we take care of for our customers and our suppliers. We always sit at center of technology, right? So, we're seeing it on both ends. As far as the pricing, yeah. So, that's been pretty public out there for many suppliers. We won't comment on any one supplier. But yeah, definitely seeing some pricing increases in—whether it be shipping debit or just commodity costs. We do have processes in place to go and work to pass that on to our customers. Sometimes that's difficult based on the contract we have, and we need to do some further negotiation. But certainly, the plan is particularly—as these are sort of supply, we certainly can't be the shock absorber to pick up the pricing increases. Our—and what our major price increases, Matt, as far as going with us, we work with the customer together then to explain that. So, it's not a black and white answer. It's a challenge, but we do have the mechanisms in steady analytics to go back and track that to be sure that we're driving—increasing fairly, by the way. I mean, we might have customers on is called fairly, the public price increases that are being passed on to us.

Okay.

That, I think I hit them all.

No, I appreciate it. Just one quick follow-up just in terms of the gross margin. Tom, sort of backing into the number, it looks like it's going to be what, 30, 40 basis points sequentially. I know that mix is part of that TI going away as part of that. But as we look forward, when Asia comes back, is it kind of sort of be in that range for a while until you start to see more demand creation and premier Farnell contribute? Or is it different?

No, I think you're absolutely right. It will be in a range. One of those two factors …

Okay.

Thank you, Matt.

Thanks, Matt.

Our next question comes from Steven Fox with Fox Advisors. Please proceed with your question.

Yeah. Thanks. Good afternoon, everyone. Just following up on the last question about where the supply chain is at. Phil, can you sort of—if we roll this situation forward say three to six months, what's the buffer that sort of keeps things from getting sort of out of hand where you do get into a situation where customers are double ordering? Is it that—do you see the demand on the other side of some of the inventory build that some of your suppliers are talking about, or is there another catch-up here that I'm missing? But I'm just trying to understand why this doesn't become a problem say in 90 days, and then I have a follow-up.

Yeah. Hi, Steve. Thanks. Again, I think it's based on what we're seeing today in the forecast management systems we have today. And when I say that, I mean back upstream with our suppliers and downstream for our customers. So, we're seeing bi-directionally. Right now, just based on the activity we see, the backlog, I mean, automotive—the diversification, Steve, as well. Automotive, industrial, consumer, the application technology. I'm not a prognosticator to go out three, six, nine, and twelve months. We typically don't do that, but just right now, the demand looks pretty darn good. I was with three major semiconductor suppliers today, and protecting certain commodities. But it feels pretty good. Again, we've been around the industry for a long time, so we see the cycles. I think this is just a different type of cycle, which is maybe makes it a little bit more difficult because you do have the COVID issue—how much of it's new demand versus replenishment of inventory. They—in the automotive, for example, because they didn't have inventory. So, that's what we're just going to continue to track and put our own analysis around it and the analytics around it. The other word I use with customers and suppliers is, hey, we all need to be more responsible. What is it we really need? What is it that the customers really need, okay, without inflating it? We need to hold ourselves a little bit more accountable in the supply chain.

Okay. I appreciate that perspective. And then just on the Leeds, the ramp-up of that distribution facility. Tom, you mentioned $19 million of eventual cost savings. Do we think about that as sort of a fairly straight line, or is there a certain hump you still have to get over before you start realizing the bulk of the $19 million? How does that play out between …?

It'll be —sorry—I didn't mean to interrupt, Steve.

I was just saying between now and say—you’re talking six quarters from now.

Yes. Yeah. And it's going to take another quarter to two before you start to see the savings. But it's designed to have higher capacity at lower total costs. What we see is it's on track as far as the ability to achieve the savings.

And Tom, I could add to that Steve, because it's a great question. We're all over that. It's also going to add more capabilities for us, okay? There's certain value added. The new logistics center will offer our customers that in the current facility today in the U.K., we can't do. So, it's not only a cost—I mean, a hard black and white cost savings to Tom's point, but it should enable us to sell more and offer more services as well.

Okay. That makes sense. Thanks for that color.

Thanks Steve.

Thank you. Our next question comes from Nick Todorov with Longbow Research. Please proceed with your question.

Hi, guys. Good afternoon and thanks. I wanted to double-click on the comment of replacing TI's revenue in Asia. Just to confirm this as sales, does that mean that you guys have replaced essentially more from a gross margin perspective what you were getting from TI in Asia? And maybe if you can give us a split, how much of that is new province wins? And lastly, on that point, maybe how has progressed on doing the same thing in EMEA and North America?

Yeah. Thanks Nick. I appreciate that. The answer is really yes and yes. So, we—on the revenue side, just looking at the last three years while we're talking, it was—as we said the highest number we had would have had the guys from Texas in the numbers. So it's now—it was effectively out altogether and a similar on the profit side, which to the earlier question drove nice drop through for us in Asia-Pac. So, effectively, yes. So, we got revenue and GP. What was the follow-up question on that one?

