Avnet Inc (AVT) Q3 2021 Earnings Call Transcript

Greetings, and welcome to the Avnet Third 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 third 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 contain forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. 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.

Thank you, Joe, and thank you, everyone, for joining us for our third quarter fiscal year 2021 earnings conference call. I hope everyone is safe and healthy. Overall, we're very pleased with our third quarter results, and I'm excited to talk through some of the quarter’s highlights. Over the past year, our employees have continued to demonstrate incredible resilience despite the enduring challenges associated with the pandemic. And I'm personally impressed by and proud of the strides we've made as an organization, sticking to the plan we set for ourselves, even in what can only be described as a complex operating environment. Let me kick this call off by providing a bit of insight about what that operating environment looks like today from our seat in the center of the technology supply chain. As many of you know, while there’s a glimpse of light at the end of the tunnel as countries around the world work to vaccinate their populations, we are still operating in an unpredictable market. Supply constraints, combined with the recent strong rebound in demand, have resulted in widespread inflation we have not seen for many years. As we highlighted in our second fiscal quarter, we saw notable demand increases across the automotive, consumer, and industrial segments. Those end markets, in addition to communications and computing, drove end market demand throughout the third quarter. Customers are seeking to reduce supply chain risks by securing longer-term supply agreements and exploring second sources, providing welcome opportunities that we were not previously seeing. On top of that, many suppliers are also experiencing raw material price increases for items such as resins, copper, and more. In most cases, Avnet is able to pass along these price increases to our customers. While this type of operating environment is not ideal, we have navigated similar circumstances throughout our 100-year history and have a number of systems and processes in place that enable us to effectively serve our customers and suppliers. Those systems are incredibly effective and enable us to continue to compete in this market. But what's really key to our success is our commitment to prioritizing strong partnerships. Avnet is and will continue to act responsibly and transparently in how we manage and communicate about the supply and demand curves. Our teams have established relationships that are unmatched in this industry by remaining in constant contact with our customers and suppliers and working collaboratively, upstream and downstream, to manage forecasts and mitigate supply chain risks. These deep relationships, some of which extend four to five decades or more, provide us with strong visibility into potential pricing shifts and customer response. We take great pride in the supply chain engagement practices we've built with both our supplier partners and customers, and we strive to maintain this approach. Of note, we continue to see strong design activity coming off record registrations in the second quarter. In our fiscal third quarter, our demand creation revenue, design registrations, and design wins increased sequentially and year-over-year, and I’m really proud of that. This success is directly tied to the investment in relationships and our engineering capabilities, which include digital self-serve and design tools and of course our account management team and field application engineers. Not only does this result in engagements with stronger margins, but it improves our revenue visibility, which in turn allows us to operate our business more intentionally with fewer surprises. Our success in stabilizing our business while prioritizing strong partnerships has proven effective as the environment has become more dynamic, and I'm confident it will enable us to continue to adapt to changes as we have for the past 100 years. Now turning to Slide 5, you'll see evidence of our progress in the third quarter of fiscal year 2021. In the third quarter, revenues were $4.9 billion, up year-over-year and sequentially, exceeding our guidance range and also up sequentially and year over year on a constant currency basis. Excluding TI in both periods, sales grew 22% year over year on a constant currency basis. We were pleased with how we performed in the Americas and the EMEA regions, and we’re encouraged by the continued progress we are seeing at Farnell. In the Asia region, a shortened Chinese New Year and continued strong demand in all end markets contributed to continued momentum in the region. Looking at our core electronic components business on Slide 6. Revenues were up year over year and sequentially in the quarter at $4.5 billion. As mentioned earlier, strong continued growth in Asia drove the outperformance in this segment, demonstrating solid execution against our China growth plan as we gained share across the entire APAC region. We were also encouraged by better-than-expected results in the Americas and continued incremental improvement in Europe, our strongest region. Lead times lengthened throughout the quarter, driving very high book-to-bill ratios in every region. We are continuing to tightly manage our backlog, and our teams are working closely with our customers to gain extended visibility, which we are then sharing with our supplier partners. While it is difficult to forecast how long the supply constraints will continue, most market participants expect them to extend through at least the second half of calendar year 2021. Turning to Farnell on Slide 7, revenues were up year-over-year and sequentially in the quarter at $396 million and operating margin increased sequentially to 6%, progressing towards our target of 10%. We made the conscious decision this quarter to continue maintaining operations at both the Leeds distribution center and the existing facility for the foreseeable future. This decision is in line with our commitment to provide seamless service to our customers as we continue to see increased demand out of Farnell. We remain steadfast in our commitment to continue to invest in this critical aspect of Avnet and are excited about the clear potential of Farnell as we further digitize our business. Casing point, Farnell saw e-commerce sales up 20% year-over-year. We are bullish about the contributions Farnell can make to Avnet's value proposition and continue to invest in Farnell. We added 67,000 SKUs through the first nine months of fiscal year 2021 and are progressing on our plans to add up to 250,000 SKUs through the fiscal year 2022. So with that, I'll turn it over to Tom, so he can dive a bit deeper into our third quarter results.

