Avnet - Earnings Call - Q3 2020
April 27, 2020
Transcript
Speaker 0
Welcome to the Avnet Third Quarter Fiscal Year twenty twenty Earnings Call. I would now like to turn the floor over to Joe Burke, VP, Treasury and Investor Relations for Avnet. Thank you, operator. Earlier this afternoon, Avnet released financial results for the 2020. The release is available on the Investor Relations section of the company's website.
A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet's website. Lastly, 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, in particular the scope and duration of the COVID-nineteen outbreak and its impact on global economic employees, customers, and 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. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10 Q and 10 ks 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 Bill Emilio, Avnet's CEO and Tom Liguori, Avnet's CFO. Also, Phil Gallagher, Global President, Electronic Components joins us to participate in the Q and A session. With that, let me turn the call over to Bill Amelio. Bill?
Speaker 1
Thank you, Joe, and thanks to everyone for joining us on our third quarter fiscal year twenty twenty earnings call. As we're all well aware, the whole world is dealing with the challenges brought on to us by COVID nineteen, NavNet is no different. Today, we'll walk you through the impact it has on our business. Our third quarter revenues and EPS were down sequentially and year over year. Softer demand, particularly in Asia, impacted our quarterly results as well as softer pricing and increased costs related to the impact of COVID nineteen on our logistics operations.
That said, revenues in our Americas and EMEA regions increased sequentially in the third quarter, which reflects normal seasonality as well as our focus on keeping the business running as effectively as possible over the past few months. We met the low end of our original guidance for the quarter, which Tom will talk about a bit later in the call. Last quarter on our second quarter earnings call, we told you that despite the ongoing industry correction, we're starting to see some good signs of stabilization across key geographies. At that time, COVID nineteen was still in the early days and confined to Asia. During the third quarter, as COVID nineteen's reach widened, we acted quickly to conserve cash and manage our debt prudently.
As a result, our focus on working capital management enabled us to generate positive operating cash flow. Looking at our electronic component business, revenues and operating margins were down both sequentially and year over year in the March. The most notable region impacted was Asia. We saw orders decline early into the seasonal effect of the Chinese New Year and was further affected by COVID nineteen. That said, we did not experience any material disruptions or upstream supply chain or incoming goods from suppliers.
For the most part, our distribution centers remain operational as we implemented our business continuity plans to ensure worker safety first and foremost, and then to mitigate any business impacts. In certain areas, we had some minor disruptions due to travel restrictions and other related issues. Shipments to our customers continued, but we experienced longer lead times from new orders in certain regions and some delays due to the challenges that freight forwarders had with volumes and border crossing checks. Meaningful impact on bookings. Our book to bill ratio at the end of the third quarter was well above parity.
We kept a close eye on the rate of bookings and backlog to ensure the integrity and transparency of our supply chain. We continue to work diligently to confirm the orders our customers had were firm, so we would could provide the best possible visibility to our supplier partners, allowing them to allocate their resources appropriately. In terms of vertical market segments, as most of you know, we saw weakness in auto as plants in The United States and Europe shut down due to COVID nineteen. While transportation was strong in the beginning of the quarter, we saw a trend down at the end of the quarter. Throughout the quarter and even today, we see continued strength in our defense and aerospace businesses, as well as medical and various parts of industrial, particularly where they are seen as essential.
Although not a vertical segment necessarily, we did see strength and steadiness in our EMS segment. Overall, some of operations in our electronic component business appeared to be operating as business as usual during the quarter. However, it is clear that COVID nineteen created a high level of uncertainty with some recent reports referring to the possibility of advanced buying and pull ins leading to panic buying. With that in mind, we are preparing for all scenarios including potential challenges in the next couple of quarters. Tom will provide more detail on that later.
Turning to Farnell. Both sales and operating income margins in the third quarter were up slightly sequentially. Farnell started shipping from its new distribution center in Europe, but progress to ramp up the new facility will be slower than initially planned due to COVID nineteen. During the quarter, we continue to execute our five pronged plan that we put in place to improve Farnell's competitiveness in the high service model and promote long term success. The five parts of our plan are listed here on slide six.
We saw signs of progress from our plan in the beginning of the quarter. However, once the lockdown started in the European countries like Italy and The UK, Farnell slowed down as well. Turning to IoT. Investors expressed interest in our ability to scale our IoT offerings. Our new IoT partner program will allow us to do just that.
Although the operating environment has changed, we signed up a number of IoT partners in the quarter, and we will update you on additional IoT developments in the months ahead. Despite the current operating environment, we continue to work on our five strategic priorities as outlined on this slide. Amplifying our core distribution, scaling our high margin businesses, expanding our digital capabilities, leveraging our ecosystem for growth, and driving continuous operational improvement. To be clear, while we are still executing on the long term goals that we laid out previously, we have adapted our near term priorities to respond to the COVID nineteen pandemic. Overall, considering your challenges with COVID nineteen and its impact on global commerce, we believe our third quarter results demonstrate the following.
First, our commitment to ensuring our employees' health and safety while keeping our business running as efficiently as possible. The resilience of our business model and the strength of our countercyclical balance sheet. Our flexibility to adapt quickly to changing market conditions allowing us to maintain quality service levels for our customers and ongoing value for our supplier partners. Our success in activating our business continuity plans, and lastly, our company's strength overall and our ability to withstand challenges and navigate market turmoil. The last point reminds us of Avnet's longevity and why our company has been able to bring technology to market for ninety nine years.
