Avnet [AVT] Conference call transcript for 2021 q3
2021-10-28 21:23:05
Fiscal: 2022 q1
Operator: Please standby. Our presentation will now begin. Welcome to the Avnet First Quarter Fiscal Year 2022 Earnings Conference Call. I would now like to turn the floor over to Joe Burke, Vice President and Treasurer and Investor Relations for Avnet.
Joe Burke: Thank you, operator. Earlier this afternoon, Avnet released financial results for the first fiscal quarter of 2022. 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. 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 Tom Liguori, 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 for our first quarter of fiscal year 2022 earnings conference call. As we shared last quarter, despite supply disruptions and ongoing pandemic restrictions in certain regions, we've continued to execute well in a strong market environment and progress on our margin expansion efforts by accelerating the growth of our high margin for no business, while also supporting the growth of our core distribution business to investments to improve efficiencies and strengthen critical partner relationships. Our focus and execution and the durable changes we've made to position Avnet as a stronger business are reflected in this quarter's results for both electronic components, and Farnell businesses. This momentum brings us much closer to achieving our goal of delivering sustainable operating margins of at least 3% to 3.5% for total Avnet in any kind of market. Of course, this momentum is largely due to the dedication of our employees. I cannot emphasize enough how truly lucky I am to lead a company with such hardworking and talented individuals across the globe. Our team has endured the challenges of a complex market, but I truly believe it has resulted in a stronger, more resilient organization that is poised for long-term success. Even as we've continued to navigate a difficult operating environment, our priority has remained investing in our people or relationships and digital enhancements that make our business more effective and efficient. These investments have been critical to our success to date, and I'm confident they will continue to yield strong returns. Now with that, let me turn to the highlights of the first quarter on Slide5. In the quarter, we achieve sales of $5.6 billion, up 7.6% sequentially, and 17.5% year-over-year in constant currency, excluding TI sales and the extra week in the prior year, sales grew 32.9% year-over-year in constant currency. Record sales for Electronic Components and for Farnell, supported by improved operating efficiencies, allowing us to deliver operating margins that reached our short-term targets of 3% and 10%, respectively. We were pleased to achieve these targets sooner than originally forecast. And given the current market environment and the improvements we've made to our business, we expect to sustain these margins in the coming quarters. Our strong results are partially driven by continued market strength. Overall demand was robust across vertical segments with the industrial, automotive and communication segments serving as significant drivers. Looking at Electronic Components segment on Slide 6, revenues for the business repurposed sequentially and year-over-year in the quarter to $5.1 billion with sequential growth across all three geographic regions. Growth primarily came from our largest region Asia, which again had record quarterly sales. Strong performance in EMEA and continued improvement in the Americas also contributed to better than expected results in the quarter. Our investments in digital and design tools and field application engineers continues to pay off as we had another strong quarter of design and engineering activity across all regions. Strong levels of design registrations and design wins in prior quarters have resulted in record sales in design win revenue, and gross profits for the first quarter. These design wins and registrations continue to be a key organic growth driver for Avnet benefiting our operating margins, while also driving new business for our supplier partners. As mentioned last quarter, our supply chain services capabilities also continue to be of great value to new and existing customers as they navigate the increasingly complex supply chains. We're excited to continue to build out this capability and demonstrate Avnet vital role at the center of the global technology supply chain. We excited this quarter with a positive book-to-bill in all regions well above parity. Now, before I move on to Farnell, I would like to briefly address the Analog Devices maximum decision. As we shared a few weeks ago, maximum intend to discontinue its distribution relationship with our Tronic opponents business. Maxim products only accounted for about 3% of the company's sales during fiscal year 2021. And a financial impact on our business won't be immediate. Given current market dynamics, the strength of our existing line card and supplier partners and our track record of managing through the impact of industry consolidation. We believe we can replace the margin dollars. We're proud of the strong supplier partnerships we have today and look forward to expanding these relationships to meet the specific analog needs and the broader technology needs of our customers. Now turning to Farnell Slide 7. Our strategic investments in SKUs and e-commerce continue to benefit performance at Farnell as we achieve record revenues of $455 million and operating margins up 10.9% in the quarter. Our investments in Farnell continue to deliver meaningful returns. In the quarter for Farnell's digital capabilities yielded notable performance with 53% of revenues and 69% of total transactions attributed to e-commerce sales. We've seen positive results from the Farnell platform over the last 18 months as the team has embraced digital transformation. And we're really excited by the potential for even greater success as we move all Avnet businesses to the platform over the coming quarters. We also continue to invest in inventory this past quarter adding 18,800 skews. This reflects continued progress on our plan to add an additional 250,000 skews through the fiscal year 2022. Our inventory investments at Farnell have been critical to our success. This quarter 15% of Farnell sales were derived from new skews added over the last two years. We look forward to delivering continued returns on these investments, as they've enabled us to grow and strengthen our overall offering to our broad base of engineering customers and suppliers around the globe. With that, I'll turn it over to Tom to dive a bit deeper into our first quarter results.