Thank you, Phil. Good afternoon, everyone, and thank you for attending today's call. As Phil stated, we are pleased with the progress we made and the results we posted in the third fiscal quarter. Looking at the key highlights on Slide 9. In the third quarter, we grew our top line by 14.1% year-over-year and expanded operating margins for the third consecutive quarter. Our efforts today have put Avnet in a much stronger position to execute in this dynamic operating environment. I am excited to walk you through more of the highlights from the quarter as I continue to indicate Avnet’s critical role in the center of the technology supply chain. Our revenues for the third quarter were $4.9 billion and adjusted EPS was $0.74. Both our revenues and adjusted EPS exceeded our guidance range and grew from $4.3 billion and $0.38 in the prior year's quarter. As Phil mentioned, strong revenues were primarily driven by an exceptional quarter in Asia and Farnell, and better-than-expected performance across the Americas and EMEA. We used $10 million of cash flow for operations to support our top line growth while working capital was up slightly in the quarter. We further reduced our net working capital days to 72, the lowest level in several years, further demonstrating our team's success in managing cash and working capital as we continue to navigate the volatile market. We are seeing strong returns from our investments in low-touch e-commerce and in our steadfast commitment to deep supplier and customer relationships, which are yielding exciting design wins. Looking at the income statement on Slide 10. Gross margin of 11.6% was up sequentially, primarily due to increased prices we are passing through and regional mix. Farnell, EMEA, and Asia each increased their gross profit margin sequentially, an encouraging trend. As for our revenue mix by region, Asia revenues, while better than typical seasonality, were a bit lower than last quarter while Americas and EMEA revenues both grew sequentially, thus contributing to the higher gross margin. OpEx as a percentage of gross profit continues to decrease, reaching 80.6% from 84.4% last quarter. Adjusted operating expenses of $458 million were up by 6.1% sequentially. The dollar increase was primarily due to increased volume, strong euro and pound exchange rates against the dollar, the discontinuation of temporary cost containment measures, and higher distribution costs as we continued to maintain operation of both Farnell warehouses. As Phil mentioned, the decision to continue to operate both warehouses was primarily driven by strong demand and a decision to prioritize customer service over cost savings. Of course, this means we will maintain higher operating expenses in the near term. But with continued growth at Farnell and improving e-commerce results, we continue to expect to achieve our 10% operating margin target by the end of fiscal year '22. On the non-operating front, interest expense is slightly up sequentially due to slightly higher debt through the quarter. Though interest expense declined year-over-year by 25%, hitting $22.3 million this quarter, the decrease year-over-year was due to lower debt levels, reflecting our continued commitment to maintain an investment-grade profile. We recorded foreign currency transaction gains of $1.2 million this quarter due to some favorable one-off items, and we revised our annual tax rate expectations for fiscal year 2021 to 16%, up from 15%. As a result, we booked a 20% tax rate in the third quarter to true up the year-to-date amount to 15%. On Slide 11, we highlight results across our three geographic regions and from our two business segments. Total revenue growth was largely driven by strong sales in Asia, which benefited from more shipping days in the region due to the shorter than expected Chinese New Year and broadband market demand. Farnell revenues grew substantially as our e-commerce and inventory investments are paying off and Farnell is capturing increased demand. We saw signs of continued recovery across the Americas and EMEA regions. Looking at the electronic components segment, we achieved revenue of $4.5 billion, increasing 4.1% sequentially and 13.7% versus the prior year. The electronic component segment operating margins were 2.6%, a 23 basis point improvement from last quarter. Farnell revenues for the quarter totaled $396 million, up sequentially and year-over-year, primarily driven by our improving ability to capture share and increase demand. We saw strong e-commerce revenues that were up 20% year-over-year, indicating that investments to improve customers’ online experience are drawing a notable return. We are continuing to invest in the business by adding SKUs and prioritizing excellence in customer service. The Farnell segment had an operating margin of 6% in the quarter. While the OpEx was higher than anticipated, primarily due to our decision to maintain operation of the existing facility and lease distribution center, we expect Farnell operating margins to continue to steadily improve over the coming quarters, and we remain on track to achieve a 10% target operating margin by the end of fiscal year '22. Turning to cash, liquidity, and the balance sheet on Slide 12. Our liquidity position remains strong, and our debt leverage continues to improve. We ended the quarter with cash and equivalents of $323 million and with $1.7 billion of available lines of credit. We are comfortable with our debt position, especially as the macro environment continues to recover. We maintained moderate debt levels quarter-over-quarter with debt coming in at $1.2 billion and net debt at $873 million. Our gross leverage was 2.7, and net leverage was 2.0. We intend to refinance $300 million of capital market notes due in December of this year. We continue to support our dividend and return $21 million to shareholders in the quarter. Our net book value per share was $39. Turning to Slide 13. I will wrap up with some comments about our expectations for the next quarter. For our fiscal Q4, we are guiding revenue in the range of $4.7 billion to $5.1 billion and adjusted diluted EPS in the range of $0.71 to $0.77. Our guidance is based upon current market conditions and inventory availability. Before I turn it back over to Phil, I just want to reiterate how incredibly proud we are of our team's efforts. Today, thanks to their work, Avnet is in a much stronger position to deliver to its stakeholders, especially as we navigate this dynamic market and capitalize on growth opportunities. I'm excited and optimistic about what lies ahead.

