Earnings Call
Avnet Inc (AVT)
Earnings Call Transcript - AVT Q2 2023
Operator, Operator
Welcome to the Avnet Second Quarter Fiscal Year 2023 Earnings Conference Call. I would now like to turn the floor over to Joe Burke; Vice President, Treasury and Investor Relations for Avnet.
Joe Burke, Vice President, Treasury and Investor Relations
Thank you, operator. Earlier this afternoon Avnet released financial results for the second quarter fiscal year 2023. 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. 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 statement or supply new information regarding the circumstances after the date of this presentation. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?
Phil Gallagher, CEO
Thank you, Joe, and thank you everyone for joining us on our second quarter fiscal year 2023 earnings conference call. I am pleased to share that we delivered another quarter of solid financial results, which exceeded the higher end of our sales and earnings guidance. More importantly, we achieved these results despite the macro headwinds affecting certain areas of our business, which I'll touch on in a minute. In the quarter, we grew sales 21% year-over-year in constant currency, making it our eighth consecutive quarter of double-digit year-over-year sales growth. We believe this growth resulted in another quarter of gaining market share, thanks in large part to our customer partnerships and the dedication and execution of our employees. Efficient management of our operations also enabled us to drive a solid operating margin of 4.5%, which is the fourth consecutive quarter of greater than 4% operating margin. Further, the combination of strong sales growth and effective management of operations allowed us to increase operating income nearly three times faster than that of revenue on a year-over-year basis. During the quarter, we saw continued strength in the Americas and EMEA regions and began to see signs of slowing in Asia beyond the COVID-19 customer shutdowns, which had some impact on both electronic components and Farnell. Our team has executed very well in helping our customers manage market complexities, as they face dynamic supply chain conditions and uncertainties. From a demand perspective, in the quarter, we saw continued strength in key vertical segments, most notably transportation and industrial. In the last earnings call, we indicated that lead times were improving. And in the second quarter lead times continued that trend for many products. Although, for certain products, lead times still remain extended. Across all regions, we've been coordinating closely with customers and suppliers to effectively manage our backlog. As a result of those actions, our overall book-to-bill ratio softened during the quarter and we exited the second quarter below parity on a global basis. Across the supply chain, inventory levels remain elevated, including that of many of our customers. In order to support our customers, as they continue to be challenged with higher inventory and obtaining all the key parts required to complete their products, our inventory levels also increased this quarter, which Ken will speak to further in his commentary. Overall, we remain comfortable with the quality of inventory and are working to improve our inventory turnover heading into the third quarter. Our role as a distributor is particularly critical in these types of uneven environments. As we have proven over the years, the value of Avnet in a complex operating environment is our ability to serve as a control tower for our customers and suppliers, helping them to proactively manage their supply chains. With the changes we have made to the organization over the past two-and-a-half years, I'm confident that we are a much stronger and more resilient company today and are well positioned to deliver value and quickly adapt as market conditions change in the future. So, with that, let me turn to the highlights for our business. Electronic Components business drove year-over-year sales growth across all three regions. In constant currency, Electronic Component sales were up 23% year-over-year, the seventh consecutive quarter of 20% or greater organic sales growth in constant currency. I am particularly proud of our EMEA team, delivering record sales and operating income for the quarter. The Americas team also continued to make steady progress and delivered another strong quarter with sales, achieving the highest operating income in several years. The Americas and EMEA regions both benefited from strength in key verticals, notably, industrial and transportation. In Asia, we experienced a softening of demand as we worked with customers to adjust their backlogs due to lead time improvements. Additionally, many of our customers across the region experienced challenges with their operations due to the rise in COVID-19 cases. I'm proud of our Asia team's continued success not only in ensuring business continuity but in consistently gaining market share in the region at the same time. Although our Asia business saw signs of slowing, they continue to gain market share during the quarter and a favorable sales mix led to operating margin expansion during the second quarter both sequentially and year-over-year. Overall across all regions we continue to benefit from our unique engineering and demand creation capabilities with our field application engineers and digital design tools once again achieving record revenue and gross profit dollars for demand creation. We believe this ongoing strength is indicative of the increasing value of the capabilities we provide to both our customers and suppliers. Now let's turn to our Farnell business. Farnell sales declined sequentially and year-over-year and continue to be impacted by product availability and pricing. As shortages for certain parts begin to moderate, customers will shift some