Yahoo Finance Avnet Inc (AVT) Q3 2024 Earnings Call Transcript Highlights: Navigating Market Challenges with ...
Sales: $5.7 billion
Adjusted Operating Margin: 3.6%
Operating Margin in Electronic Components: 4.1%
Cash Flow from Operations: Nearly $500 million
Book-to-Bill Ratio: Below parity, modest improvement from last quarter
Inventory Reduction: Noted progress in reducing inventory levels
Receivables Reduction: Reduced alongside inventory
Gross Margin: 11.8%, down 62 basis points year-over-year, up 46 basis points sequentially
Adjusted Operating Income: $203 million
Adjusted Diluted EPS: $1.10
Working Capital Decrease: $574 million sequentially
Debt Reduction: Decreased by $495 million
Release Date: May 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Avnet Inc (NASDAQ:AVT) achieved sales of $5.7 billion and an adjusted operating margin of 3.6%, with the Electronic Components business achieving a 4.1% operating margin.
Generated nearly $500 million of cash flow from operations, demonstrating strong working capital management.
Made progress in reducing inventory levels and receivables, aligning with efforts to manage working capital efficiently.
Experienced growth in the defense and data center markets, and saw increasing demand globally in the transportation sector.
Continued to engage successfully with customers and suppliers on design wins and registrations, driving increases in revenues and margins.
Negative Points
Faced a challenging business environment with elevated inventory levels, cash flow constraints, and diminished customer visibility.
Experienced a sequential decline in demand across most end markets served by Avnet Inc (NASDAQ:AVT).
Reported a global book-to-bill ratio below parity at the end of the third quarter, indicating potential challenges in order bookings.
Farnell's margins were not at desired levels, prompting cost reductions in warehousing, freight, marketing, and headcount.
Guidance for the fourth quarter of fiscal 2024 indicates a sequential sales decline of 3% to 8%, reflecting ongoing market challenges.
Q & A Highlights
Q: Phil, first question just in terms of your forecast for below seasonal again, in all regions, but sequential growth in Asia. So that would imply year-over-year declines of, I don't know, 20% to 25% year-over-year in the Americas and EMEA. And do you expect -- do you think that's sort of the last drawdown, if you will, in terms of inventory? Are you getting any signs that, that may be it and then we're going to start to see at least more stability in terms of customer orders? Or anything else that makes you optimistic that this may be the bottom here? A: Philip R. Gallagher - Avnet, Inc. - CEO, Member of Executive Board & Director: Thanks, Matt. Appreciate it. I said I'd start with Asia. As we said in the script, we do believe (inaudible) in Asia. We're seeing some moderate forecasting through 2024. But again, moderate, but that's good news. And as we know historically, a lot of time to sign start in Asia and circle around to the West and then kind of where you're going, I think. In Europe, I mean, part of the challenge in Europe with the year-on-year drop is we just -- we're coming off record highs, so it's compounding the image, if you will. But tough to call if that's the bottom. It feels like it might be, Matt, but there are so many mixed signals out there. I won't want to project that as absolute. But we do think it will start bouncing back in the second half very slowly, more into 2025.
Q: Okay. And then on the cost cutting, I think you said it was a $40 million annual run rate. When should we think about those costs coming out? Will it start in the June quarter? And what should we think about OpEx sequentially? Will that be down or will that be up? A: Kenneth A. Jacobson - Avnet, Inc. - CFO: Yes, Matt, this is Ken. I'd just say that a lot of those actions for the new incremental actions beyond Farnell are actually occurring kind of as we speak during the quarter, so expect it to be more of an FY '25 kind of benefit. And think about OpEx being down next quarter slightly due to the Farnell actions plus the volume decline.
Q: Maybe just on that on the EC margin front. I guess, like as you think about that mix benefit, we assume that, that margin can remain still above that 4% threshold for the June quarter? A: Kenneth A. Jacobson - Avnet, Inc. - CFO: Yes, Joe, I guess I'd characterize it as it could be slightly below, it could be slightly above the 4%, right? It's kind of within that range. So depends on how the regional mix shakes out ultimately. But it's -- the guidance implies it right around the 4%, but could be slightly below, could be slightly above.
Q: First, I'm hoping you can comment on order trends in the first month of the current quarter and how they might have progressed relative to what you characterized for the last quarter. And then I do have a follow-up. A: Philip R. Gallagher - Avnet, Inc. - CEO, Member of Executive Board & Director: Yes, I'll take that, Will. Thanks. Yes, the order -- the book-to-bills had improved but modestly. We're seeing more improvement in Asia Pac. And as we called out, we're seeing some improvement in Farnell as well as in IP&E, and even within the IP&E, it's probably more -- it's connectors and (inaudible) is balanced. So we are seeing some recovery in book-to-bill.
Q: Maybe this time, I'll start with Ken. Ken, can you remind us like what revenue level do you need for keeping -- in order to keep the components operating margin above 4%? I know you talked about some restructuring and cost control. How much of that is split between Farnell and Components? A: Kenneth A. Jacobson - Avnet, Inc. - CFO: Yes. I mean, I think most of the cost actions that you're going to see through the remainder of the year would be more Farnell because the core business is in the process of executing some of those things. I would kind of say, Ruplu, the question I got before was the guidance implied below 4%. Is it probably at 4%? So I'd kind of flip it and just say, "Hey, this level of revenue, depending on regional mix, is kind of where we're at to maintain the 4% because the guidance implies kind of right around 4%.
Q: Okay. Okay, that's helpful. And Ken, maybe another one for you. Can you talk about how you think about the cash conversion cycle trending over the next couple of quarters? How should we think about free cash flow? Then you laid out uses of cash. I mean, can you give us your thoughts on buybacks and any opportunity for M&A in this environment or not? A: Kenneth A. Jacobson - Avnet, Inc. - CFO: Yes. I mean, I think we'd expect positive free cash flow. We are going to be in the market in the fourth quarter buying back shares. We believe they're still at a great value, considering they're well below book value. I would not anticipate any M&A through the remainder of this calendar year. I think we're always looking. But again, looking at smaller like IP&E type acquisitions, nothing transformational. But at this point, we're probably not going to be active in M&A over the next few quarters. And CapEx should return to normal levels. So think about it as $25 million to $35 million a quarter as a normal run rate.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.
