Avnet, Inc. (NASDAQ:AVT) Q1 2024 Earnings Call Transcript
Avnet, Inc. (NASDAQ:AVT) Q1 2024 Earnings Call Transcript November 1, 2023
Avnet, Inc. beats earnings expectations. Reported EPS is $2.25, expectations were $1.5.
Operator: Greetings and welcome to the Avnet First Quarter Fiscal Year 2024 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Burke, Vice President of Investor Relations. Thank you, Joe. You may begin.
Joe Burke: Thank you, Paul. I’d like to welcome everyone to the Avnet first quarter fiscal year 2024 earnings conference call. This afternoon, Avnet released financial results for the first 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 in advance 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 the 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?
Phil Gallagher: Thank you, Joe, and thank you, everyone, for joining us on our first quarter fiscal year 2024 earnings conference call. Before we get into the quarter, I want to take a moment and remark on recent events in the Middle East in general and specifically, our operations in Israel. Our thoughts and prayers are with our employees and all those in the region affected by recent events. We hope this devastating conflict will be resolved as soon as possible. As of this date, all of our employees in Israel are safe and accounted for, and we continue to service our customers to the greatest extent possible under these circumstances. Moving on to our results. I’ll start with a reminder that in fiscal year 2023, we delivered double-digit sales growth in constant currency, record earnings per share and ended the year with a strong balance sheet and great momentum.
I’m pleased to share that we kicked off the new fiscal year with another quarter of solid financial results, continuing that momentum and underscoring our strength and resiliency in the current market environment. In the quarter, we achieved sales of more than $6.3 billion. This was above the midpoint of our guidance, down 3% sequentially and down 6% year-over-year. Continued efficient management of our operations enabled us to drive solid operating margins of 4.1%, highlighted by a 4.6% operating margin in our Electronic Components business. Our team continues to compete well in this market by working with our customers to provide the flexibility they need to manage their component supply chains and by working with our suppliers to provide visibility to end-customer demand and the impact to our customers’ current inventory levels have or near-term demand.
In the quarter, demand was mixed across our diverse verticals. Transportation remains strongest, while demand in the industrial and aerospace and defense verticals were a bit more moderate. Overall, semiconductor lead times continue to improve slightly, but still remain higher than pre-pandemic levels. Shortages continue in some areas, particularly MCUs and power products targeting automotive and industrial applications. While pricing has generally stabilized, we do not expect overall pricing to decline in the near term due to the increased cost for producing components, including higher cost for labor, raw materials and general inflationary pressures. We continue to coordinate closely with customers and suppliers to effectively manage backlog, which is down from a year ago.
As a result, our overall book-to-bill ratios continue to be below parity, though modestly above last quarter. We communicated on our August call that we expect inventory levels to be up this quarter as we supported a specific strategic initiative. Our ending inventory levels were in line with those expectations, which Ken will discuss in his comments. I do want to emphasize that as a distributor, inventory is the lifeblood of our business and having the right inventory is a strategic advantage. We are always working to ensure we have the right mix and right levels. Our suppliers continue to work with us on inventory, and I want to thank them for their partnership and support as we work through the correction together. Before we move on to operating group results, I wanted to provide my thoughts on recent conversations I’ve had with key stakeholders across the supply chain.
I was recently in the Bay Area with a large group of procurement leaders from several of our customers and suppliers. The consensus of the group is that inventory levels for certain parts across the supply chain continue to be elevated and that additional flexibility to delay inventory replenishment is necessary. Although demand across end markets remain healthy, customers have enough supply of many components, which will take multiple quarters to burn off. The conversations with these procurement leaders also confirmed our belief that Avnet is well positioned with our supply chain capabilities. Our customers continue to have a need for our services as they transition from a JIT to a more resilient supply chain. With that, let me turn to the highlights for our businesses.
At the top line, Electronic Components business saw mixed results across the regions. In constant currency, Electronic Components sales were down nearly 3% sequentially and 8% year-over-year. Sales in the Americas were down 9% sequentially and 6% year-on-year with transportation and industrial as the strongest end markets. Sales in Asia were up 4% sequentially and down nearly 17% year-on-year, coming off a record sales quarter last year. In Asia, transportation continues to be our strongest end market and China continues to have the softest demand. Coming off a record sales quarter in Q4, EMEA sales were down 5% sequentially and up 2% year-on-year in constant currency. In the quarter, EMEA continued to see strength in transportation, industrial and the aerospace and defense end markets.