Tom Liguori: Thank you, Phil. Good afternoon, everyone. And thank you for attending today's call. As Phil stated, we were very pleased with our results this past quarter. While there's still work ahead, I am encouraged by our strong start to the fiscal year and excited to share some highlights from the quarter. Turning to Slide 9, our revenues of $5.6 billion and adjusted EPS of $1.22 both exceeded guidance. Consistent with our objective of growing higher margin businesses. Our Farnell revenues grew 33.5% year-over-year, although electronic components grew 17.1%. We delivered our second consecutive quarter of record sales in both our electronic components and Farnell segments. We reached our short-term operating margin objectives, achieving 3.2% for electronic components and 10.9% for Farnell. Our operating expenses remain well managed, declining $12 million sequentially in a quarter in which our revenues grew. And we continue to manage our working capital with net working capital days decreasing to 69 days compared to 79 days a year ago. All of these contributed to a return on invested capital of 11% in the quarter. As demonstrated on Slide 11. This was our fifth consecutive quarter of operating margin expansion. It was also our fifth consecutive quarter of reducing our operating expense has percentage of gross profit dollars. Our goal is to deliver sustainable operating margins of at least 3% to 3.5% for total Avnet. Moving to the first quarter income statement on Slide 12. Gross margin of 11.8% was down slightly from 12.3% last quarter, primarily due to regional mix. The September quarter is seasonally slower for EMEA, while Asia remains strong. Compared to the prior year quarter gross margin improved by 88 basis points. All of our businesses improved gross margin year-over-year. Adjusted operating expenses of $481 million were down $12 million or 2.5% sequentially. On the non-operating front, interest expense decreased slightly to $22.8 million from the prior quarter. We recorded foreign currency transaction losses of $5.1 million, which represent the impact of FX fluctuations throughout the quarter, primarily between the U.S. dollar and the Euro and British pound, as well as the costs associated with hedging or foreign currency risk. We booked a 21% adjusted tax rate in the first quarter, which is also our estimated rate for total fiscal year 2022. On Slide 13, we highlight results across our Electronic Components segment and Farnell. Looking first at Electronic Components. We achieved revenues of $5.1 billion with every region growing sales in a strong market. Operating margins were 3.2%, a slight improvement from last quarter as the team continues to manage operating expenses, while growing revenues driven by improved efficiencies across the business. Farnell achieved a record sales quarter with revenues totaling $455 million. The Farnell segment had an operating margin of 10.9% in the quarter. While favorable pricing contributed approximately 200 basis points of the 10.9%. The Farnell team has made notable improvements in their business, primarily driven by investments made over the last two years. As Phil noted, these initiatives include our efforts to expand skews in Farnell's inventory and enhance new product introductions, as well as make investments and systems and e-commerce, all of which have been major contributors to strong and sustainable operating margins. Overall, we're extremely pleased with Farnell. We continue to believe that Farnell is a critical component of our long-term margin expansion effort. Turning to cash, liquidity in the balance sheet on Slide 14. Inventory remained relatively flat sequentially. And as a distributor, we're pleased that we are able to maintain these levels in a tight market. While working capital dollars were up, we were still able to improve our working capital days to 69. Our liquidity position remains strong, we ended the quarter with cash and equivalents of $299 million, and $1.5 billion of available lines of credit. We remain comfortable with our debt position. Our gross debt leverage was 2.1 and net debt leverage was 1.7. Our net book value per share increased to $41 compared to $38 in the year-ago period. On Slide 15, I would like to reiterate our capital allocation priorities. We should expect a balanced approach to our capital allocation with approximately half gone to reinvestment in our business and half to shareholder returns. Reinvestments will primarily be capital expenditures for distribution centers and business systems for continued