I'm so proud of our employees across the entire company and what they've been able to do working together to collaborate with our customers and partners in the fight against COVID nineteen. In our press release, you will see specific examples of ways we are leveraging Avnet's end to end ecosystem to accelerate our customers' abilities to provide life saving medical solutions and increase the overall supply of medical equipment. Of course, at the forefront of it all, we are doing everything we can to ensure the safety and health of all of our employees. As we look to the macro forces at play and consider the range of economic forecast, global GDP will contract substantially in 2020. The IMF forecast that the global economy will contract 3% in 2020 and contract in the mid to high single digits in most of the developed countries we serve.
Some estimates that the annualized US GDP will fall as much as 40% in the current quarter from a year ago. As we know, unemployment has increased at an alarming rate with 26,000,000 people currently unemployed in The United States. This reflects a level of job loss that is the worst our country has seen since the Great Depression. With these factors in mind, and as we look ahead, we acknowledge that the macroeconomic will likely have a meaningful impact on our fiscal fourth quarter financial results across geographies and across our business units. While no one knows exactly what the extent of the global recession will be or how long the health crisis will last, we are all taking numerous steps to prepare for a significant downturn.
Tom will explain in detail the actions we are taking to ensure financial stability for Avnet during the current uncertain times that we face. In closing, we are encouraged by our performance in the third quarter. Despite recent uncertainty, one key point to remember is that Avnet plays a critical part in the supply chain for our customers and our suppliers. They depend on us, and many electronic products won't get made without us. While we continue to respond to the COVID nineteen pandemic and adapt our business for the challenges ahead and the opportunities, We remain confident in our long term strategy.
With that, I'll turn the call over to Tom to report on our financials for the quarter. Tom?
Speaker 2
Thank you, Bill, and good afternoon, everyone. I hope everyone and their families are healthy and safe. Let me start by adding on to what Bill said about how we play a critical role on the supply chain. We supply electronic components globally, operating in 100 plus countries. We stock inventory and ship components to customers as they are needed.
We are a one stop shop for our customers' procurement staff. And by using our strong balance sheet, we provide inventory receivables financing to our customers. All of these continue today, and they will for years to come. Therefore, as we manage through the COVID nineteen crisis, our financial priorities are centered on retaining the critical internal resources and capabilities required to be an integral player in the electronics supply chain maintaining a strong and healthy balance sheet so that we can continue to provide financing to our customers and ensuring the necessary liquidity and financial flexibility to run our operations no matter the economic environment. As we review our third quarter financial performance, I will discuss these priorities and our actions to support each.
Turning to Slide 11. Our revenues for the third quarter were $4,300,000,000 and adjusted EPS was $0.38 Both our revenues and adjusted EPS were within the original guidance ranges provided during our last earnings call. While we preannounced that we would most likely fall short of guidance, our teams were able to keep our global distribution centers operating throughout the quarter and continue to support our customer needs. A lower tax rate and interest expense contributed to the EPS performance. The lower tax rate was part of our longer term effort to work with operations and improve the geographic income mix of our business from a tax as well as cost perspective.
Gross margin of 12% was higher than last quarter, primarily due to a lower mix of revenues from Asia. We expected our Asia revenues to decline in the third quarter as a result of Chinese New Year, though COVID-nineteen played a part as well. Asia became the first region impacted by the pandemic. Adjusted operating expenses of $449,000,000 were higher, both sequentially and over the prior year quarter, as we incurred additional costs to manage through COVID-nineteen. This included cost and inefficiencies for new health and safety work procedures in our distribution centers, new shift patterns, as well as higher freight cost.
These cost increases overshadowed lower costs in areas like travel and conferences. While it is difficult to put a precise number on the net additional costs related to COVID-nineteen, we estimate the impact to be roughly 10,000,000 Our adjusted tax rate was 12.8% and benefited from a favorable mix of income. Interest expense was lower due to our improved debt position. Regarding the Texas Instruments transition, our revenues from TI in the third quarter were $4.00 $1,000,000 flat sequentially and a $50,000,000 decline from a year ago. We expect to see a decline in TI revenues as we continue through the calendar year.
As a result of macroeconomic impacts of COVID-nineteen, we performed an interim test of goodwill and recorded a charge of $160,000,000 which includes goodwill and intangible asset impairment related to electronic components acquisitions and equity investments. The $160,000,000 charge includes a $15,000,000 impairment of equity investments, which is included in other expense. There were no impairments to our Farnell segment. On Slide 12, we show revenues by segment and region. Electronic components revenues of $4,000,000,000 declined 5.5% sequentially, primarily due to lower revenues in Asia as a result of the Chinese New Year and COVID-nineteen.
Sequentially, Americas and EMEA revenues increased, which reflects typical seasonality. Electronic Components operating margins were 2.1%, down slightly from 2.2% sequentially due to the lower sales volume. Farnell revenues for the quarter totaled $335,000,000 up 1.2% sequentially. The Farnell team achieved a 7% operating margin, showing progress in operating margin improvement. Farnell began the March with fairly strong demand.