of their orders to volume distributors thereby affecting demand and pricing at Farnell. As we announced last quarter, we are the exclusive distributor for the Raspberry Pi single-board computer, which continues to see more potential in industrial applications. The backlog for single-board computers remains robust. And when certain key semi-electronic components become more available towards the end of our fiscal year, we expect to realize such sales. Operating margins for Farnell were over 9% during the quarter. Our operating margins are lower this quarter. It's really important to note that Farnell's margins are still two times that of Avnet's overall operating margin. Our investments in Farnell's eCommerce platform and improved user experience continued to yield results with 55% of Farnell's total sales and 73% of total orders placed through the eCommerce platform this quarter. We are pleased with these results and expect to see increased traffic and new customer acquisitions in the quarters to come as certain components for new product introductions and single-board computer products become more available. Additionally, Farnell has a diverse product mix that not only solves customers on-the-board needs but also supports test and measurement as well as industrial maintenance and repair operations as needed. For the long-term, we remain very excited about Farnell and continue to see the opportunity to leverage both Farnell's and Electronic Components' unique and synergistic collaboration. This allows us to better serve our customers and suppliers for new product introduction to mass production and is a key differentiator for Avnet. To recap, while we are pleased with the strong finish of the calendar year 2022 and the better-than-expected results for the quarter, we are closely monitoring market visions and the impact of component lead times on our backlog and inventory levels as products become more available. We expect to experience a high end of seasonal sales declines in the Asia region due to the Lunar New Year with some uncertainty on how COVID-19 may impact the return of the workforce once the holiday is over. We're also keeping an eye on the impact of rising interest rates, inflation, and the signs of slowing growth in the global economy. We continue to be confident in our team's ability to execute in a dynamic and uncertain environment by delivering value to our supplier and customer partners. We have been in the business for over 100 years. We have weathered many market cycles and our team is up to the challenge. There has never been a greater need for the capabilities that Avnet has to offer and we look forward to continuing to play a critical role at the center of the technology supply chain. So, with that I'll turn it over to Ken to dive deeper into our second quarter results.
Ken Jacobson, CFO
Thank you, Phil. Good afternoon, everyone, and thank you for your interest in Avnet. The Avnet team delivered another strong quarter of sales and operating income growth compared to the year-ago quarter. We are very pleased with our second quarter and the calendar year 2022 financial performance. We believe we continue to be well-positioned to deal with the market challenges and uncertainties that Phil previously mentioned. In the second quarter, our sales were $6.7 billion, up nearly 15% year-over-year, exceeding the top end of our guidance range. This represents our 10th consecutive quarter of year-over-year sales growth. In constant currency, sales growth was 21% year-over-year with each region contributing to the growth. Sales were flat on a sequential basis in constant currency, which was above our typical seasonal trend and included a higher mix of sales from our Western regions. We had year-over-year sales growth across all of our regions led by EMEA, which delivered a record $2.3 billion in sales. On a year-over-year basis in constant currency, sales grew 38% in EMEA, 21% in the Americas, and 9% in Asia. From an operating group perspective, Electronic Component sales grew 16% year-over-year or 23% in constant currency. Electronic component sales were flat quarter-over-quarter in constant currency. Farnell sales declined nearly 8% year-over-year and were flat with the prior year in constant currency. Excluding sales of single-board computers, Farnell sales grew 4% year-over-year in constant currency. For the second quarter, gross margin of 11.7% improved 29 basis points quarter-over-quarter and was down 49 basis points year-over-year. The sequential improvement was primarily due to higher gross margins across all three regions as well as a shift in sales mix from Asia to the Western regions. We continue to maintain discipline around SG&A expenses as adjusted operating expenses were $484 million for the quarter, down 3% year-over-year and up 2% sequentially. Adjusted operating expenses increased 4% year-over-year in constant currency to support the 21% sales growth. As a percentage of gross profit dollars, adjusted operating expenses were 62% in the second quarter, a full eight percentage points lower than the 70% a year ago. Adjusted operating income of $301 million increased 39% year-over-year and grew 2.7 times greater than sales. This is the eighth consecutive quarter of operating income growth exceeding our sales growth. Our adjusted operating margin was 4.5% in the second quarter, which improved 80 basis points year-over-year and improved 12 basis points quarter-over-quarter. By operating group, Electronic Components operating income was $297 million, up 57% year-over-year. EC operating margin was 4.7%, up 122 basis points year-over-year and up 47 basis points quarter-over-quarter. All three EC regions saw year-over-year and quarter-over-quarter operating margin expansion led by our EC EMEA business, which expanded operating margin by more than 200 basis points year-over-year. Farnell operating income was $37 million, down 39% year-over-year. Farnell operating margin was 9% in the quarter, down 461 basis points year-over-year and down 308 basis points quarter-over-quarter. The decline in Farnell operating margin was primarily driven by a combination of lower sales in part due to the lack of availability of certain components for single-board computers and from a lower gross profit margin. The expected decline in gross profit margin was primarily related to the unwinding of pricing premiums as certain components became more available. Farnell continues to have the highest margins within Avnet and their operating income margin continues to be two times greater than Avnet's overall operating income margin. We expect Farnell operating margins to remain at similar levels for the second half of fiscal 2023 as seasonal sales growth will be offset by the continued unwinding of pricing premiums on certain components. Turning to expenses and gains below operating income. Second quarter interest expense of $59 million increased by $37 million year-over-year and $14 million quarter-over-quarter primarily due to a combination of increases in interest rates and higher borrowing amounts to support working capital increases. This increase in interest expense negatively impacted adjusted diluted earnings per share by $0.31 year-over-year. During the second quarter, we entered into legal settlements, which resulted in a one-time gain of $62 million. This gain benefited second quarter GAAP earnings per share by $0.51. Our adjusted effective income tax rate was 23.6% in the quarter. Adjusted diluted earnings per share were $2 for the quarter, which increased 32% year-over-year and were flat quarter-over-quarter. Turning to the balance sheet and liquidity. During the quarter, working capital increased by $876 million including a $318 million increase in inventories. As a result of this working capital increase, working capital days were 84 days for the quarter which increased 11 days quarter-over-quarter. Our inventory days increased by approximately six days and our receivable days increased by approximately four days quarter-over-quarter. Our return on working capital continues to be higher than our cost of capital and improved over 100 basis points year-over-year. Our inventories grew during the quarter due to a combination of factors, including customers requesting delays of product shipments, changes in foreign currency exchange rates compared to last quarter, and an increase in Farnell inventories as components became more readily available. We have seen an increasing trend of customers rescheduling product shipments as they manage their inventory, production timing, and cash flow challenges. This contributed to the increase in days of inventory, as turns slowed during the quarter. The quality and freshness of our inventory continue to improve year-over-year. During the second quarter, we also saw a slowdown in the collection of receivables. Our team continues to work diligently with customers to collect past due receivables and effectively manage bad debt risks. Our team has done a tremendous job since the onset of the pandemic in minimizing bad debts by proactively managing the credit and collection activities with our customers. While we continue to focus on improving inventory turns, our top priority is to ensure we are managing overall customer risks appropriately. The increase in working capital led to an increase in debt of approximately $850 million and a corresponding $321 million use of cash from operations. The increase in debt led to a gross leverage of 2.4 times at the end of the quarter. At quarter end, we had approximately $300 million of available borrowing capacity and our teams continue to work on selling inventory on hand and collecting receivables to provide additional liquidity. In the second quarter, we repurchased approximately $64 million worth of shares, which represented nearly 2% of shares outstanding. We have $319 million left on our current share repurchase authorization entering the third quarter. We continue to prioritize our existing business needs including working capital and capital expenditures when we evaluate share repurchases. During the second quarter, cash used for investing activities including capital expenditures was $107 million or an increase of approximately $90 million quarter-over-quarter, primarily to support a new warehouse being built in EMEA. During the quarter, we also paid our quarterly dividend of $0.29 per share or $26 million. Book value per share improved to approximately $48 per share or an increase of approximately $6 per share due to a combination of strong earnings, lower share count, and changes in foreign currency exchange rates compared to last quarter. Turning to guidance, for the third quarter of fiscal 2023, we are guiding sales in the range of $6.15 billion to $6.45 billion and adjusted diluted earnings per share in the range of $1.75 to $1.85. Our third quarter guidance is based on current market conditions and implies a sequential sales decline of 4% to 8%. This guidance assumes a seasonal decline in sales from Asia, primarily due to the Lunar New Year and below seasonal sales growth for the Western regions. This guidance assumes similar interest expense compared to the second quarter, an effective tax rate of between 22% and 26%, and 92.5 million outstanding shares on a diluted basis. In closing, I want to thank our team for delivering another strong quarter of sales and earnings growth. During calendar year 2022, we delivered sales of over $26 billion and adjusted diluted earnings per share of over $8. Avnet's diversification of suppliers, products, and the end markets we serve are key differentiators that will enable us to be resilient, despite uncertain and challenging market conditions. With that, I will turn it back over to the operator to open it up for Q&A.
