Avnet (NASDAQ:AVT) Q2 2021 Earnings Call

0:00 Please stand by. Our presentation will now begin. 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.

0:18 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. Thank you for joining us. and the supply chain. Such forward-looking statements are not the guarantee of performance, and the company's actual results could differ materially from those contained in such statements.

1:14 Several factors that could cause or contribute to such differences are described in detail in Abbott's most recent form, 10Q and 10K, and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. 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.

1:52 Phil? Thank you, Joe, and thank you, everyone, for joining us for our second quarter 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 due in no small part 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 ADNA continues to play for our customers and our suppliers.

2:47 As I've highlighted in past calls, Our employees continued hard work has been supported by 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 the core and funnel, and investing in our value-added businesses, including the likes of IoT and Avnet Integrated. We've continued to add SKUs to the Fresnel inventory, add salespeople and FAEs in selected geographies, invest in employee development programs, strengthen our supplier engagement teams, and embrace digital capabilities.

3:32 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 in driving tangible results across the board. I'm 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. 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.

4:30 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 are 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 auto and industrial sectors in Asia and, frankly, globally. Tom will discuss our financial performance in further detail a bit later.

5:32 We truly are hitting on all cylinders and competing favorably across the board. While we are 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, Adnet has a broad and diverse portfolio across franchises, and we are not overly exposed to any one product category. As we always have and will continue to do so, we are managing our backlog tightly and staying close to our customers and suppliers. Continuity of supply and supply chain visibility are key assets of AdNet's value proposition.

6:23 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 are our customer engagement scores. Additionally, we are seeing that suppliers are responding favorably to our approach as we continue to gain traction, 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 AdNet brings to these partnerships. We also announced earlier this month that we have rejoined the Electronics Components Industry Association, known as ECIA, as a distribution member. I'm very excited to take part in more directly contributing to enhancing the efficiency and effectiveness of our industry and look forward to furthering our industry relationships through that partnership.

7:28 Looking at our core electronic components business on slide six, revenues were up year over year in the quarter at $4.3 billion. As mentioned earlier, We realized record results in Asia, our largest segment, posted 9% growth sequentially. We are confident our China growth plan is working and that we are gaining share in the entire APAC region, which is really 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 UK. Overall, we were pleased with the gross margin of improvement we saw across both regions. We exited the quarter with strong book to bills in every region.

8:14 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 continue to see strong design activity coming off record registrations in the first quarter. Turning to Fresnel on slide seven. were encouraged by the improvement we're seeing with Fresnel. While Fresnel sales were down sequentially any year over year with higher gross margins and reduced operating expenses in the quarter, we were still able to increase our operating margins to 4.5% from 3.5% in the prior quarter, tracking well towards our goal of 10%. We're continuing to invest, adding 49,100 SKUs through the first half of the fiscal year.

9:01 Progressing on our plans to add up to 250,000 SKUs through fiscal year 2022. Earlier this month, we also announced that Fresnel was appointed as a National Instruments Authorized Distributor, significantly expanding its product portfolio to include NI software, connected test, and measurement solutions for customers of all sizes. Amidst ongoing lockdowns in the UK, we continue to carefully manage the ramp-up of the Leeds Distribution Center. We know it will take time, but with a fully operational LEED 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.

9:47 Before I turn over to Tom, I just want to reiterate how proud I am of our team. They have truly demonstrated resilience, adaptability, and perseverance, a tenet of Adnet's core and Ability to evolve and deliver value over the past 100 years. As I mentioned last quarter, 2021 kicks off Adnet's 100-year anniversary celebration, which is a rare accomplishment for any company. But Adnet 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 then we have the right team, experience and strategy to build on our recent momentum.

10:34 With that, I'll turn it over to Tom to walk you through the financials for the quarter. Tom?

10:43 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 and 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 fully implemented our $75 million OpEx reduction plan and are near in 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.

11:35 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. And 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 Network and Capital of Days targets.

12:20 On slide 11, you can see the yearly progress we've achieved. As noted, Revenues of $4.7 billion and adjusted EPS of 48 cents 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 an unpredictable market. We used 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 return $21 million to shareholders in the quarter. We're pleased with where our debt levels stand today.

13:06 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 Fresnel. 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.

13:57 An effort to outsource transaction 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. and we're happy with both Fresnel 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.