Despite some of the broader market challenges we’ve been facing, we’re encouraged by how demand is holding up in some of our key markets. We believe that our diversification and focus on high-growth verticals is helping to keep sales above the $6 billion per quarter level as previously communicated. We continue to benefit from our unique engineering capabilities with our field application engineers and digital design tools, resulting in another strong quarter for demand creation. As component lead time stabilize, our field application engineers are now busy spending more time on product innovation and developing new design starts rather than chasing down parts to maintain existing designs. Customers are also evaluating more redesigns as they look to optimize costs or to mitigate future risk related to older technologies.
Turning to our Farnell business. As expected, Farnell sales and profitability were impacted by product mix and competitive pricing pressures. Farnell sales were down 5% sequentially and down 4% year-over-year in constant currency. In the quarter, we made progress working through the backlog for single-board computers, but the shipments have yet to fully ramp. We also had a good quarter for test and measurement component sales. Sales of the onboard product lines comprised of semiconductors and IP&E products saw the greatest decline in sales, driving the unfavorable sales mix. Operating margins for Farnell were above 4% during the quarter, and we expect them to be at or above similar levels in the December quarter, which is traditionally the lowest sales quarter from a seasonality standpoint.
We remain excited about Farnell despite the disappointing near-term outlook and see additional opportunity to leverage Farnell’s and Electronic Components’ unique and synergistic collaboration to better serve Avnet customers. Farnell also has growth opportunities with recent line card additions and from investments in new products that should materialize over the next few quarters. Given the recent results, however, we are taking certain cost actions to reduce the operating expense base at Farnell, which Ken will touch on in his remarks. To conclude, as we navigate the current market environment, we continue to demonstrate our strength and resiliency. I believe our recent results reflect that, and I want to thank our teams for delivering under such challenging conditions.
Given the macro and industry-specific backdrop, it is difficult to gauge when the correction will finish, but our best estimate is it will last through mid-2024. This time frame is also consistent with some of the recent conversations I’ve had with top executives of several of our major suppliers, who share the view that the correction will subside sometime in the middle of 2024. We continue to believe our diversified end markets and our broad customer base positions us well for profitable growth for all of our stakeholders. As [Indiscernible] market, I am confident in our team’s ability to execute in a challenging and uncertain environment and to continue to deliver value to our suppliers and customer partners. With that, I’ll turn it over to Ken to dive deeper into our first quarter results.
Ken?
Ken Jacobson: Thank you, Phil, and good afternoon, everyone. Thanks for joining our earnings call. As Phil mentioned, we had a solid start to 2024. Our sales for the first quarter were approximately $6.3 billion, down 6% year-over-year and in line with guidance. On a sequential basis, sales were down 3% in constant currency. From a regional perspective, sales from the Western regions were 61% of sales in the first quarter compared to 64% last quarter and 56% in the year ago quarter. The sequential decline was expected due to seasonal mix shifts from the Western regions to Asia in the first half of each fiscal year. From an operating group perspective, Electronic Components sales declined 7% year-over-year and 8% in constant currency.
Sales declined 3% quarter-over-quarter in constant currency. Farnell sales declined 1% year-over-year and 4% in constant currency. Farnell sales were 5% lower sequentially in constant currency. Excluding sales of single-board computers, Farnell sales declined 8% year-over-year and 7% quarter-over-quarter in constant currency. For the first quarter, gross margin of 11.8% improved 43 basis points year-over-year and was 67 basis points lower quarter-over-quarter. EC gross margin improved year-over-year primarily due to a greater mix of sales from our Western regions. EC gross margin declined sequentially primarily due to a seasonal mix shift to Asia. Farnell gross margin was down year-over-year largely due to the unwinding of pricing premiums and unfavorable sales mix and from competitive pricing pressures.
Farnell gross margin was down sequentially primarily due to an unfavorable sales mix and from competitive pricing pressures for on-the-board components. Turning to operating expenses. We continue to focus on controlling and reducing costs in specific areas, but we aren’t currently planning any broad-based cost-reduction actions while we navigate through this market correction. We want to build on the momentum we created over the past couple of years and to be fully resourced to take advantage of the opportunities we see coming out of the correction. During the quarter, adjusted operating expenses were $486 million, down 4% sequentially, but 2% higher year-over-year. Operating expenses were down slightly in constant currency year-over-year.