Operator, Operator
Thank you. We'll now begin the question-and-answer session. Our first question is from Melissa Fairbanks with Raymond James. Please go ahead with your question.
Melissa Fairbanks, Analyst
Hi guys. Thanks very much. Great work navigating kind of uncertain times today. It's really great to see these results and the outlook. You did mention that lead times are improving for a lot of the products. Last quarter you gave us some detail on to which products still had the longest lead times. I was wondering if you could maybe give us a little bit more detail on that.
Phil Gallagher, CEO
Sure, Melissa. This is Phil, and I appreciate your compliment. This is certainly a hot topic. We have noted some modest improvement, possibly even better than modest. However, lead times have stabilized for most products but remain 20% to 60% longer than pre-pandemic levels. While some products are coming in, others, particularly MCU in automotive analog power, IGBTs, MOSFETs, and 45-nanometer FPGA programmable logic, are still significantly constrained. This complexity makes the current market different from what we have experienced in the past. IP&E and passive ceramics have lead times of 12 to 18 weeks, with some cases extending to 26 to 32 weeks. Capacitors continue to have lead times of 26 to 56 weeks, while resistors like thick films range from 52 to 72 weeks. Overall, connector products tend to have the shortest lead times in interconnect, averaging 13 to 16 weeks, depending on the connector type. To summarize, high-end controllers, power-related components, op amps, and voltage regulators are still quite tight, especially in automotive. Hopefully, that clarifies things, but it's still a bit varied across the board.
Melissa Fairbanks, Analyst
No, that's actually really helpful. Absolutely. Yes, I really appreciate the detail. Maybe one for Ken on the growth in inventory. This is something that obviously everyone is paying really close attention to. You highlighted a few different factors behind the growth this quarter. And I think it's fairly well understood what's driving it. But can you maybe quantify was the majority of it due to Farnell? What was the kind of breakdown of the contribution there?
Ken Jacobson, CFO
Yes, I would say about 50% was driven by foreign exchange; we did have some challenges there. Farnell is about another 25% of that, and then the rest was just slower turns and those types of things. But I will comment that the FX impact offset what was last quarter, so it would be kind of a wash over the past two quarters as FX has normalized. So, clearly just some broader growth in the regional inventories this quarter mostly in the West versus last quarter it was mostly Asia.
Melissa Fairbanks, Analyst
Okay, great. Thank you very much, guys. That’s all from me now.
Phil Gallagher, CEO
Thanks, Melissa.
Operator, Operator
Thank you. Our next question is from Ruplu Bhattacharya with Bank of America. Please proceed with your question.
Ruplu Bhattacharya, Analyst
Hi, thanks for taking my questions. I was wondering if you can delve a little bit deeper into the margin performance for each of the segments. So, in components on flat sequential revenue, you had a 50 basis points of margin improvement. Is there any way that you can parse out how much of that was because of pricing versus say volume versus mix versus FX? And how should we think about the sustainable level of margins in the component segment? And same question for Farnell, I mean the 300 basis points sequential decline any way to parse that out between all of these factors?
Phil Gallagher, CEO
Yes, I'll start and then let Ken add his thoughts. You partially answered the initial part of that question, Ruplu. A lot of it relates to the mix. There's very little impact from ASP inflation this quarter, although we faced numerous supplier price increases that might affect dollar amounts but not the percentage margin. The mix is the main factor. We observed some softening from Asia towards the end of the quarter, while the West showed improvement, which allowed us to gain some margin. This reflects strong execution by our team. Regarding Farnell, we've mentioned this before. They benefit from appreciation in a tighter market, leading to some natural gains. As lead times begin to improve and some of those customers return to higher volumes, they have experienced some margin pressure and a decline in volume, contributing to the negative drop-through. Ken, would you like to add anything?
Ken Jacobson, CFO
Yes. On the components business, I would say it's the regional mix but then we did have a more favorable product customer mix. If you recall what we said last quarter was because gross margin was down a little bit there. All of our regional businesses had a more favorable mix and then the regional mix between the West versus Asia was the bigger driver there with controlled expenses obviously, right? And then when you get to Farnell, I would say, approximately 50-50 between the sales piece and then the deterioration of the gross profit margin due to the unwinding of the premiums. That's probably the right way to think about it.