Thanks, Tom. Before we turn it over to Q&A, I just wanted to reiterate my excitement about celebrating Avnet's 100-year anniversary. As many of you know, I have been with Avnet for nearly 40 years. And despite the macro challenges we've had to navigate over the past year, and any uncertainties associated with the supply constraints, the digital transformation that companies like Avnet are undergoing is significant. Those of us who've been running complex businesses for a long time understand what a game changer digitalization is. It is one of the most exciting times to be at Avnet and in our industry, and I'm proud to be leading such a tremendous team at this time. It is because of our team's hard work that we continue to play a pivotal role at the center of the technology supply chain. I just want to thank our employees for their continued support and dedication to our customers, suppliers, and Avnet. So with that, I'll turn it over to the operator for questions and answers.

Our first question comes from Adam Tindle with Raymond James.

I just wanted to start with a question on margins and the trajectory. You talked about being on track for the 10% Farnell margin by the end of fiscal '22. We can clearly see the progress this quarter. I wanted to ask in core components, you said you're around 2.6% now. Americas, I think, beat expectations in this quarter and is maybe turning. How do you think about the core components opportunity ex that Farnell piece during this time to fiscal '22 and the key drivers? And if you want to touch on near term Americas performance in that response, that would be helpful.

Electronic Components was at 2.6% this quarter. Our target is 3% to 3.5% and we see that as very doable by the fourth quarter of fiscal year '22. A lot of that is continued revenue growth while we hold our OpEx relatively constant and get drop through. When we look at it, we will get some benefits from pricing. And again, we're just passing on price increases that would more be a benefit on the Farnell side. With region mix, if you look at it today, Asia is very strong, and I think that's not unique to Avnet. Americas and EMEA, they did very well this quarter. But Adam, I would consider them recovering, they are still on an upward track. We're very happy with EMEA, they're up 17%, I think, sequentially. They grew their operating margin by 100 basis points, but there's more to go. And as we look at our budgets for next year, that's what we're seeing from the team. Lastly, demand creation. As Phil said, demand creation is very, very strong. On the Farnell side, we see a lot of good things happening. The investment from adding SKUs is paying off. You see that in the revenue number. The investments in e-commerce are paying off. You see that on the online sales, growing 20% year-over-year. And Adam, that's important because online revenues are at a slightly higher gross margin because people are coming in, and they’re electing to choose a market price in choosing that because they can get the inventory and have it on their desk in two days. We see national instruments starting to contribute in fiscal year '22. And one thing we didn't say, Raspberry Pi has been very strong. So there are a lot of levers here for operating margin improvement. Electronic Components, 3% to 3.5%. Farnell getting from 6% up to 10%, very positive story going forward.

I want to reemphasize that the Americas present a significant opportunity for us. We saw the improvement we were hoping for, and the team met the targets we set. This region is one of the key drivers of our success. While we often discuss Farnell, the Americas remain a critical focus for us, and we have a strategy to ensure it returns to its necessary performance level. We are pleased with our progress across all regions and wanted to highlight this point.