The demand trailed off in March and appears to be weakening in April due to COVID-nineteen impacts. Turning to cash flows and balance sheet on Slide 13. We continue to have a healthy balance sheet with sufficient liquidity to support our global business operations and the working capital needs of our customers. We ended the quarter with a cash balance of $4.00 $3,000,000 and debt of 1,600,000,000.0 Our gross debt leverage ratio was 2.8, and our net debt leverage ratio was 2.1. Our net book value per share was $37 a $2 decrease sequentially due to the impairment charge we previously discussed.
Tangible book value per share remained relatively constant at $29 Recently, investors have asked us about our inventory and the quality of receivables, both key parts of our tangible book value. As of March, we had $4,000,000,000 of working capital, including $3,000,000,000 of accounts receivable and $2,700,000,000 of inventory. We regularly review these valuations. As of quarter end, our receivable aging remains healthy and similar to q two. In EMEA and Asia, we have credit insurance programs that provide some risk mitigation for receivables in those markets.
Historically, during a downturn, we may experience some slowdown in the timeliness of customer payments. We have not incurred significant reserves or write downs in receivables. I attribute that to the quality of our experienced credit team. The same goes with inventory. Our global teams focus daily on managing inventory, and we have various contractual arrangements with suppliers.
Should our inventories become aged, obsolete or affected by changes in market prices. We ensure a healthy Avnet balance sheet by maintaining our disciplined working capital processes and performing quarterly reviews. Turning to liquidity on Slide 14. Our liquidity position remains strong. All of our businesses are focused on managing working capital and generating cash.
During calendar year 2019, we put in place improved processes, reporting, accountability, automated tools, and metrics to focus on cash generations. These actions reap benefits in 2019 with the generation of $948,000,000 of cash flow from operations. The processes and systems we put in place during the last year are serving us well today as we manage our liquidity throughout the pandemic and downturn. In the third quarter, we generated $98,000,000 of cash flow from operations. This is the sixth straight quarter of positive cash flow from operations.
We used the cash to pay down $92,000,000 of debt and returned $58,000,000 to shareholders. Going forward, we want to remind you that we have a countercyclical balance sheet, meaning that when revenues decline, we collect receivables and reduce inventory purchases, both of which contribute to positive cash flow. We expect that to continue. And when revenues improve in the future, we would expect to use some of that cash to accommodate the additional working capital. Turning to Slide 15.
As a management team, along with our Board, we evaluated several possible economic scenarios for the future in order to identify and implement any actions required to restore liquidity. As a result, we have taken the following actions: We continue to focus our businesses on managing inventories, receivables, and generating cash. We suspended our share buyback program in early March as a result of the economic uncertainties. We also paused our M and A activities and curtailed nonessential outside services and hires. We are implementing actions to manage our debt.
For background, our debt maturities are spread out as shown on slide 14. We have a $300,000,000 note due in June, which we will redeem at the April. The next note does not mature until December 2021, which means we do not have another debt maturity due for the next twenty one months. In addition, we have open lines of credit of 1,600,000,000.0. Our receivable securitization line matures at the end of this summer, and we intend to renew it, and it is supported by our U.
S. Receivables. Overall, our liquidity includes $2,000,000,000 of cash and credit facilities to fund near to medium term operation, and our debt maturity dates are spread out over time. Turning to business outlook on slide 16. Despite COVID-nineteen, we continue to serve the needs of our employees, suppliers, customers, and business partners.
We are confident in our liquidity position. Like many companies, we are unable to predict to what extent the global COVID nineteen pandemic may adversely impact our businesses for the next quarter. Therefore, we are not providing guidance for the fourth quarter. The color we can provide for the fourth quarter is Greater China is operational, and the region appears to be recovering from the COVID-nineteen outbreak. Some uncertainty remains in parts of Southeast Asia, India, and Japan.
We expect a drop off in EMEA revenues. Farnell is experiencing a fairly sizable downturn in revenues. The Americas region is cautious given the continued COVID nineteen cases along with government restrictions. However, we see strength in aerospace, defense, and medical markets. We expect to continue to incur higher operating expenses as we manage through the government imposed travel and commerce restrictions.
These are uncertain times, but Avnet took proactive steps in the third quarter to stabilize our near term performance and secure our liquidity. We will continue to do so in the months ahead as we navigate the COVID nineteen crisis. As Bill said, Avnet has served customers and suppliers for ninety nine years, and next year is our centennial anniversary, which is a huge milestone. As a management team, we are focused on keeping Avnet healthy and strong for years to come. With that, let's open the line for Q and A.
Operator?
Speaker 0
Thank you so much. Ladies and gentlemen, we will now be conducting a question and answer session. Our first questions come from the line of Adam Tindle of Raymond James. Please proceed with your questions.
Speaker 2
Okay. Thanks. Good afternoon. And I appreciate all the color by region, and I want to ask about forward trends into June. I was a little bit confused by the commentary that book to bill was above parity at the end of Q3, but the mix by region sounds like a lot of negative data points.
So first, maybe you could touch on where book to bill is now at the April. And as we think about June, I'm not asking for a forward guidance here, but maybe you could just touch on what you're currently seeing in terms of the sequential decline. Just for perspective, your largest semiconductor customer was alluding to a low double digit sequential decline into June, and I'm wondering if that's kind of the level that you're at least currently seeing.