Phil Gallagher, CEO
I want to emphasize that we are still very satisfied with Farnell. Their operating margins are significantly higher than our core business. Therefore, we will continue to focus on improving Farnell's performance and growth.
Ruplu Bhattacharya, Analyst
Okay. Thanks for the details there. Phil, you made a comment that Asia is softening. And for the next quarter you're guiding below seasonal growth in the West. So, can you maybe touch a little bit deeper into that like which end markets or which verticals are softer now and in Asia versus in the West? And how do you see that progressing as you go through the year?
Phil Gallagher, CEO
Yes, it's been challenging to predict throughout the year due to market fluctuations. Currently, there is some inventory oversupply in Asia-Pacific, and while we did see an inventory increase last quarter there, the automotive sector remains strong. In fact, both automotive and industrial sectors are showing good momentum in Asia-Pacific. However, the end consumer markets, particularly PCs and mobile applications, continue to be weak. It's also important to note that we are no longer following traditional patterns with the Lunar New Year, which has shifted due to COVID in the last couple of years. We need to observe how that might impact the market and workforce as people return from the holiday. Additionally, we must account for the uncertainty surrounding COVID, which has negatively impacted us as well. Overall, we are pleased with our performance in Asia and believe we are gaining market share. Our business is quite diverse; while we do have a presence in China, we are seeing strong performance in Southeast Asia and Greater Taiwan, along with a solid business in Japan. Regarding the West, we typically see a sequential increase from December to March, but these traditional trends have been disrupted in recent years. However, we are experiencing good performance in the West, and Europe has achieved record quarters, although they face tough comparisons. We believe the numbers in Europe for the March quarter will remain solid, similar to those in the Americas.
Ruplu Bhattacharya, Analyst
Okay Phil, thanks for the details there. If I can sneak one more in. OpEx as a percent of gross profit, is that at a stable level now? It looks like it's been in the 62% of gross profit over the last couple of quarters. Or do you have more levers to take out costs? So how should we think about OpEx going forward? Thanks.
Ken Jacobson, CFO
This is Ken. I would say, I wouldn't think about additional cost takeout. Clearly, depending on market conditions, we may have to tighten our first strings a little bit, but no significant actions planned at this time at these levels of sales. And so I would say, it's a pretty stable percentage at this level of sales.
Ruplu Bhattacharya, Analyst
Okay. Thanks for all the details. Appreciate it.
Ken Jacobson, CFO
Thanks, Ruplu.
Operator, Operator
Thank you. Our next question is from Matt Sheerin with Stifel. Please proceed with your question.
Matt Sheerin, Analyst
Yes. Thank you. Phil, I'm hoping that you can be a little bit more specific on the book-to-bill ratios that you're seeing by region? And then on the push-outs that you're seeing from customers, are you seeing cancellations as well? And as you've gotten through the quarter so far, has that gotten worse or stabilized?
Phil Gallagher, CEO
Yes, thank you, Matt. Regarding the book-to-bill, while we don't provide it at a regional level, I can share that we are currently experiencing a negative book-to-bill across all regions. The Americas are closest to parity, followed by Europe and then Asia. While these figures are moderating, I don't view this as a negative. We had a significant run of positive book-to-bill ratios that were unsustainable, so this moderation feels natural and healthy to me. Therefore, I don't have any significant concerns. In response to your second question, we are managing the backlog and working closely with our customers. There is still some reluctance to cancel, and while there are rescheduling events pushing timelines out, our cancellation rates are, as I mentioned in previous calls, manageable. Our buffer in the backlog, which accounts for adjustments on any given day, is around 25% to 30%. Currently, we are seeing about 27%, which is an increase but not overly alarming. We monitor this daily. Overall, I see this as an adjustment that the market needs.
Matt Sheerin, Analyst
And you commented previously on a question regarding seasonality next quarter. It sounds like you're saying that even though Europe and North America will be below seasonal they're both going to be up sequentially?
Ken Jacobson, CFO
Matt, I would say, flat to down slightly, and then Asia obviously down. And that's where the drop in revenue comes from. But I think just to remind everyone, when we move into our third and fourth quarters we've got a higher mix of Western sales. So, we offset some of that sales decline by higher gross margin, because of the more favorable mix.