Just any update on the province wins.

Americas and Asia? Yeah. So, in Asia, obviously, we've got a little bit of a lift from the market as well, right? Because Asia market's really hot. So that's certainly helped us as well as organically working with other suppliers to help drive more shifts and design. There's three areas we're focused on. And we've mentioned this before. One is the pin for pin replacement. So, that's in a range of 10%, 12% of the business. And that's a global statement, by the way. And the second one is the design win. And that bucket is going to be the longer pole at tent that will affect more of the west, okay, and be slow to fulfill in both Europe and Americas. Even some of that might be fulfilled in Asia-Pac. We'll track that. But that number is growing nicely. And that's when you're catching the next generation of design that a customer—they're not going to typically design something out to midstream, but we've got our design registration, design win tracking, and we've actually got some design wins already going into production and replacing some of that business. The third bucket is what we call shifts. And that's where there's—I think that's where—we all should remember that the customers care what happens with their supply chain and their suppliers. They like to at times share that business, okay? There might be reasons they have to share. So there's some shifts inside the customer where we lost a line like this one that we can go make it up in DTAM or TAM to DTAM shift inside the customer, and that we're tracking as well. So there's a three-pronged approach that we're getting after on TI. We're ahead and, to your point, good observation, we're ahead in Asia-Pac versus the balance of the west.

Okay. Great. Thanks for the color. If I can follow up with one more. Maybe Phil, can you—I understand that there's pockets of where lead times are strict and maybe out of pockets, there are not. And maybe if you can compare and contrast the lead times relative to the prior cycle, maybe to the peak of the prior cycle. And if lead times are stretching, what do you think is customer's ability to build inventory? Because it seems like we're hearing more of the fact that they cannot get product rather than build inventory on their shelves.

Yeah. That's right. That goes to, I think, Steve's question and part of Matt's question earlier on the building of inventory. Again, tough for us to track that, although we try to with the MRP sharing. So the lead times, yeah, it's a really good question versus 17, 18. It feels a little different than 17, 18. I mean—and I think we all need to remember this can change within days and weeks, okay? In 17, 18, it was more in a passive area, the capacitor area, not exclusive, but just if you would make a statement, it was more than that capacitor area where today it seems to be more in the actives in the semi-electro side. That's not to say it can't spread into the passage as well, but it's really a moving target. In the last call we had with everybody back in October, it was predominantly 32-bit, the high-end microcontrollers, which is predominantly driven by automotive. That's still maintained to be a challenge. And so huge range because we say 32-bit, what a ton of different packages and whatnot, but it's 16 to 52 weeks lead times. We see it spreading into some of the FPGAs, power. Some parts of the analog or find other parts, seeing that it hits in the power devices in certain op-amps and some of—and automotive ICs. 16 bits starting to leak out a little bit, it's out about four to six weeks from where it was several weeks ago. Some of the 8-bit are starting getting out to the extended lead times as well. So, it's a bit of a moving target, but it definitely seems to become a bit broader than we saw even in the October timeframe.

Got it. Very helpful. Thanks.

Thank you.

Thanks Nick.

Thank you. Our next question comes from Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Hi, thanks for taking my questions. Tom, I think you said that there was $40 million left in the $245 million cost reduction program. How should we think about that flowing in? And also how should we think about SG&A trending over the next couple of quarters? Are you done with all the hiring that you needed to for Salesforce and engineers? And do you have enough staff to capture the end market demand, or how should we think about SG&A over the next few quarters?

Ruplu, thanks for asking that. I think that's really important. I would expect our OpEx dollars to remain relatively flat with some adjustment for volume. We have $40 million left to go. Remember that half of the $75 million were temporary measures—things such as furloughs. As Phil mentioned earlier, we are making a number of investments. The good thing that we're really pleased with the OpEx is that as the market recovers, as revenues grow, we're not going to be adding dollars, other than sales commissions and some distribution-related costs. Therefore, we'll get some pretty good drops through down to the operating income dollars and the operating margins. Does that help?

Yeah. It does. I mean, that's very helpful. Maybe just as a follow-up to a prior question on the TI revenues. In the past, you've said that you don't have to make up the entire TI revenue that's going away because you're targeting revenues that are at a higher margin. So in that vein, is there a way to quantify how much of the revenue that you need to make up you've already made up? So like, have you made up half of that revenue that you need to make up, or one-fourth or three-fourths? Is there a way to quantify how much more revenue that you need to make up to get to the same gross profit dollars?