Speaker 1
Okay. Adam, I'll do the book to bill question and I'll have Tom and Phil give a little color on the sequential moves with respect to the revenue. On book to bill, we're definitely over parity in every region. And we've also normalized that by given the fact that billings are down, we looked backwards at previous quarter and previous year's billings and said, where do we stand against the bookings? And where do we stand against that if we normalize the higher position and we're still above one?
So there's no question that we see some level of robustness with with respect to book to bill. And with that, I'll have Tom and Phil chime in on the revenues.
Speaker 2
Hi. Hi, Adam. How are you today? You know, we're not giving guidance and a lot really depends on COVID nineteen related events, timing of return to work, changes in restrictions, and, you know, it is still April, so a lot can change between now and then. You know, the ranges you threw out are reasonable, but, however, you know, we're not sure exactly what will transpire in May and June.
I have looked at the models that are out there. It it would bring to everybody's attention that, you know, our breakeven from an EPS perspective is in the 3.7 to $3,800,000,000 range. So if we were at that range, that's about a $500,000,000 reduction from March and at a 12% gross margin, that's about $60,000,000 that we'd be making up and that's the commentary on the breakeven. You know, that said, we will be at the June. It is difficult to say what what we really like is what we're seeing with the operating performance of Farnell, the operating performance and potential of EC that we still have our projects in place for OpEx.
Our cash generation seems to be working well. All I would reiterate before turning over to Phil is that, you know, Asia remains to be stable but we all have seen, you know, recent changes in restrictions in Singapore, India, Japan and elsewhere. You know, the one data point that in the near term that is concerning to us is that Farnell is the one that's seeing a fairly sizable downturn of revenues, which is part of our breakeven commentary. With that, Phil?
Speaker 3
Yeah. Thanks. Thanks, Tom. Thanks, Adam. I'll just add a little bit more.
I think Bill and Tom covered it really well. Beyond the backlog, to Bill's point in the book your booking question, we have a rigorous management process of managing that backlog. Okay? As the book to bills, as Bill pointed out, were above parity, k, we're also very cautious to be sure that, all the inventory coming in is gonna go back out. So we're we're working with, it's, like I said, rigorous and day to day with our customers and our suppliers, and we're we're sitting right in the middle of it.
As far as the outlook, again, we're not giving an outlook, you know, Asia seems to be, as Tom and Bill both pointed out, you know, we're we're we're 100% operational across Asia Pac. We're back in the offices in Taiwan on a on a limited schedule. Demand seems to be coming back decent for us in Asia and held up, you know, at least through April, which is really positive. The Americas, as Bill pointed out, Tom did in the scripting, we're cautiously optimistic in Americas. We're not it's not where we want it to be, but it's not as far down as we thought.
And then Europe is the one that's probably got the bigger impact. It's been shut down for so long and the automotive is such a big part of the European marketplace. But
Speaker 2
as
Speaker 3
the country start to open up, that's what we're managing between Italy and Austria and Germany is talking about coming back. The question will be how fast do they bring back manufacturing. Okay? And with the full month of May and June left, you know, we're we're we're hopeful that we'll turn that back
Speaker 0
on as quickly as possible.
Speaker 3
But that's really about it, Phil. So as Tom pointed out, defense is strong, medical is strong, parts and industrial are still doing well. And we know where we got some of the gaps with the automotive transportation.
Speaker 2
Got it. Very helpful. And just as a follow-up, maybe one for Tom. And just because the stock is basically trading at tangible book, market obviously has a negative view on the intangibles in Avnet. I think you did mention, Farnell was a large portion of the goodwill and there was no impairments related to Farnell, in the quarter.
So moving forward, I know you mentioned expecting a fairly sizable downturn in revenue in Farnell. Can you just talk about the gating factors to the impairment test in that segment and your view on those as the market seems to be expecting another impairment? Thanks. Yeah. Thanks, Adam, for that.
We're we're not expecting another impairment. That said, right, we don't know where COVID nineteen will go. The testing that we did, for now, actually has a fair amount of headroom still available even with our current projections. I would think about it in terms of if our operating margins were nine or 10% or lower long term then for now would come up for possible impairment. You know, we saw good progress this last quarter.
It was only four quarters ago we were at 12% operating margin. So that's that's that's very encouraging to us. So, you know, right now we see a fair amount of headroom for for now and impairment and yeah, you're right. You know, I've met as always traded at 1.1 times net book value. Net book value today is 37.
We we did the test. We tried to be conservative. You know, there were a number of smaller things that were impaired but, you know, I think we ended up in a in a good position given all of the, you know, the uncertainty out there. And as you can imagine, these are the auditors and I know the many companies going through the same type of exercise. Does that help, Adam?
Okay. It does. I and one last clarification. I know you've mentioned some capital allocation priority changes. I think you're maintaining the dividend.
Correct me if I'm wrong, and tell me what says about your feelings about cash flow in the next quarter and beyond. Thanks. Yeah. We're gonna make a decision on the dividend in May. You know, the dividend is is not huge large cash outlay.
It's around 21,000,000 a quarter. You know, that said, let's see where the macro environment is in a few quarters down the road. I'm sorry. Now a few weeks down the road to to get to mid May, but we'll make a decision on that. Again, it's not a large out out outlay.
Yeah.
Speaker 1
I I'd add to that. I I'd add to that, Adam. Look. We paused the buyback, which is a much bigger outlay, and we we think the dividend sends a solid message still that we what we what we feel about the confidence of the company. And as Tom points out, though, if COVID goes further south, that you know, all options are still on the table.