Matt Sheerin, Analyst
Okay. So Europe too. Okay. Okay. Great. And then just lastly on the inventory, it looks like your inventory was up roughly 40% year-on-year. Your guiding revenue you're down modestly year-on-year. You talked about customers pushing out orders. Can you do the same thing? Are you turning around and canceling or pushing out orders to your own suppliers to try to start working this down?
Phil Gallagher, CEO
Yeah. Everyone is a one-off Matt. every supplier depending on the commodity has different – we've got different NCNRs non-cancel non-returnables and all those things in place. But where we can, we certainly are. And we're also working out with our customers. So, we do believe, as we say, we'll start turning that inventory. The inventory is good inventory. It's fresh inventory. We have a customer that needs some help for a challenge. And we're in it for the long haul. So we may be carrying a little bit more than we would for some customers because we want to work with them for the long term, and not force them to take something we know they're not going to be able to pay for or don't want or need. And that's not – that doesn't bode well for the relationship. And again, we've been in this situation before it's not our first rodeo, but – yes, it's a constant negotiation of all one-offs. I will say the positive is, we're not seeing suppliers ship early. We're not – so I think that's a really important point. So – I'm sure I'm going to get that question. But – so it's just, they're catching up, based on lead times coming in okay, and then we've got to work with the customers to see what other parts they need to finish out their builds.
Matt Sheerin, Analyst
Got it. Okay. Thanks, Phil.
Phil Gallagher, CEO
Thanks, Matt.
Operator, Operator
Thank you. Our next question is from Jim Suva with Citigroup. Please proceed with your question.
Jim Suva, Analyst
Thank you, Phil and Ken. Phil, when you were away from Avnet for a little bit of time, there were some supplier relationships that kind of went up for bid had some changes. Some of them adversely affected Avnet. Some of them did not. Now that we're exiting COVID, are the suppliers coming back and talking about changes or new terms or anything different? Because it seems like the past two to three years it's been anything but stable. Thank you.
Phil Gallagher, CEO
Yeah. Thanks, Jim. Yeah, those were some interesting years. They're behind us, with the supplier, I'll say destabilization. No, I think the supplier – supplier ratios have been extremely positive. And we even note that, when it comes to things like demand creation they're actually leaning on us more as we saw our demand creation numbers go up again this quarter to some record numbers. So I think that, the supplier relationships are strong partnerships as they are relationships and they're actually asking us to do more for them. So now, I'm very open about this. We don't sit in the boardrooms. We don't know, who's looking to potentially buy who, and that we can only control how well we execute for them. And when we look at the top suppliers on the semi side and the top suppliers on the IP&E side, we're pretty much number one or two with every one of them. So, conversations right now are very strategic and very positive as we sit here today.
Jim Suva, Analyst
Yeah. And – no I didn't mean that in a negative way like share losses or disengagement in a minute. Just as far as discussions could they potentially be evolving into more demand creation or more services or holding or consignments that didn't happen pre-COVID?
Phil Gallagher, CEO
Yes. So, thanks, Jim. So what – some of the suppliers are acknowledging that customers are looking for as much around solutions as they are chips – they want total solutions, right? Board solutions, not just chip solutions. And that's where we can offer that value of the chip plus the balance of the solution for the customer. So – and as engineering resources become more and more scarce and difficult to get, and more on the software side, the suppliers can scale with us and we've got the reach to help them get to that other customer base that they may not be able to get to. So in that regard, I mean there's not a meeting we have with the supplier that we're not talking about demand creation. A matter of fact, it's the first thing you want to talk about. And then on the supply chain as we call Supply-Chain-as-a-Service or our Avnet Velocity business we've had more suppliers coming to us and large OEM customers saying, 'Hey, we need some help in building out the supply chain capabilities.' The suppliers want to drive R&D manufacturing, sales, and marketing and you know us for some of our supply chain capabilities. So I think that's been a real positive through these last 2.5 years and I think it's very sticky.
Jim Suva, Analyst
And then maybe a follow-up for Ken. Ken, you mentioned premier Farnell's margins came down a little bit some of it due to sales, some of it due to the removal of the premiums that happened during the shortages. I'm wondering have those premiums now been largely or completely resolved, or are those premiums still coming out of the model, where we should model a little bit more margin compression in the quarters ahead? Thank you, gentlemen.