As a percentage of gross profit dollars, adjusted operating expenses were 65% in the first quarter, 320 basis points higher than a year ago and 323 basis points higher than last quarter. For the first quarter, we reported adjusted operating income of $262 million, which decreased 11% year-over-year. Our adjusted operating margin was 4.1%, which decreased 22 basis points year-over-year and decreased 64 basis points quarter-over-quarter. By operating group, Electronic Components operating income was $273 million, up 2% year-over-year. EC operating margin was 4.6%, up 38 basis points year-over-year, but 47 basis points lower sequentially. The year-over-year improvement was led by our EC EMEA and EC Americas businesses, each of which expanded operating margin year-over-year by more than 20 basis points.
The sequential decline was primarily due to a combination of lower sales and a seasonal mix shift of sales to Asia. Farnell operating income was $18 million, down 66% year-over-year. Farnell operating margin was 4.2% in the quarter, down 389 basis points quarter-over-quarter. Farnell operating margin continued to be impacted by sales mix and competitive pricing pressures related to on-the-board components. In order to improve margins, Farnell has implemented a series of expense management activities to reduce operating expenses. While we anticipate Q2 to be another challenging quarter for Farnell, we expect these actions will support its path back to high single-digit operating margins in the near term and a return to double-digit operating margins in the medium term.
Turning to expenses below operating income. First quarter interest expense of $71 million increased by $26 million year-over-year, but decreased $40 million quarter-over-quarter. Increased interest expense negatively impacted adjusted diluted earnings per share by $0.21 year-over-year. Our adjusted effective income tax rate was 24% in the quarter as expected. Adjusted diluted earnings per share were better than expected at $1.61 for the quarter. Turning to the balance sheet and liquidity. During the quarter, working capital increased by $134 million, including an expected increase in inventories of $290 million, partially offset by an $84 million decrease in receivables and a $72 million increase in payables. As a result of this working capital increase, working capital days was 101 days for the quarter, which increased four days quarter-over-quarter.
Our return on working capital decreased accordingly but remains well above our cost of capital. Inventories grew during the quarter due to two factors. The largest was expected increase in inventories for EC business due to the strategic opportunity we had communicated last quarter. The second was an increase in inventory investments made at Farnell. Note, we don’t expect any further investments in Farnell as they have sufficient inventory to support current business conditions. As we move into our second quarter, we are seeing a ramp in our supply chain services, which will result in an increase in inventories. For Q2, we expect inventory levels to remain flat to up slightly as a result of the inventory growth for those engagements, which are expected to be cash flow and working capital-neutral.
We continue to characterize our inventories as stable. And as Phil mentioned, we believe it will take multiple quarters for customers to burn off their elevated inventory levels. While we continue to focus on improving inventory turns and generating cash flow, our top priority is to ensure we continue to support our customers’ and suppliers’ needs as we work through these challenges together. The increase in working capital led to an increase in debt of $112 million. During the quarter, we used $41 million of cash for operations. We used $110 million of cash for operations over the past 12 months. We ended the quarter with a gross leverage of 2.3 times, and we had approximately $732 million of available committed borrowing capacity. Our teams continue to work on selling inventory on hand and collecting receivables to provide additional liquidity in the coming quarters.
From a capital allocation perspective, we continue to prioritize our existing business needs, including working capital and capital expenditures. During the first quarter, cash used for capital expenditures was $76 million primarily to support a new distribution center being constructed in EMEA. We increased our quarterly dividend by approximately 7% to $0.31 per share, and we repurchased approximately $27 million worth of shares. We have $291 million left in our current share repurchase authorization. For the long term, we remain committed to our road map of delivering a reliable and increasing dividend and share repurchases to increase our shareholder value when we believe our shares are undervalued by the market. Book value per share improved to approximately $52 a share or a sequential increase of approximately $1 per share.
Turning to guidance. For the second quarter of fiscal 2024, we are guiding sales in the range of $6.0 billion to $6.3 billion and diluted earnings per share in the range of $1.35 to $1.45. Our second quarter guidance is based on current marketing conditions and implies a sequential sales decline of 1% to 5%. This guidance assumes a seasonal decline in sales from the Western regions primarily due to holidays. This guidance assumes similar interest expense compared to the first quarter, an effective tax rate of between 22% and 26%, and 92 million shares outstanding on a diluted basis. In summary, we’re pleased with our performance and execution during the quarter within this current market environment. We will continue to focus on execution, managing through the correction and achieving our stated financial goals.
With that, I will turn it back over to the operator to open it up for questions. Operator?
See also 12 Best Mid-Cap Value ETFs and 10 Stocks Receiving a Massive Vote of Approval From Wall Street Analysts.
To continue reading the Q&A session, please click here.