But at this at this juncture, we don't see that to be a threat.
Speaker 2
That's helpful. Thanks, Bill. Thank you, Adam.
Speaker 0
Our next questions come from the line of Ruplu Bhattacharya of Bank of America. Please proceed with your questions.
Speaker 4
Hi. Thanks for taking my questions. I think, Tom, you said that the cost additional cost associated with COVID-nineteen was about $10,000,000 in the quarter. How should we think about those additional costs trending in the fourth quarter? And in general, how should we think about OpEx as a percent of sales?
Are there any incremental cost actions you can take to lower OpEx? Thanks.
Speaker 2
Sure. Thanks, Ruplu. First of that $10,000,000 is related to things like freight, which is a near term issue for us, personal protective gear, you know, all of our distribution centers, they've done a great job of operating, continue to operate but, you know, they're they're working within social distancing, work rules, cleaning, disinfecting. So this June, we would expect most of those to continue, probably start to subside through the quarter, meaning things like, you know, freight costs. We fully anticipate to start returning to normal.
And I think as our distribution centers get familiar with working with the new rules, their productivity will go up. For the June, I would plan on it being at the same level or slightly below our March. You know, seeing OpEx as a percent of revenue, you have to forecast revenue. So let's leave that to the side. We historically talked about an OpEx in the mid $430,000,000 assuming that revenue stay within a reasonable range.
I think that's what's a good number to go with going forward. On our OpEx, we continue to work with the $245,000,000 cost reduction plan that that's going well. You know, we've talked about the defined projects in that to fully achieve that. Right now, we're about a 190,000,000 of the $2.45 achieved. We we believe we'll end up at $2.45 or or million of savings or probably more.
The one thing I would say is that those are those are gonna take a little longer, meaning in the three to six month longer time frame. The reason is that some of those savings are based on, you know, moving various functions either to a lower cost country or or an outsource type mode. And with our new work restrictions and people working at home, the knowledge transfer takes a little longer. But so near term, you know, June is gonna be very similar to March. Once we get the additional costs associated with COVID nineteen normalized, we'll be in the mid $430,000,000, $4.35, 435,000,000 per quarter.
And over the next eighteen to twenty four months, you'll see the rest of that $245,000,000 plan come to fruition.
Speaker 4
Okay. Thanks for the details on that, Tom. Just for my follow-up, you know, you talked about the countercyclical balance sheet. If I look back to fiscal two thousand and nine, I think you guys generated about $1,000,000,000 in free cash flow. You know, any idea if that kind of that level of free cash flow makes sense for the fiscal year of cash?
You you paid down some debt, you delevered this quarter. Should we expect that delevering to continue as we go forward in the next couple of quarters? Thanks.
Speaker 2
Sure. So as far as cash flow and comparing it to 02/2008, 02/2009, the the model is similar. So I think in 02/2008, 02/2009, our revenues declined 20 to 30%. It was quite substantial. At that level of decline, yes, we would generate hundreds of millions, just not a billion dollars of cash flow.
I'm sorry. What was the second part of the question?
Speaker 4
And in in terms of delevering the balance
Speaker 2
sheet Debt, de levering. Yeah. Yeah. So right now, our focus is on the balance sheet and and really liquidity. So I would anticipate in June our debt to be the same or or lower.
And, you know, one thing to keep in mind, to the extent we generate a lot of cash because of a slowdown in macro, a good part of it will go back into the business once the recovery comes. Thank you, Ruplu.
Speaker 4
Thank you. Thanks for the details.
Speaker 0
As a friendly reminder, we ask that you please limit yourself to one question and one follow-up question. Our next questions come from the line of Will Stein of SunTrust. Please proceed with your questions. Great. Thanks for taking my question.
Speaker 2
Many companies and Avnet falling in this category of posting reasonable results for Q1 and highlighting reasonably strong bookings, but sort of withdrawing an outlook or not providing an outlook for Q2. As it stands now, when you look
Speaker 5
at that
Speaker 2
backlog and you think about revenue for Q2, is the concern more that you think perhaps some of the orders could get canceled or pushed? Or is the concern instead that you feel comfortable with the backlog, but pace of turns business would be slower than typically? And then as the follow-up that's related to this, I think typical revenue is up a couple of percentage points sequentially. Is there any chance do you think revenue could be flat in the quarter?
Speaker 1
Yes. It was a lot packed in there. Well, let me give it a shot and then I'll have my teammates take a shot at it as well. Let's first start with the idea that how good the backlog. Phil mentioned that in the previous question.
We we put a rigorous management system in place. We're actually able to look at any individual customer and know what their booking patterns are and be able to determine if and their billing patterns to be able to determine the discrepancy between bookings and billings in a given quarter as well as going back previous quarters and previous years to see if all of a sudden there's an anomaly there that we can see where the outliers are and question customers on whether or not they're true true bookings or in fact, they are in fact doing some additional bookings that we then would say put stricter terms in place. So I think that's helping us clean up the backlog to make sure it's it's really in a good position because as you can imagine, some of our suppliers who are concerned with filling their factories when they're only running at 40%, they wanna make sure the orders they get are really good orders and and they're gonna go to actual demand to customers or in some cases, life saving devices for customers. So that's critically important to all of us in the supply chain. With respect to what we think about how the orders look then, there is a concern that if the COVID gets worse, we could see things happening like what happened in automotive where the production actually stops.