Ken Jacobson, CFO
Yes, thank you for the question, Jim. I see it this way: there will be a seasonal increase in sales due to the nature of their Western-oriented business, but this will be counterbalanced by the ongoing unwinding. I would estimate that while it may not be most, certainly over half has been addressed, but there is still some to come. Therefore, we anticipate a flat or stable operating margin, as increased sales will be offset by further pricing declines as we reach a steady state. We are also seeing positive indicators, particularly regarding product availability, such as single-board computers and the necessary components, which we view as encouraging momentum heading into our fiscal year 2024.
Jim Suva, Analyst
Well, thank you, Phil and Ken. Congratulations to you and your teams for navigating a very challenging time.
Ken Jacobson, CFO
Thanks, Jim.
Phil Gallagher, CEO
Thanks, Jim.
Operator, Operator
Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.
William Stein, Analyst
Great. Thanks for taking my questions. First, the receivables increase I think was a little bit unusual. I know you guys historically have not had any sort of unusual collection issues. So I don't think we expect that this during the cycle. But I wonder if you can comment as to any concentration in the AR increase either by geo or end market or any other way you'd categorize it?
Ken Jacobson, CFO
Yes. Thanks, Bill. I guess I would say no specific concentration. But again, we don't have any major customer concentrations or supplier concentration that matters. We like the fact that we're not beholden to any one customer or supplier. But what I would tell you is it was kind of across the board regionally, and part of it was challenges the customers with their own cash flow situations that we worked through like Phil talked about. And on the other part was just quite frankly, it was December 31 and people want to pay us in January, and that was a piece of it which kind of then recovered early in the next quarter. So I would say we actually just had a call with the team today because we are definitely focused on credit collections, any high-risk areas that we can get the business involved in. And I think they're saying actually the aging has improved a little bit. Still have about a normal amount of past dues but it's improved a little bit but clearly something we continue to focus on.
Phil Gallagher, CEO
Well, I'll just jump on that. You actually – because actually a couple of years ago when all this started to happen with COVID, 2.5 years ago, we actually were very concerned about receivables and from a standpoint of bad debt and we're concerned that customers aren't going to make it the ones with the weaker balance sheets. And actually, we've been pleased, frankly that we've not had that, okay? A little extension yes for sure we're all over it. But our bad debt exposure of write-offs if you will have been minimal, okay? And that's a compliment to our collections and receivable teams and the business overall. I just want to add that on.
William Stein, Analyst
Yes. I appreciate that. Two other real – well, one quick one and then a more in-depth one if that's okay. It sounded like the way you were talking about the changes in order patterns, the backlog, the order reduction. It sounds like that was more of a China-focused event, but I would think lead time is more of a global metric. So, I'm hoping you can just level set me on that.
Phil Gallagher, CEO
It is. I don't have a clear answer on that. The lead times are certainly a global issue, not limited to Asia. I mentioned that the West was slightly stronger in book-to-bill compared to Asia-Pacific. This shouldn't come as a surprise considering the current situation in Asia-Pacific. We're being more proactive, and our customers are aligned with us in efforts to address the backlog. In response to Matt's point, we are having reasonable discussions with suppliers. We want to avoid accepting products that our customers don't need, and suppliers prefer not to have unwanted products in inventory. As they expand their capacity, they need clarity on what is genuinely required. To address Matt's question, some suppliers are collaborating well with us and allowing customers to exit NCNR agreements because they don’t want to produce items that won't be needed, while others are more inflexible. Each situation is a bit different but not exclusively arising from Asia.
William Stein, Analyst
Appreciate that. Last one, if I can squeeze it in. Can you remind us of the capital allocation strategy or tactics however you want to describe it the dividend in particular, what the plan might be for future increases there? Thanks so much guys.
Ken Jacobson, CFO
Yes. I believe that in terms of the dividend, our historical trend has been to consider an increase once a year in the September quarter; we've been fairly successful with buybacks as well. Over the past 12 months, we have repurchased 8% of our shares. This quarter, when looking at our buybacks, dividends, and capital expenditures, we actually exceeded the levels of the previous few quarters, indicating a larger capital expenditure. From a priority perspective, we will continue to focus on the business needs for working capital and capital expenditures before returning funds to shareholders. However, as we shift back towards generating cash flow rather than using cash for working capital, we anticipate having sufficient funds to repurchase shares. We still view the stock as trading below book value, making it an attractive opportunity, despite its relatively strong performance compared to others in recent quarters.