14:44 So we've reduced our quarterly operating expense run rate by about $50 million without touching salespeople, FAEs, or any market-facing staff. This positions us well as the market recovers so we can focus on growing revenues with lower operating expenses and without the cost of adding people. Interest expense continues to decline and is now lower by 12 million, or 37%, compared to a year ago due to lower debt. Brown. Foreign currency expense was $5 million this quarter, an improvement from the prior quarter due to the weaker U.S. dollar. And our tax rate remains below 20%. On slide 12, we highlight results across our three geographic regions and from our two business segments.

15:34 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 percent versus the prior year. The electronic component segment operating margins were 2.4 percent, 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 UK lockdowns.

16:23 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, Fresnel gross margins also increased sequentially and were over 30% in the December quarter, illustrating the continued value that Fresnel provides to engineers by having SKUs in stock and the ability to deliver to their desk within two days. We're optimistic that with the Brexit resolution, and improving economy will be able to realize the full potential of the LEED facility and continue driving Fresnel forward.

17:15 Turning to cash, liquidity and the balance sheet on slide 13. The liquidity position remains strong and puts us in a good position to fund operations as the microenvironment continues to recover. We ended the quarter with cash in equivalence of $376 million. and with 1.6 billion of available lines of credit. Her gross debt leverage was 3.0 and net debt leverage was 2.1. Her net book value per share was $39 and her 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.

18:03 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's team 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 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 with sales of other supplier product lines to new and existing customers.

18:50 At the same time, we reduced our networking 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 2022. to meet growing demand, despite a tight supply situation. Even with the additional inventory, our electronics component segment reduced working capital days to below 70. Phil said it well. Though we're 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 to $4.7 billion and adjusted EPS in the range of $0.52 to $0.58.

19:46 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 reductions programs, we expect to drive higher profitability in the March quarter. In summary, we're on pace and will 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.

20:32 With that, let's open the line for Q&A. Operator? Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Thank you. Our first question comes from Adam Tyndall with Raymond James.

21:17 Please proceed with your question.

21:20 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, you know, pursue M&A in an effort to enhance the portfolio, potentially accelerate growth, aid 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.

21:56 Yeah, thanks, Adam. Appreciate that. Well, it might be an and versus an or. You know, Adam, you know, short term, you know, 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 to 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. Of course, Asia, we're really, really pleased with the progress we're making in Asia and with effectively a record quarter. So that's in the core. And then you got, you know, I'll call that, there's really two of those. Then you got Farnell. So there are the two major paths.

22:42 And Farnell, again, we made some progress this past quarter. We're expanding SKUs and the mild progress in the Leeds facility. As far as, I mean, and then, of course, we have Adden Integrated, which is our embedded business, right? And we've... We're restructuring that a bit and putting that closer to the core, particularly where there's boards and software and displays that goes 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 can jump in on M&A if he wants. But on M&A, right now, we've been pretty convicted to continue to – and many more. So, we're going to strengthen the balance sheet and protect that as much as possible while also protecting the dividend, right?

23:33 Now, that doesn't mean we're not going to date and look at opportunities from the future for M&A, and I'm sure that will begin again at some point in time. We're just not ready to talk about it yet. So, again, I think it's more of an and than an or and maniacally focused on execution.

23:54 Just to set expectations, any M&A would be a smaller tuck-in with a distributor that had a complementary either supplier or customer. So keep that in mind, Adam.

24:09 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, Barnell is one of the big potential drivers here. I wanted to ask on that path to I think you said 10% over a six-quarter time frame. 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, kind of doubling operating margin while the gross margin correction seems already done. Is there OPEX to come out? Is there volume on the revenue side? You know, what are the drivers to get to that number? Thank you.

24:55 Bill, should I take that?

24:57 Sure. Why don't you start, Tom? Go ahead.

25:00 You know, I think the main thing is getting the lead distribution center ramped. You know, 19 million is, I think, close to maybe 150 basis points improvement. and, you know, the Fresnel team has done a really good job on OPEX management and moving things to lower-cost geographies, so there's some of that. You know, we're going to continue to add SKUs, which we expect will help bring people into our website and grow revenues, as well as enhance our e-commerce tools and some marketing investments. But we want, you know, the expectations should stay the same, about 100 basis point improvement per quarter We feel good about where we're at with that.

