Avnet Inc. (NASDAQ:AVT) Q2 2024 Earnings Call Transcript
January 31, 2024 11:00 AM ET
Company Participants
Joe Burke – Vice President of Treasury & Investor Relations
Phil Gallagher – CEO, Member of Executive Board & Director
Ken Jacobson – Chief Financial Officer
Conference Call Participants
William Stein – Truth Securities
Ruplu Bhattacharya – Bank of America
Joe Quatrochi – Wells Fargo
Matt Sheerin – Stifel
Toshiya Hari – Goldman Sachs
Operator
Welcome to the Avnet Second Quarter Fiscal Year 2024 Earnings Conference Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.
Joe Burke
Thank you, operator. I’d like to welcome everyone to the Avnet second quarter fiscal year 2024 earnings conference call. This morning, Avnet released financial results for the second quarter fiscal year 2024 and the release is available on the Investor Relations section of Avnet’s website, along with a slide presentation which you may access at your convenience.
As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not 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 Ken Jacobson, Avnet’s CFO. With that, let me turn the call over to Phil Gallagher.
Phil Gallagher
Thank you, Joe, and thank you, everyone, for joining us on our second quarter fiscal year 2024 earnings conference call. I am pleased to share that we delivered another quarter of solid financial results, which was in line with our guidance.
In the quarter, we achieved sales of $6.2 billion. This was slightly above the midpoint of our guidance, down 2% sequentially and down 8% year-over-year. We achieved operating margins of 3.9% highlighted by a 4.3% operating margin in our Electronic Components business.
We’ve been working through an inventory correction on a global basis over the past couple of quarters. In addition, we’re also facing weak and uncertain economic conditions which began in Asia, including China and are now present in the West. This economic softness has resulted in lower demand with some of our customers, which is being magnified by elevated inventory levels across the supply chain.
In the quarter, demand was mixed across the diverse end markets we serve. Defense and transportation markets continue to show relative strength, while demand in the industrial, consumer and communications verticals was relatively soft.
As semiconductor lead times continue to improve, the pricing environment remains stable, which is a positive sign. And for the majority of the products, we do not expect overall pricing to decline meaningfully in the near term as we see it today.
We continue to manage our backlog and close coordination with our customers and suppliers to align with current softening market conditions. Our backlog activity is centered on pushouts and reschedules rather than cancellations, which are within a normal range. Shorter lead times, however, are contributing to backlogs being lower year-over-year and sequentially.
As a result of these factors, our book-to-bill ratio continued to be below parity, though modestly above last quarter.
Although our reported inventory levels were up, the increase was driven by a combination of Supply Chain as a Service engagements and foreign currency. Excluding these items, inventory for our core EC business was relatively flat. And our teams are confident that inventory levels for this core business will come down over the remainder of fiscal 2024. Ken will provide further color on inventory and our supply chain as a service offerings.
As I mentioned previously, we are in the midst of an inventory correction. And our team has done a really nice job navigating it with a focus on optimizing our inventory investments today and reducing inventory levels in the coming quarters. We provide our supplier partners with our best read on true end market demand for our customers. I’ve said it before, we view inventory as a vital asset to fuel our business. But with the near-term sales outlook, we are focused on reducing inventory, were elevated and improving our cash conversion cycle.
With that, let me turn to the highlights for our business. At the top line, our Electronic Components business saw mixed results across the regions. In constant currency, electronic component sales were down 1% sequentially and 9% year-over-year. Sales in the Americas were up 1% sequentially and declined 6% year-on-year with defense and transportation as the strongest end markets. Sales in Asia were up 2% sequentially and down 10% year-on-year. In Asia, transportation and communications were our strongest end markets. EMEA sales were down 7% sequentially and 10% year-on-year in constant currency. It is worth noting that EMEA had near record sales in the December quarter last year, Saragon is up against a tough compare. In EMEA, we are seeing softening in the industrial and transportation sectors.
For our Farnell business, as expected, sales and profitability were impacted by softening demand, product mix and competitive pricing pressures. Farnell sales were down 6%, both sequentially and year-over-year in constant currency. Operating margins for Farnell were 4% during the quarter, which is disappointing but in line with our stated outlook. Despite the greater-than-expected sales decline, we were able to hold our operating margin as we began to see the benefits from some of the cost reduction actions we have already taken. We still believe Farnell has a great potential to deliver value to customers, suppliers and is an important part of the Avnet portfolio. We are focused on improving operating margins near term while further leveraging the breadth of Avnet’s customer base and sales force to identify growth opportunities.
Our team is focused on several growth and margin expansion opportunities, including demand creation, IP&E and Embedded Solutions. In the quarter, our demand creation design wins and registrations remained strong, and demand creation revenues as a percentage of total revenue was stable on a sequential basis. We are also pursuing growth in our IP&E business. IP&E products have higher gross margins, and there are many cross-selling opportunities with IP&E components that are complementary to our semiconductor business. Finally, we see exciting opportunities with our embedded business, where we offer embedded board and display solutions. We have the capability to offer both custom solutions and third-party solutions, both of which come with higher gross margins. We continue to find ways to leverage our global sales force and technical capabilities to capitalize on these embedded growth opportunities. Our supplier partners value Avnet’s ability to create solutions for customers that leverage their entire portfolio of products. The importance of solutions selling highlights why our suppliers continue to support our demand creation efforts. They are also focused on increasing customer count and leveraging the long tail of the industrial sector to generate growth. Our suppliers continue to part with Avnet and distribution in general to help them drive the growth they are seeking.
As exciting as these opportunities are, we are still in the midst of an uncertain market. Over the past several weeks, I have met with several CEOs and decision makers at our supplier partners, representing nearly half of our revenues. The consensus sentiment among this group is that overall market softness will continue for at least a couple more quarters, but could extend through calendar 2024.
To conclude, we are confident that our strong competitive position and our experience managing through many prior market cycles will serve us well as we navigate through these choppy waters. I want to thank our team for their dedication and commitment. We believe our people and our culture are key differentiators for Avnet, which enables us to compete well in any market environment.
With that, I’ll turn it over to Ken to dive deeper into our second quarter results.
Ken Jacobson
Thank you, Phil, and good morning, everyone. We appreciate…
Source link