So then all of a sudden, we'll see end user demand kinda get curtailed pretty quickly. And that happened almost overnight if you recall. It's what happened with the automotive sector. And that could happen in the industrial and some of the other sectors that we're in, communication, consumer, etcetera. So that's really what the concern is with respect to what's going to happen in the uncertainty with respect to demand in the future.
At this given juncture, our book to bills look solid. Pass it to Tom.
Speaker 2
Thanks, Bill. I would just add, Will, that today is April 27. There's a big difference between today and March 27 and maybe in a different situation, May 27. That could be much better, it could be much worse. So that's really what we're saying by not giving guidance.
Bill, I don't have anything to Go ahead.
Speaker 3
Yeah, Tom, I would just say, I think, again, you guys said it well, and and it's the question. And and we're we're using, frankly, you know, we talk about accountability in the backlog, accountability of the customers. It's really, we're getting talking to all our constituents about being responsible. K? And, you know, we're we're we need to be good responsible partners with our suppliers as they some of them some of them have some limited capacity as you guys all know.
And to be sure that the products that they that we're asking for based on our customer backlog, they really need. Okay? And we so working upstream with our suppliers and downstream every day, okay, with our customers. And so just say, everybody needs to be responsible right now. This is something like none of us have have seen before.
Speaker 2
I, you know, I I would add to that, Will, what Phil said. You know, we're having weekly calls with each of the businesses. Phil's leading them up. It's it's it's very impressive and comforting to look at what the sales and supply chain people are doing in each one of our businesses of staying in contact with their customers, checking what you brought up, you know, is that order real or could that go away in May and June and adjusting our purchases to ensure our cash flow. So it it you know, one of them joked that this this message will transpire in five seconds back to the mission possible show, which I thought was very humorous, but that's really what it what it is.
It's everyday we're getting new orders, new changes are made, new demand signals, and just an uncertain time. But know this, that everybody is on top of managing. And, you know, we're going to we we believe we'll have a good cash story and keep the company liquid and keep our balance sheet strong. Thanks, Will. Our
Speaker 0
next question is coming from the line of Matt Sheerin of Stifel. Please proceed with your question.
Speaker 6
Yes, thank you. I wanted to ask about the Texas Instruments revenue run rate. It sounds like that $400,000,000 was higher than you had expected. I think you expected it to be down from last quarter. So could you give us an update on how you see that transitioning over the next two to three quarters?
And I know also, Phil, you've talked about backfilling lost revenue with other suppliers and other share gains. Can you update us on that? And is this current environment making it more difficult to win incremental business now?
Speaker 1
Yes. So I'll start with that one, Matt. With respect to TI, there's, of course, a lot of questions about the timing of the transition. So here's what you can expect. It's still we're on track for seeing it completed by December 31.
Although, as you pointed out, we would expect to see a little bit more of a decline most likely to some impact with COVID nineteen. So it was essentially flat sequentially. But we continue with our plan on how we're gonna retake or replace that revenue with in fact richer margin other suppliers' products. We're doing pin to pin replacement wherever possible. We've got some share shifts going on between supplier lines and where where customers wanna make sure they stay balanced with their distributors.
And, of course, demand creation, which takes a little bit longer to get design win that leads into revenue.
Speaker 0
But those three are
Speaker 1
active in place and we have a really tight management system across the world to make sure we can maximize on the results associated with that. So, Phil, you wanna add something else to that?
Speaker 3
Yeah. Great job, Bill. Thanks. And, Matt, good good to hear from you. Thanks for the question.
Yeah. This is hey. This is another one of those rigorous processes we have in place. We're meeting regularly with the regions down to the country level. We know every single customer, every single part, and, the GP dollar generation by customer by part.
So that's the that's the the detail of what we're doing. And Phil just pointed it's pin for pin, new generation designs, and share shift, okay, internal to customer. We have a tracking process, and I'd say right now, we're we're we're satisfied, and we're pleased. Right? But we're satisfied with, with where we are in the process against the timeline to replace that business.
I'll be candid with you. I think we're probably pleasantly surprised that the decline really hasn't come sequentially. We are, to Tom and Bill's point, planning on it by the end of the calendar year. But I think it's a tribute to frankly, if I could put a plug in for our sales and marketing team and customer engagement, customers obviously aren't really looking to move that business too fast. And I think it's a compliment to the team, but we will be planning on it by the December.
Speaker 6
Are are you expecting that to be down in line with the overall business or a little bit more because that might happen or just no visibility?
Speaker 3
Well, we're plan that separately. So it's it's oh, go ahead, Phil.
Speaker 1
I was gonna say at this at this juncture, I would plan it linearly to the end of the year, but, you know, you can never tell if it's gonna extend or not. I mean, because this it's not as as you're as we're seeing, it's not an easy thing to move it quickly. But we're our plan is that every quarter we reassess it, but we're essentially putting a line in place and says it's gonna be gone by the end of the year.
Speaker 3
Okay. Thank you. Right, Bill. So financially, it's how we're modeling. Yep.
Speaker 6
Okay. Thanks, Bill. And just on my follow-up regarding gross margin, which was up nicely to 12. And obviously, mix helped you a lot there, particularly with Premier Farnell flat, in Asia down. It looks like that's going to work against you pretty significantly this quarter.