25:46 Tom, the last comment I'll make, Adam, is that we were there. Six, seven quarters ago, we were at that 10% operating margin. We're effectively reverse engineering the business back to get to that 10%. The math's working. Now the execution has to follow. That's what Chris and the team are working on.

26:06 Good point, Phil. I appreciate the details and congrats on the quarter.

26:10 Thanks, Adam. Thanks, Adam. Thank you. Our next call comes from Tim Yang with Citibank. Please proceed with your question.

26:24 Hi. Thanks for taking my questions. On incremental margins, if I use midpoint of guidance, I think you are guiding 88 to 90 million operating profit, which means that you are guiding profit of roughly 18 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 flow, I mean, flow through margins or incremental margins, given you have far now recovery and cost saving?

26:57 Well, you know, the good thing about our financial model is that we feel very good about the cost structure. We feel very good that, you know, all of our organizations are staffed properly, that we have the proper you know, staffing out in the field. So, you know, we use the term drop-through. This is one of Phil's favorite terms, right, Phil? And what it means is as we get gross profit dollars, Tim, we're not going to be adding a lot of cost. It'll go straight down and help with the operating income and the operating margin percent as well. Does that help answer your question?

27:39 Sure. So basically, it's an incremental dollar amount that is generating the revenue. How much of that would flow through to your operating profit line on a year-over-year basis? I think that's my question.

27:53 You know, I think we've said in the past, you know, 70% to 80%. You know, it kind of depends, but, you know, that's what we target internally. So it should be quite healthy.

28:05 Got you. 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 for going forward in the next two quarters?

28:18 You know, we've given out a number, I think, $8 to $10 million. That's probably about steady. You know, 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.

28:39 Gotcha. Thank you. Thanks, Tim.

28:43 Thanks, Tim. Thank you. Our next question comes from Matt Sheeran with CIFL. Please proceed with your question.

28:53 Yes, hi. Good afternoon, everyone. Just a question, Tim, about just the current demand environment, if you could drill a little bit more Phil, in terms of the book to build 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?

29:53 Sure, Matt, I'll take that. Was that one question? That was a multiple-part question, so thank you. You got it, Matt. I'm teasing you. So on the book, I jotted them down here. I think I got them. On 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 noted 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 very positive book the bill. And I think it leads, you know, to the kind of the next question that are kind of combined.

30:41 Part of it is lead times going out, Matt, right? And I'll comment on that as well. And as lead times go out, customers do tend to book more out as well, right, to adjust for the lead time. So that's what we track really closely. Total book to bill, bookings inside of 30, inside of 90, and then anytime you get outside of 90,120, obviously statistically the accuracy comes down a little bit. But we're tracking that. We've got the mechanisms to do that. We're taking in roughly 1,000-plus customers, MRPs, every day, week, and month. So we've got the analytics around that. So feeling good there. As far as selling through, I just know that I'm on a lot of expedite calls where customers have real demand. I was on three today, as a matter of fact, and with the suppliers.

31:30 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. 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. We get a customer that comes in and is using a match here in Inc., using 100 pieces a week, and all of a sudden they want 300 or 400. We try to catch that and go back and re-verify that it's true demand. I'm not feeling that at this point in time. Our cancellation rates, push-outs, all that we look at are pretty consistent right now in that 25%, 30% range, which is, for those that aren't aware, that's normal.

32:24 That's the buffer and the shock absorber we take care of for our customers and our suppliers as we sit in that center of technology, right? So we're seeing it on both ends. As far as the pricing, yeah, so that's been pretty – 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 ship and debit or just commodity costs. And we do have processes in place to go and work to pass that on to our customers. Sometimes that's difficult based on a contract we have. We're going to need to do some further negotiation. But certainly the plan – is particularly where things are short of supply.

33:11 We certainly can't be the shock absorber to pick up the pricing increases. And what are major price increases? Matt, the supplier is going with us, and we work with the customer together to explain that. So it's not a black and white answer. It's a challenge, but we do have the mechanisms and steady analytics to go back and track that to be sure that we're drive, you know, increasing fairly, by the way. I mean, you know, we might have customers on this call. Fairly, you know, the public price increases that are being passed on to us. That is, 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.

33:58 TI going away is part of that. But as we look forward when Asia comes back, is it going to sort of be in that range for a while until you start to see more demand creation and Premier Fernell contribute, or is it different?

34:11 No, I think you're absolutely right. It'll be in that range for those two factors if further implemented. Thank you, Matt.