And maybe just as a follow-up in terms of the near term guidance. Just have to ask why would revenue and EPS be flat sequentially in the June quarter? On revenue, you typically get a little bit of an uptick sequentially. And I know that there's typically some margin pressure from mix and stuff sequentially. But pricing is only getting tighter going forward. You've got more wood to chop in Farnell. There's some good guys happening on margin. So maybe what are the main offsets near term? I think we went through a long-term trajectory, but just in near term guidance, why would revenue and EPS be flat?

I think part of it, Adam, is March was very strong. Asia revenues, they were much higher than seasonality, higher than expected, and probably true for our peers as well. So I would say that's really the main reason why it's flat. When we look at what our peers are reporting, I think generally, peers are reporting June revenues up versus consensus but somewhat flat to March. Now that said, what would be the drivers to exceed? Well, the inventory availability depends on things like auto production and how successful people are in continuing the strong demand. We believe the demand is still there. And those would all drive some margin upside as well. But I think really, the main thing is March was a very strong quarter.

And typically, I'm just looking at multiple years of history here in front of me. And typically, March is one of our stronger quarters. So that's not really totally atypical to be flattish in June. Now with the current market environment, yes, there's a possibility we can exceed that, obviously, but there are a lot of factors out there playing right now. But Asia strength, growing at 50% year-on-year without the guys in Texas is pretty phenomenal growth. So we're just watching that closely.

Our next question comes from Nik Todorov with Longbow Research.

Phil, you talked about customers exploring second sources. I guess can you talk about this opportunity and what it means to Avnet? What can you do to turn those potential opportunities or longer-term relationships rather than the one-offs?

I was mentioning a few points. Clearly, there are some discussions about the tightness in the market for certain technologies. I spoke to a supplier yesterday who is encountering opportunities related to the inability to obtain specific parts, leading to redesign efforts and the need to explore alternative platforms. It's a challenging redesign process, but it's happening now; when parts are unavailable, they feel compelled to find solutions for their applications. Additionally, I was noting that both suppliers and customers are seeking more options. A positive aspect is that we're seeing new opportunities from suppliers reaching out to us for supply chain management, which is our expertise. Customers are also approaching us for alternatives. In cases where we previously had limited involvement, we are now being engaged to assist with their supply chains, develop new market strategies, and facilitate product movement. The key takeaway, Nik, is that people often take supply chains for granted until they face product shortages, whether they are consumers or businesses. This has been evident over the past year and a half with various household items, prompting a reevaluation of supply chains. That is what I was indicating regarding both sides of our business, upstream and downstream.