And also, so could you comment on that, whether you think gross margin is going to be weaker? And then the demand creation business, obviously drive gross margin, is that weaker just because of customer engagements are down because of COVID, or are there no changes there?
Speaker 1
Okay. I'll take the demand creation question, and then Tom can talk about the regional mix. On demand on demand creation, we are, in fact, holding solid. In fact, it's it's even a little bit more robust than we expected it to be. So it's still you know, roughly in the core business 30% of our revenues and it continues to be that way.
Tom?
Speaker 2
Sure, Matt. Gross margin was up because of mix. When you looked at each individual business, their gross margin was pretty much flat to slightly down. And mix will play a part going forward and what you're bringing up is Farnell, we said would be down the most and Asia seemed to be flattish. So you are correct.
Thank you.
Speaker 6
Okay. Thanks very much.
Speaker 2
Thanks, Matt.
Speaker 0
Our next questions come from the line of Steven Fox of Fox Advisors. Please proceed with your questions. Thanks for taking my question. Good afternoon. I guess, question, I was just curious if you guys could provide a little bit more insight or color into the receivables collectible question that you brought up earlier.
I know there's differences between collecting from a small business versus collecting from a large EMS provider. Can you talk about how you're supporting some of the small customers in terms of credit terms, etcetera? And then I had a follow-up question.
Speaker 1
Sure. I'll I'll start on that and then Tom can give some more color on. The good news is we've gone through cycles before. And when we've gone through cycles, we had we didn't see a significant amount of bad debt come out from our our customers, which is a great thing. And we're we believe that may occur this time as well.
We do have some level of insurance coverage across the world, but that's not enough to cover if this if this gets into a a worse position. But we're pretty comfortable with the level of the receivables, and we do an audit check on them on a regular basis to make sure that they are, in fact, good receivables and and they and they fit our accounting standards. Tom?
Speaker 2
Thanks, Phil. Steve, no change in our receivables aging quarter to quarter. So that's a very good sign.
Speaker 0
Okay. I appreciate that color. And then just getting back to one of your original comments in terms of potential panic buying reports. I mean, like, is there a certain area that maybe you are more, suspect of in terms of orders you're seeing or certain region? I mean, what is it that, you know, you're most you're most on that lookout for in terms of maybe over over buying right now?
Speaker 1
I I would say the the following on it. It's it's you gotta think about this maybe on commodities. If you caught the hot commodities that you're considering whether they're SSDs, NANDs, DRAMs. So memory is is one where you could have some level of concern. But by focusing on individual customers and individual customer behavior, we're able to fair it out pretty quickly where we think there could be some double ordering or or quote unquote panic buying.
So can we go discuss with the customer and we put tougher terms in place when we believe that's the case? And that helps essentially normalize the demand profile we have and ensure ourselves that we're not going to be caught with orders that aren't going to be fulfilled.
Speaker 0
Great. But your general viewpoint right now is, broadly speaking, you're not seeing that?
Speaker 1
Mean, you look at cancellation rates, they're not abnormal at this juncture either. So that's another good indicator that tells you that we've got a pretty solid backlog.
Speaker 0
Great. That's very helpful. Thank you.
Speaker 2
Thanks, Steve.
Speaker 0
Our next questions come from the line of Shawn Harrison of Loop Capital. Please proceed with your question. Hi, afternoon, everybody. Guess, either Bill or Phil, could you remind us kind of what percentage of your sales are automotive versus, you know, aerospace, defense, kind of medical given kind of diverging trends you're seeing?
Speaker 1
Sure. If you look at the split of the key verticals in revenue, EMS represents and it's been steady about 35% of our business. Industrial and transportation represents another almost 30% and the rest of it is what we call diversified which includes aerospace and defense. That kind of gives you the balance of the major revenue streams we have.
Speaker 0
Okay. And then as a follow-up, I just wanted the Farnell weakness, is that solely a function of that it's it's more, I guess, it's stronger position within Europe? Are you seeing any changes in design activity within the business? Or is there something else going on in Farnell where you're seeing kind of the most the greatest weakness currently?
Speaker 1
Well, a couple of things. Mean, Farnell, at the beginning of the quarter, was off to a good really solid start, and and we, you know, finished really strong from an operating income point of view, demonstrating the fact that our SKU expansion that we're doing, the work that we're doing on our user experience, the web speed, the mark marketing dollars that we're spending is all effectively starting to work. And then as we went into the latter part of the quarter when The UK and others in the EMEA market went dark, that created an enormous problem for us as far as, you know, things slowing down. And that's what we that's essentially what we saw. As far as the design activity goes, no, we're not seeing anything different with respect to that.
And I think as people come start going back to work again and country start opening back up again, we're hopeful that that turns back around again, but it's still a wild card.
Speaker 3
Yeah. Sean, I think I would just say that we we got a lot of confidence in in our Farnell position right now. And to Bill's point, right around March 17, frankly, we started to see that decline, which is where you start to see the acceleration, to your point, in Europe, okay, in The UK and whatnot, where, yes, that's their strongest region by a good shot.
Speaker 0
Okay. That's helpful. Tom, if I may slip in one last question, just inventory velocity, do you think you'll be able to keep it at this level into the June? Or do you somehow think with Asia coming back, you'll actually improve inventory velocity into the June?