34:18 Good. Thanks a lot. Thanks, Matt. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Stephen Fox with Fox Advisors. Please proceed with your question.

34:43 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? 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 follow-up.

35:20 Yeah, thanks, Steve. Thanks. Again, I think it's based on what we're seeing today and the forecast management systems we have today. And when I say that, I mean upstream with our suppliers and downstream for our customers. So we're seeing bidirectionally. And right now, just based on the activity we see, The backlog, I mean, you know, automotive, the diversification, Steve, as well, you know, automotive, industrial, the consumer, the application technology. You know, I'm not a prognosticator to go out three, six, nine, 12 months. We typically don't do that. But just right now, the demand looks pretty darn good. And I was on with three major semi guys today, and particularly in certain commodities, right?

36:07 You know, but it does feel pretty good. So, again, we've been around the industry a long time, so we see the cycles. And I think this is just a different type of cycle, which is maybe making it a little bit more difficult, too, because you do have the COVID issue, you know, how much of it's new demand versus replenishment of inventory because, you know, 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 analytics around it. And I think 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 do the customers really need without inflating it? And we need to hold ourselves a little bit more responsible in the supply chain.

36:50 Okay, I appreciate that perspective. And then just on the leads, the ramp 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 certain humps you still have to get over before you start realizing the bulk of the $19 million? How does that play out? Sorry, I didn't mean to interrupt, Steve. I was just saying between now and say you're talking six quarters from now. Yes. 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 cost and You know, what we see is on track as far as ability to achieve the savings.

37:42 Okay.

37:43 And, Tom, I could add to that, Steve, because it's a great question, and we're all up for that, is it's also going to add more capabilities for us, okay? There's a certain value-add that 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.

38:07 Okay. That makes sense. Thanks for that call.

38:09 Thanks, Steve. Thank you. Our next question comes from Nick Todorov with Longbow Research. Please proceed with your question.

38:25 Hi, guys. Good afternoon. Thanks. I wanted to double-click on the comment of replacing TI's revenue in Asia. Just to confirm, this is 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, you know, how much of that is new program wins? And lastly, on that point, maybe how is progress on doing the same thing in EMEA and North America?

38:59 Yeah, thanks, Nick. 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, and that would have had the guys from Texas in the number. So it's now, it was effectively out altogether. And similar on the profit side, which to the earlier question drove nice drop through for us in Asia-Pac. Effectively, yes. So we got into revenue and GP. What was the follow-up question on that one?

39:39 Oh, America and Asia.

39:42 Yeah, so in Asia, obviously we got some – yeah, thank you. So obviously in Asia we got a little bit of a lift on the market as well, right, because the Asian market is really hot. So that certainly helped us as well as organically working with other suppliers to help drive more shift and design. There's three areas we're focused on. 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 polling attempt that will affect more of the West, okay, and be slower to fulfill in both Europe and the Americas. And even some of that might be fulfilled in the Asia pack. We'll track that. But that number is growing nicely, and that's when you're catching the next generation of design to the customer.

40:33 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. And then the third bucket is what we call shift, and that's where there's – I think that's where – We also remember that the customers care what happens with their supply chain and their suppliers, and they like to at times share that business, okay? And there might be reasons they have to share it. So there's some shift inside the customer where if 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 third-to-three-pronged approach that we're getting after on TI. And we're ahead, and to your point, good observation, we're ahead in Asia-Pac versus the balance of the West.

41:30 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 stretching and maybe outer pockets there are not, but maybe if you can compare and contrast the lead times relative to the prior cycle and maybe to the pre-cover the prior cycle and And if lead times are stretching, what do you think is customers' 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.

42:01 Yeah, that's right. And 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 in 17-18. I mean, and I think we all need to remember this. This can change within days and weeks, okay? In 17-18, it was more in the passive area, you know, the capacitor area. Not exclusive, but just if you were to make a statement, it was more in that capacitor area where today it seems to be more in the actives, you know, in the semiconductor side. That's not to say it can't, you know, spread into the passives as well.

42:47 But it's really a moving target. And the last call we had with everybody back in October, it was predominantly 32-bit, you know, the high-end microcontrollers, which is predominantly driven by automotive. That still maintains to be a challenge. And it's a huge range because, you know, we say 32-bit. Well, there's tons of different packages and whatnot. But it's, you know, 16 to 52 weeks lead times. We see it spreading into some of the FPGAs. Power, so some parts of the analog are fine. Other parts, you know, seeing that it hit in the power devices and certain op amps and some of the automotive ICs. 16-bit is starting to leak out a little bit. It's out about four to six weeks from where it was several weeks ago.