And as a follow-up, your inventory decline on an absolute basis, and you mentioned inventory availability a couple of times by now. So can you talk about what inventory constraints are limiting your sequential performance in the June quarter? I wonder what's your ability to build inventory at this time. I guess it's limited, but when do you think you're going to be able to potentially put some inventory on your books?

It's challenging to address the first part of that question, which likely relates to Adam's inquiry about the June guidance. It's hard to determine what specific constraints could impact billings. While we anticipate another question regarding our customers not choosing other products due to unavailability of certain technologies, we are not currently witnessing significant issues in that regard, though it could become a factor. So, forecasting in that area is difficult. Regarding inventory, we would prefer to have a bit more available. We conduct weekly inventory calls with our asset teams globally, and they are aligning with the overall inventory forecast. This is simply a condition of the market. We could manage an increase of 10%, which would extend our inventory days accordingly. We are constantly adjusting it up and down, conducting daily calls with suppliers and customers, given the market's complexity. However, I want to remind our sales team that we still have a considerable amount of inventory available. It's easier to sell products we cannot obtain, so let’s focus on selling what is in stock. Our team is aware of this and is engaging in those discussions.

Let me quickly ask one more question. Now that TI is no longer a factor, at what sales level would you consider America and EMEA to have recovered, as these regions are crucial for your gross margin improvement?

We're getting close to full lapse on that right now, Nik. In Asia, we're pretty much there. In the Americas and Europe, I think we'll be close to it by the end of this year. Remember, we said it would take about 18 months to two years, and we believe that gap will be filled as we move into fiscal '22.

Our next question comes from Jim Suva with Citigroup Investment Research.

I have a longer-term strategy question, considering how long you've been in your position. With the pandemic now mostly behind us, or at least showing progress in certain countries, and the supply chain challenges from semiconductors, does the management team at Avnet ever discuss with customers or your Board of Directors, CFO, and CEO whether there is a need for significant changes? You mentioned that some of your customers and suppliers are exploring new ways to approach the market. Can you clarify what that entails? Does it suggest that it might be beneficial to maintain a larger inventory for future unforeseen challenges? How should we interpret the longer-term insights gained from these two distinct yet difficult situations, the pandemic and the semiconductor shortage?

Sure, we're having these conversations. The main point is that around 50% to 55% of our business currently involves some form of MRP management. We receive electronic format automation feeds daily, weekly, and monthly from thousands of customers, and I expect this trend to continue to accelerate. There are already opportunities from large OEMs approaching us for new models and service strategies, which might necessitate adjustments in inventory management, including different types of inventory and programs like DMI and consignment. Our suppliers are interested in investing in technology, R&D, engineering, and potentially fabs, while we excel in design and supply chain services, which is our core competency and a key connection to many suppliers. This is enhancing the strategic thinking among Tier 1 customers and suppliers alike. The shift we’re experiencing is exciting, and the key message in my closing remarks was about the rapid acceleration of digitization, potentially by three to five years. We are actively reassessing our go-to-market strategy to align physical and digital approaches. For example, while FAEs and account managers will remain essential, we are also focused on introducing more online digital tools, self-service options, and design resources to enhance our value to the industry. Additionally, there are significant considerations regarding ESG impacts, which is a separate but important topic as we have initiatives in that area, projected to play a substantial role in the coming years. Lastly, we're evaluating our workplace strategies and footprint, with substantial discussions taking place with the Board and the executive leadership team.

Our next question comes from Matt Sheerin with Stifel.

I wanted to ask about the Farnell growth that you saw, certainly accelerated growth there. Just trying to figure out whether that's just a function of design activity picking up, as you talked about, Phil, in terms of demand creation? Or is it also due just to the fact that shortages are driving customers to the so-called tech catalog distributors or small volume distributors where they may have inventory? I know you saw some of that last cycle. Is that part of it at all?