Speaker 2
Well, we we we think Asia will improve inventory velocity. You know, I think the bottom line, what we're wanna be able to achieve in June, Sean, is, you know, positive cash flow, and that imply
Speaker 0
Our next questions come from the line of Tim Yang of Citi. Please proceed with your questions.
Speaker 5
Hi, thanks for taking the question. You mentioned weakness in Asia in March. I think it was down roughly 4% year over year. But one of your largest competitor, WPG, reported double digit year over year growth for the March. Can you provide some color on the disconnect between your performance versus WPG?
Speaker 1
Joe, you want to take a shot at that one?
Speaker 3
Yeah. I'll I'll I'll take a shot at that one. And, of course, we don't know exactly, all the details about WPG. They do play in a different market than we play, particularly in, in processors, memory. They they they have a very substantial sized business in that in that space and tends to be much lower margin business, and we we just don't play there.
So as far as the share goes in our in our lines that we manage as far as the basket, in Asia, we're holding our own plus sum. So I'm going to estimate that it's a commodity situation.
Speaker 5
Got it. So it's not share shift, it's more like just end market mix than
Speaker 3
Yes. Would say it could be end market mix as to where the processors memory, those parts of products go that we don't play in as much. Correct.
Speaker 5
Got you. The second question is, can you maybe talk about the demand, the median average during the quarter? I think you mentioned that in early March that you would not meet the March guidance, but you still achieved the on the revenue side, you still achieved the midpoint of the original guidance. Did you see a strong demand in the multi pop side?
Speaker 1
I'm sorry, can you repeat the last part of that question?
Speaker 5
So is that just the performance of the month of March that drive the upside so that you can actually achieve the midpoint or the guidance range. But in the mid in the beginning of the March, you actually mentioned that, you know, you cannot meet the guidance.
Speaker 1
Well, when we say we could not meet the guidance, it looked like things were gonna fall off faster than they did. And we were able to end end up doing better than and as you noted, when you look at some of this operationally, we also had some advantages on tax, so that that helped us along as well. But we were really close to that bottom end, and that's one of reasons why we did it did the preannouncement.
Speaker 5
Gotcha. Okay. Thank you. Our
Speaker 0
next questions come from the line of Nick Todorov of Longbow Research. Please proceed with your questions.
Speaker 7
Thanks. Good afternoon, gentlemen. Given the some of the indications of extended lead times, can you talk about the pricing outlook? I know that matters mostly for Farnell, but and that segment is going to get hit from the top line perspective. But is that the potential area of near term benefit here over
Speaker 5
the next couple of quarters? Can you talk about the pricing, please?
Speaker 1
Of course, when lead times start to extend, that's always an opportunity to see some ASPs expand as well. We haven't seen that occurring yet, but of course as time goes on and the situation gets tighter and tighter, you will start to see that occur.
Speaker 7
Okay. And as a follow-up, you mentioned the strength in aerospace multiple times. Typically, we think about the production cuts from the major aerospace companies. Is there anything different in your exposure that allows you to see strength in that business? And do you expect to see strength going forward?
Speaker 1
Yes. I think when we made that comment, we're talking more about defense than we are actually aerospace because clearly the planes not flying, that has an impact on air aerospace, but we're not seeing that in defense. And also, as you imagine, medical is up for us too, and that's all in the same sector.
Speaker 7
Okay. And if I can sneak one more. Can you talk a little bit about that expanding relationship with Micron? What does that entail for which products or end markets that is?
Speaker 1
Yeah. Absolutely. Phil, you wanna give them the details associated with Micron, please?
Speaker 3
Yeah. Well, we got Micron around the world in the Abnet core, and the simple simple response to Nick is really just we're expanding that with with Farnell. So it's a real big win. It will be across the portfolio of Micron. So it's a nice win for us there.
Speaker 5
Okay. Got it. Thanks.
Speaker 0
Our next questions come from the line of Joe Quatrochi of Wells Fargo. Please proceed with your question. Yeah. Thanks for taking the question. Just kind of building on the last one.
Are there any categories where we should think about, you know, being the most likely to see shortages or extended lead times at this point?
Speaker 1
Well, I think that's specific by supplier, and I think you could talk talk to everyone of the suppliers and know which ones have facilities in some of the countries that have had lockdowns, like The Philippines and Malaysia to name a couple.
Speaker 0
Okay, fair enough. And then just one kind of housekeeping question. How do you think about the tax rate just given the quite significant decline in the March relative to your long term target rate?
Speaker 2
You know, total total year estimate is about 19%, and our long term target has been to get it under 20%. So, you know, we feel really good about the progress with our with our tax rate, Joe. Did I answer it?
Speaker 0
Yeah. That's perfect. Thank you.
Speaker 2
Thank you.
Speaker 0
Gentlemen, there are no further questions at this time. I'll now turn the call back to Bill Emilio for closing remarks.
Speaker 1
Thank you, operator. And in closing, I'd like to say that our thoughts are with all those that are impacted by the COVID nineteen across our global community. Are incredibly grateful for the dedication of the first responders and health care professionals who are out there each day working tirelessly to fight this virus, and we're proud of how our employees have risen to the challenge and have come together to make a positive difference in our industry, in our communities, and other people's lives. We will continue to monitor the COVID nineteen developments closely as things continue to evolve, and we will update you on our fiscal fourth quarter results in just a few months. Thank you, operator.
Speaker 0
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great
Speaker 2
night.