Yeah. We're probably in a range of between 30% and 35%, right? Because again, the biggest bucket is that design win registration bucket. And that's the one that's going to be a further out because of just the share cycle time of design to fruition—or registration to fruition in the 30%, 35% range. And we've said—we would just remind it, we've always said it’s a roughly a two-year period that's going to take. So we feel we're tracking.

Right. No, that makes sense. Just the last question, I don't know if you've mentioned this. But the end markets that were strong, if you can just kind of quantify, I'm pretty sure like a demand from automotive was strong. But as you go forward, I mean, which—the demand that you're seeing from different end markets, if you can quantify like which one is stronger, which one is weaker? And in that vein, are you seeing any unusual demand from markets like automotive? So, I mean, getting back to the question of double ordering, do you think anybody like the tier ones versus OEMs could be, both ordering at the same time? So, are you concerned about any double ordering in the— in your backlog? Thanks.

Well, again, we always track the double ordering, as I said earlier. We work with our suppliers in that because they could see it too, by the way. They see X, Y, Z customer place in the same part with three people, then—they catch out as well and then they're working on that. So, I don't think it's as prevailing as maybe it used to be shorter some out there. The auto, I don't think there's any— you mentioned auto. I don't know. They're taking anything they can get right now. I don't believe there's any buildup of or exaggeration there in what they need at, and that's pretty public information. The industrial has come back strong, and that's still about 30%, 35% of our business, which is really—the nice thing about industrial is really a diverse customer set. We need to make sure that we do everything we can to protect that customer base. It tends to be a much longer tail, a higher mix, a little bit lower margin—or lower volume, but a good—we bring a good value prop to them. The margins tend to be good. The consumer has been strong. Defense, aero, they were running against their own compares there. But aerospace not as much, we kind of combine them. On the defense side, definitely still strong in the defense side as well.

Got it.

We're not dependent—overly dependent on any one vertical really, which helps our diversification model.

Got it. Thanks for all the details. Appreciate it.

Thank you Ruplu.

Thank you. Our next question comes from David Williams with Loop Capital. Please proceed with your question.

Hey, thanks for letting me ask a question here and congrats on the progress. Just want to see maybe if you could talk a little bit about the execution hurdles that are in front of you. What are the main sticking points or the areas that we should be concerned with or potentially could hang up some of the progress that you're making and your progress you're walking toward.

Well, I'll go first, Tom if you want. So, thanks David. I appreciate the question. It's a good question because we're focused on execution. So, I always say we can't control the market and the size of the market or the growth of the market, but we can focus and control what we control, which is execution. So, good question. The two we talk about most frankly, are the Americas, and I'm sure Tony, our President, is on the call somewhere, or will listen to the transcripts. It's our biggest needle mover. From several years ago we took a couple hits here, and we're pleased. I want to make that really clear. We've been picking up share in the Americas and we're pleased with the progress being made there. That's probably number one. And then number two, we've talked about quite a bit in the script, and in Tom's section, Farnell. We got the Farnell and again, when I say Farnell that includes Newark here in the U.S., with Uma and the team leading that effort. We just added National Instruments, by the way, which is exciting. We'll be executing on that; that should be a growth line for us as well. Those two are the most critical to get us back to where we need to get to. We have line of sight in both of those businesses to get there. We need to build Asia, Preston and his team continue to focus on execution. Tom talked about. They've had a nice run and he's done a nice job. Of course, Europe, our most profitable region, we need to Mary and Paul to keep the pedal to the metal in Europe and steady state and continue to drive execution there. So, demand creation is key. That's 30%, 35% of our business today. Suppliers value what we bring in demand creation. It's a topic of every conversation we have with our top suppliers, and we need to continue to grow that. IP&E interconnect pass electromechanical, right? So, that's a higher margin business for us. We've got focused on that as well. So, there's not anyone, but there are four or five as we build out the new business models, that'll have a bigger impact on margin as we go forward in IoT and the Avnet Integrated business. Hope that helps. Tom?

No, I think you covered it, Phil. Thank you.

And one more, if I could. Just maybe any color around the registrations and maybe where the activity has been the strongest specifically within the industrial segment. I know it's been strong, but are there pockets or areas that you're seeing maybe a greater degree of demand than others, or is it really truly just very broad-based?

Yeah. It's a good question. We reported the last quarter of the registration—the registered income and registration, which was the highest we've had on record. We're pleased this quarter that actually our design win revenue, so that's when you actually shipped the product against that registration. It was the highest in six quarters. So, we're pleased with the progress even with some of the line losses we've had to be able to close that gap. So, a positive on that front. And then, on the segments you asked that industrial, industrial is really diversified. But clearly test and measurement is strong. A lot of our medical falls into industrial as well as a subset effectively, but it's pretty diverse. There's not really anyone. If you can just—just thinking about all the industrial applications out there and how diverse that is.

Thanks so much and best of luck on the quarter.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.