I think in terms of all of them. It's kind of an and, and an or. Our designs overall are way up, registrations, design wins, and revenue. We're leveraging the core and Farnell really well. We're getting some really good sharing of leads back and forth from the Avnet core to Farnell and Farnell to the Avnet core. We've invested quite a bit in the quick side of things with e-commerce and the digital with Farnell and Chris Breslin and his team. Then as big as anything, the SKUs that we've added; we've added another 67,000 SKUs and we're working into the 250,000 SKUs we want to add to fiscal '22. Just to remind many on the line that years ago Farnell didn't have the capital to do that or the cash to do that. Under Avnet, they do. The part of that SKU count was not only the dollars and expanding the SKUs, it was having the warehouse to be able to put it in. This is the Leeds UK that we referenced in the script; that's allowing us to expand our SKU count because we were kind of at capacity in the previous facility. I think it's a little bit of those three or four things, Matt, that are contributing to the growth.

And then in terms of the gross margin, you saw some nice sequential growth there. I know a part of it maybe because of the mix of business you saw growth sequentially in EMEA, in North America, and no TI business. But you would think that in terms of the overall pricing environment would be favorable for you now. I know there may be some input costs such as freight. It sounds like you're passing them along. Should we expect gross margins to improve here as we go through this cycle?

I believe we will see a slight improvement in gross margins, although it's difficult to predict. We are noticing some inflation in freight and similar costs. However, we do expect margins to expand a bit. Regarding price increases, we are managing about 40 different suppliers and are confident that our teams are effectively passing on costs to customers where possible, though we cannot absorb everything. We aim to be transparent about the increases and adhere to our contracts. We navigate any shipping disruptions and are successfully managing the complexities involved. Overall, we feel optimistic about our ability to pass on these increases, which should positively impact average selling prices and contribute modestly to margin percentage.

Our next question comes from Ruplu Bhattacharya with Bank of America.

My first one is on free cash flow. Can you give us your thoughts on how component shortages would impact your working capital needs? How do you see your inventory turns versus a normal year? And as part of this, can you also talk about your capital allocation strategy, buybacks versus dividends versus any thoughts on M&A at this point?

As we go forward and revenues grow, we will be using some cash for working capital. I think this quarter, we were up about $130 million; most of that's receivables. We're fine with that level of investment because it's higher margin business. As Phil said, a little up on the gross margin going forward, a little ways to go on the operating margin. These are good returns on capital. With our capital allocation, really our priorities are just that; in the near term, liquidity and reinvestment in the business. As revenue grows and we see that continuing for some time, we will use some cash for working capital. We're clearly going to support our dividend going forward. Debt, we're very happy with our debt levels. Our gross leverage is down to 2.7. You see that coming down into the low 2s, and that's probably more from earnings momentum and actually paying down more debt. But we think debt is in a very good position. Every quarter, we talk to our finance committee about buybacks and M&A. With M&A, we continue to be focused on what we've said in the past. To the extent that we find a company that either has a product, a supplier, a new market, or something that makes Avnet a healthier, stronger business, we will continue to look at that. We have a pipeline; most of them are companies in the revenue range of $100 million to $200 million, but that's how we view our capital allocation priorities going forward. Thank you for that.

I have another question for Phil. Can you give us some color on what you saw by end market? I think in the prepared remarks, you said that EMEA and Americas came in better than expected. So were there any particular end markets that drove that outperformance? And also, I think you talked about design activity trending strong for Avnet. Can you just talk about, like, are these related to the initiatives that you have around Avnet integrated and IoT? And just in general, how does the pipeline of new business look for you?