43:34 And some of the 8-bit are starting to get out to extend read times as well. So, you know, it's a bit of a moving target, but it definitely seems to be coming a bit broader. OK, than we saw even in the October timeframe.

43:49 Got it. Very helpful. Thanks. Good luck.

43:52 Thank you. Thanks, Nick. Thank you. Our next question comes from Ruplu Bhattacharya with Bank of America. Please proceed with your question. Hi.

44:04 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 in-market demand? Or how should we think about SG&A over the next couple of quarters?

44:31 Rupal, thanks for asking that. I think that's really important. You know, 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. And then as Phil mentioned earlier, we are making a number of investments. But 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. And other than sales commission and some distribution related costs.

45:17 And therefore, we'll get some pretty good drop through down to the operating income dollars and the operating margin. Does that help?

45:25 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? I mean, is there a way to quantify how much more revenue that you need to make up to get to the same gross profit dollars?

46:03 Yeah, we're probably in a range between 30% and 35%. You're right, because, again, the biggest bucket is that design win registration bucket, and that's the one that's going to be further out because of just the sheer cycle time of design to fruition or registration to fruition in the 30%, 35% range. And we've said, just a reminder, we've always said it's roughly a two-year period it's going to take. So we feel we're tracking.

46:29 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, 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, you think anybody, like, you know, the tier ones versus OEMs, they could be both ordering at the same time. So, are you concerned about any double ordering in the in your backlog. Thanks.

47:07 Well, again, we always track the double ordering, as I said earlier, and we work with our suppliers on that because they could see it too, by the way. You know, they see XYZ customer place in the same part with three people, then they catch that as well, and they're working on that. So I don't think it's as prevalent as maybe it used to be. I'm sure there's some out there, but You mentioned auto. They're taking anything they can get right now, so I don't believe there's any buildup or exaggeration there on what they need, and that's pretty public information. The industrials come back strong, and that's still about 30%, 35% of our business, which is really a nice thing about industrial. It's really a diverse customer set, and we need to make sure that we do everything we can to protect that customer base. It tends to be a much longer tail.

47:53 Higher Mix, a little bit lower margin, lower volume, but we bring a good value prop to them, so the margins tend to be good. The consumer's been strong. Defense, Darrel, we're running against our own compares there, but aerospace, not as much. We kind of combine them, but on the defense side, definitely still strong in the defense side as well. We're not overly dependent on any one vertical, really, which helps our diversification model.

48:23 Got it. Thanks for all the details. Appreciate it. Thank you.

48:29 Thank you. Another reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from David Williams with Loop Capital. Please proceed with your question.

48:49 Hey, thanks for letting me ask a question here, and congrats on the progress. Just wanted to see maybe if you could talk a little bit about the execution hurdles that are in front of you and 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 the progress that you're working toward.

49:15 Well, I'll go first, Tom, if you want. So thanks, David. 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, is the Americas, and I'm sure Tony, our president, is on the call somewhere or will listen to 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. And that's probably number one. And then number two, we've talked about quite a bit in the script and in Tom's section, you know, Farnell.

50:03 We've got Farnell, and again, when I say Farnell, that includes Newark here in the U.S. with UMA and team leading that effort. We just added National Instruments, by the way, which is exciting, so we'll be executing on that. That should be a growth line for us as well. But 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. And then we need, you know, Asia and Princeton's team to continue to focus on the execution Tom talked about. You know, they've had a nice run and done a nice job. And, of course, Europe's our most profitable region, and we need Marion Poole to keep you know, the pedal to the metal in Europe and steady state and continue to drive execution there. So there, you know, demand creation is key. That's 30, 35% of our business today.

50:56 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. And then IP&E, Interconnect Passive Electromechanical, right? So that's a higher margin business for us and we've got to focus on that as well. There's not any one, but there are four or five as we build out the new business models that will have a bigger impact and margin as we go forward in IoT and the ad-net integrated business. Hope that helps. Tom?

51:30 I think you covered it, Phil. Thank you.

