AVNET INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Results: Achieved sales of over $5.6 billion and adjusted EPS of $0.92, both above guidance, and generated over $100 million of cash flow from operations.
• Market Conditions: Semiconductor and IP&E lead-times stable; global book-to-bill ratio below parity, with Asia region showing the strongest book-to-bill ratio. Backlog lower due to shorter lead times and customers in destocking mode. Inventory increase mostly due to foreign currency exchange rates, with expectation to reduce core inventory levels.
• Business Units: Asia performance strong; EMEA and Americas weak at Farnell. Engineering teams engaging with customers and suppliers on design wins and registrations, driving the demand creation funnel.

Segment Performance

• Electronic Components: Sales declined 11% year-over-year but increased 1% sequentially. The Asia Pac region returned to year-on-year growth, powered by strength in server, data center, and communications end markets. In EMEA, aerospace and defense end market demand increased sequentially and was flat year-on-year, while industrial and automotive end markets were soft. In the Americas, aerospace and defense was the strongest end market, with modest growth in compute, but softness in industrial and transportation end markets.
• Farnell: Sales were down sequentially and year-over-year, impacted more than expected by the EMEA macro environment. Farnell is under transition with a new President, Rebeca Obregon, focusing on cost reduction, stabilizing the top line, and gross margins.

Guidance

• Second Quarter Fiscal 2025: Guiding sales in the range of $5.4 billion to $5.7 billion and diluted earnings per share in the range of $0.80 to $0.90. Assumes current market conditions persist, with flattish sales in Electronic Components regions, Farnell's performance consistent with the first quarter, similar interest expense, an effective tax rate of between 21% and 25%, and 89 million shares outstanding on a diluted basis.

Risks

• Market Uncertainty: Prolonged market correction; global inventory levels slowly improving but with pockets of oversupply.
• Farnell Challenges: Continued weakness in EMEA, impact of foreign currency on gross margin, slower-than-expected recovery in top line despite cost reduction efforts.

Question and Answer

Q: Asia returning to year-over-year growth. Excluding data center, what else is driving it?

A: Phil Gallagher mentions broad-based growth in Asia across consumer, communication, compute, aerospace, with industrials less down than in Europe and the Americas.

Q: Farnell's go-forward path to achieve double-digit EBIT. What is required?

A: Phil Gallagher states belief in the Farnell model, with a new leader Rebeca Obregon, restructuring, a regional sales model, and a focus on execution. Ken Jacobson adds that Farnell's gross margin profile has been stable, but the top line is dropping faster than cost actions are benefiting.

Q: Guidance for the December quarter and regional growth. Clarification on Europe.

A: Phil Gallagher says there is a modest regional uptick in December, with Europe down from a low base, but the team is competing well and optimistic for flat to modestly up in Europe.

Q: Inventory target and lagging competitors. Why is Avnet lagging?

A: Ken Jacobson explains inventory is impacted by currency and timing differences, customers still have inventory, and the focus is on specific products with line of sight to reductions, with the team highly focused on inventory reduction.

Q: End market exposure. Rough breakdown.

A: Phil Gallagher provides a rough breakdown: AI low, Industrial 30%-40%, Transportation 10%-15%, Defense/Aero 5%-10% (higher in Americas), Consumer 10%-15%, Compute/Communications 30%-35%, with a diverse customer base and regions.