Let me start with the end markets. We're seeing strong demand across the board, and EMEA and Americas have exceeded our expectations. As we discussed regarding Asia, all regions there, including Japan, are performing well, especially driven by China and the Greater China area. Other regions are also doing well, including automotive, telecom, consumer, industrial, and medical segments in Europe and the Americas. In the automotive sector, we're aware of the challenges but still see strong recovery in the industrial space. Our position in Europe remains strong with a broad customer base contributing to good revenue. This diversity in demand is a positive challenge. Our EMS sector, which comprises about 30% of our business, continues to perform well. Regarding demand creation, we experienced a typical demand creation quarter, achieving one of the highest revenue periods we've ever had. Design win revenue now represents about 30% to 32% of our core revenue. We observed an increase in registration activity year-on-year and quarter-on-quarter, along with actual registered design wins. New design wins increased significantly by over 15% year-on-year and quarter-on-quarter. Overall, the outlook from a design perspective is very positive, which is somewhat surprising given the remote work environment. The increased accessibility of engineers and design teams through our suppliers and FAEs has contributed to this optimism. I'm very optimistic about the demand creation side of our business.

Our next question comes from Steven Fox with Fox Advisors.

A couple from me, please. First off, I was wondering if there's any way to put in perspective how things have maybe tightened up further since your last update, either a month ago or 90 days ago, what's the difference? Along those lines, I think you guys mentioned that there's a path to maybe seeing the current constraints end by the end of this calendar year. So what is that path to sort of normalizing?

I'll address the second question first. We're aiming to understand the expected demand balance for the remainder of the year. It's hard to predict beyond that, especially with technology and supplier challenges in the summer. While I won't cite sources suggesting these issues could last until 2022, my long experience indicates that we definitely see them extending through 2021. We're not claiming that everything will resolve by 2022, but that's our expectation. Just to clarify, that's our plan. However, I believe we will still face constraints into 2022, based on discussions with some key suppliers we work with. Regarding the first part of your question, we have discussed a lot—sorry, Steve, are you still there?

Yes. You cut out when you started to answer the first part of the question. Sorry, if you could start again.

About six months ago, the discussion centered around high-end controllers and lower-end controllers, highlighting 32% technical difficulties. What we're beginning to notice now is that these challenges are becoming more widespread across other commodities, including some areas related to power and analog technologies. We haven't focused much on interconnect passives lately, which are currently holding steady, but there are indications of lead time extensions from some passive component manufacturers, particularly with capacitors and connectors. We're also starting to see extended lead times in the connector market due to certain resins and plastics. This situation seems to be expanding, as I mentioned in response to Ruplu's question, with growth across various verticals affecting different technologies. That's the current outlook.

Can you discuss the measures you take to prevent your customers from placing duplicate orders? I understand there are ways to extend the timeframe for non-cancelable orders. Are you implementing any strategies to ensure that your orders are legitimate?

Yes, you answered part of the question with the NCNR. And for those who don't know, that’s noncanceled nonreturnable. As some of that is getting imposed on us from the suppliers where maybe the products weren't typically NCNR, we're passing on to our customers. That’s going to help limit some of the double booking. What we'll catch, Steve, is inflated demand. We’ve taken these forecasts from the customers, thousands of them. You see Fox Industries using 50 pieces a week or something. All of a sudden, you're coming in for 250 pieces a week. We catch that right away; we go back and have that dialog with the customer and make sure we're scrubbing that backlog appropriately. That's what we catch more, I'll call it, more inflated. I had a conversation yesterday with a supplier on the double, and they tend to catch that more. Once the part is up, they're not seeing that. They’re somewhere, but we're not really seeing that. The NCNR itself and you answered part of that that is helping. The stress in the supply chains and deliveries and all that. But I think as we just continue to work through it responsibly, those are tough challenges, but we've been here before; this one's a little bit different, but we've been here before.

Thank you. There are no further questions at this time. I would like to turn the call back over to Phil Gallagher for any closing comments.

Thank you, operator, and thank you all for attending today's earnings call. We really appreciate it. I look forward to speaking to everyone again in August for our fiscal fourth quarter earnings report. In the interim, stay safe, and have a great rest of the week. Thank you.

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