51:34 And one more if I could. Just maybe any color around the registrations and maybe where the activity has been the strongest specifically in within the industrial segment. I know it's been strong, but are there pockets or areas that you're seeing maybe greater degree of demand than others, or is it really truly just very broad-based?

51:53 Yeah, it's a good question. We reported last quarter the registration, the incoming registration 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 ship 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 positive on that front. And on the segments, you asked about industrial. Industrial is really diversified, but clearly test and measurement strong. A lot of our medical falls into industrial as well as a subset effectively. But it's pretty diverse. There's not really any one. It's just Just think about all the industrial applications out there and how diverse that is.

52:45 Thanks so much and best of luck on the quarter.

52:48 Thank you. Thank you. Thank you. Our next question comes from William Stein with Truist Securities. Please proceed with your question.

53:00 Great. Thanks for taking my questions. Can you talk a little bit more about the shortages maybe in this way? What is the biggest product sort of problem area for you now? And when you talk to those suppliers, you know, I think we all understand that these are real shortages. I'm guessing there is some double ordering going on, but, you know, there's also very low inventories in the supply chain, so it doesn't seem inappropriate. And, you know, demand is probably going to continue to get better as we go through 21. What are those suppliers telling you about their recovery plans for adding capacity for sort of fixing this? Because hopefully it doesn't fix the other way by demand crashing.

53:48 And then as a follow-up to that, I need another compound question, but can you talk about customer behavior in the case of their inability to get a full kit? Are they taking what they can now and then chasing the other parts? for either through you or any channel they can, or are they waiting in a way that they make sure they're always balanced? Thank you.

54:12 Yeah. Yeah. Yeah. Thanks. Well, really, really good questions. Complicated questions. And boy, I'm looking at our lead time charts here. And I don't want to talk about anyone's supplier, but for sure, the higher end MCUs, that's consistently probably the hottest right now. in the 32-bit space we talked about in October, and that continues. And it's complicated because there's so many different package sizes. And I would just say today I'm expediting a power module for a major customer in the industrial segment, so the subset of the medical that was on the phone literally about two hours ago. So it's kind of a tough question to answer. But I would say if I were going to pick one, okay, it would be, More than likely the higher end, 32-bit, but as I said earlier, it's probably leaking into the 16-bit, even some of the 8-bit right now.

55:10 And that's where you're going to get into that broader customer base, particularly 8-bit, broader applications in the industrial segment. As far as what they're saying, and a lot of this is out there already, that's why this cycle is so much different than others because of the COVID and some of the issues that and some suppliers had in packaging and whatnot over the past six, nine months in plain catch-up. But you look at the front end versus the back end and the lead time just to get a fab up and running, it could take upwards of nine to 20 weeks just to get a fab up and running. Then the back end's another 10 weeks or so. So depending on where the suppliers might be, and some of the mounts were set. Obviously, in that process is the moving target. If they're just starting now, then, well, we're going to have a long road to go, you know, and some are starting, some are already underway and whatnot. So it really just, you know, that's roughly the lead time that you'll see out there. And based on that recovery of capacity and demand, then we'll see how that adjustment plays out.

56:23 And then the follow-up was about are they waiting to get fully balanced kits or are they taking what they can?

56:30 Oh, yeah.

56:32 Is there a prevalent answer to that question? It's something that comes up all the time when there are shortages. And, you know, we had them, you know, at the end of 2018 when the cycle protracted. It happens every couple years, right?

56:45 Yeah. Sorry, I wasn't avoiding that one. I wasn't avoiding that one. Yeah, so we tracked that. We're not seeing a lot of that right now. I think what you're saying is that they can't get the, in 17, we ran into some of that, right? They can't get the MLCC capacity. They may not want the rest of it, kind of what you're saying. We've not seen that play out yet. It could on an item-by-item or individual basis, but not a whole lot. And, again, I'm not seeing the hoarding effect of inventory either on the other side to the earlier question. Right now, we're not tracking to it. We're not tracking it. We don't see it.

57:28 Thank you.

57:30 You got it. There are no further questions at this time. I would like to turn the call back to Phil Gallagher for any closing comments.

57:47 Yeah, thank you very much. I appreciate that. And I want to thank everyone for attending today's earnings call. We hope everyone stays healthy and safe during this time and wishing everybody a great 2021. Look forward to speaking to you again in April with our fiscal third quarter earnings report. Take care and thanks again. 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.