William Stein, Analyst
Thank you.
Phil Gallagher, CEO
Thanks, Will.
Ken Jacobson, CFO
Thanks, Will.
Operator, Operator
Thank you. Our next question is from Joe Quatrochi with Wells Fargo. Please proceed with your question.
Joe Quatrochi, Analyst
Yes. Thanks for taking the question. I was curious, how do you guys think about the pricing pressure that you're seeing in Farnell, as being maybe correlated to the components business? Is this kind of like a leading indicator or a precursor that you are a little bit worried about?
Ken Jacobson, CFO
I guess, I would answer that. I don't know that we're worried about it. I think it was expected. We knew that we got some uplift there in the market and normally would correct itself. And I guess, how I would characterize it is, I think we talked about it in the 200 basis points range maybe a little bit north of there, but we still have a very healthy margin gross margin in Farnell and they do have a pretty diverse product set, right? There's on-the-board type components. And that's really what we're talking about pricing premiums when we talk about on-the-board semiconductors certain IP&E. But they also have a lot of their business in other areas test and measurement, maintenance and repair. So there's a nice balanced portfolio that can keep that steady margin we believe.
Phil Gallagher, CEO
Yes, this is Phil. I'll elaborate on that. It's not a concern. We just spent a week with them in the UK last week. Ken and I have a solid team and a solid plan. We signaled this quarters ago. They are a bit worried it might decline. However, the backlog for single-board computers is growing significantly, which is affecting some of the top line. That will definitely improve, as Ken mentioned, near the end of our fiscal year and into the first quarter of fiscal '24.
Joe Quatrochi, Analyst
Got it. And maybe just ask it a little bit differently. Do you see I guess the pricing pressure that's happening in Farnell potentially spreading into the core components business, I guess is what I'm trying to ask.
Phil Gallagher, CEO
Yes. I understand your question. Farnell operates differently than our core business, particularly regarding shipping costs. Therefore, you'll notice some differences. On the core side, we expect to see some pricing pressure in the future, but for now, it's not significant. In fact, we still have over 20 suppliers who raised prices in January. Regarding lead times, while not all are improving because some suppliers are still increasing prices, overall, we don't see significant negative impacts at this moment.
Ken Jacobson, CFO
There are competitive pressures that will consistently impact our gross margin. However, we are implementing our Supply-Chain-as-a-Service and IP&E initiatives, along with our demand creation efforts, to help maintain margin stability. While we may experience ongoing competitive pressure, we can continue to drive higher-margin revenues, including rejuvenating Farnell, which will help mitigate overall impacts. This is our perspective on the model.
Phil Gallagher, CEO
Yes. Sorry to jump back in Joe, but just because this is a good question. And that's why we got to drive digital, right? And that's why we've got to drive eCommerce and online sales. And in Farnell, we had I think a record-breaking number and 55% of the revenues were actually done online and 73% of the transaction. So, that really helps you drive and offset some pressures, because you have a much lower touch, lower cost to serve on that piece of business. So, I just want to add that in.
Joe Quatrochi, Analyst
Yes. That's helpful. And just maybe as a follow-up with March quarter revenue guidance declining nearly on the midpoint, how do we think about cash flow generation? Should we start to think about that as maybe inflecting positive? And then just also on that note how do we think about CapEx? I know there's maybe more of a onetime kind of CapEx this quarter? How do we think about the CapEx in the next couple of quarters?
Ken Jacobson, CFO
Yes. To answer the CapEx question first, I'd say, it's maybe more consistent flow. So, $25 million-ish a quarter give or take something would kind of be the expectation there on CapEx. And I'd say the answer is yes on cash flow, but we've got some work to do to get the inventory levels down and collect the receivables. So, that's clearly the goal when sales go down. Our model then needs less working capital, including less receivables and less inventory and it works through. So, it may take a little bit more time than we'd like. But that's what we're clearly focused on this next quarter and then going into the fourth quarter.
Joe Quatrochi, Analyst
Thank you.
Ken Jacobson, CFO
Thank you.
Operator, Operator
Thank you. There are no further questions at this time. I would like to hand the call back over to Phil Gallagher, CEO, for any closing comments.
Phil Gallagher, CEO
Thanks a lot. I want to thank everyone for attending today's earnings call. Yes I look forward to speaking to you again in our fiscal third quarter earnings report in early May. Have a great 2023.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.