efficiency improvement, as well as expansion, a portion will be dedicated to M&A. To grow our higher value add businesses, such as Farnell, IP&E and embedded systems. For shareholder returns, you voice your desire for steady and reliable returns. And we have responded by focusing on delivering a steadily increasing dividend. We increased our dividend by 9.1% in the quarter on top of a 4.8% increase in the June quarter. As a shareholder, you should expect an increasing dividend through the cycle. We also reinitiated our share repurchase program toward the end of the quarter. And we expect to continue our repurchase activity going forward as an integral part of our capital allocation plan. Let me wrap up on Slide 16 with guidance. Our second quarter guidance today assumes ongoing strong demand, continuing supply constraints and associated electronic components price inflation. The impact of COVID-19 across the globe remains uncertain, as it relates to potential shutdowns and constraints. And today's guidance assumes conditions remain above where they're today. For our fiscal Q2, we're guiding revenue in the range of $5.3 billion to $5.7 billion and adjusted EPS in the range of $1.20 to $1.30. Turning to Slide 17. In summary, we remain committed to building a better business supported by excellent execution in our core distribution, and grow our higher value add businesses such as Farnell. Through the cycle, our objective is sustainable operating margins of at least 3% to 3.5%. Our focus on growing higher value add businesses, reliable and increasing dividend, opportunistic buybacks and investments in both organic and inorganic growth. We remain committed to this roadmap for increasing shareholder value. With that, I'll turn it over to the operator for questions-and-answers.
Operator: Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Nick Todorov with Longbow Research. Please proceed with your question.
Nick Todorov: Yes, thanks. And good afternoon, congrats on achieving the margin goals ahead of timeline. So question on that, Phil, given that you reached that milestone now and it seems like you're seeing the benefits of the current backdrop in the whole environment, how should investors think about the next near-term goal for the margins? I think you've mentioned that you anticipate that you're going to sustain those, but what are the levers that you can pull so you can continue to see improvement in those margins?
Phil Gallagher: Sure, Nick. Yes, we've achieved them early. We expect to be able to do that for the next several quarters and beyond. The levers are really what we've always talked about Farnell, they got to 10 - they got to 10%. We think they can do more, their investments and the skews and inventory are paying off, you see that in the revenue, investments in the e-commerce is paying off. You'll see that in the e-commerce revenue as a percentage of total. And then over on the course is what we've talked about with Americas. Americas, that team has done a stellar job of getting the growth and throughout margins are over halfway of where we want them to be. But what you should all know there's still more to come. Those are and continuing on demand creation. But those are the main levers, we called out with Farnell, yes, they are benefiting from pricing. So we want to be sustainable, regardless of that pricing benefit. I think the other thing you should know though, there are some headwinds in all of our businesses like fuel costs, expediting costs. So, we expect those to subside over time. It's hard to say when, but our team did a good job of margins and more to come.
Nick Todorov: Okay, great. And a question - you obviously raised the dividend again, how should investors think about the balance of increasing the dividend throughout the cycle and return through buybacks, given just where the stock is? I think it's fairly obvious that, it's pretty attractive to buy back the stock here. But how do you balance that with the dividend increases that you're planning to do to the cycle?
Phil Gallagher: Yes, we spent a lot of time internally, as most companies do modeling our cash flow through different cycles, many sessions with our finance committee and what our message is that, we believe that we're at a point where we can deliver an increasing dividend through the cycle every year going forward. Why is that different from the past? We're starting with a much lower deposition, right? So we're just in a better position from the balance sheet. You may see more on the dividend. What we're trying to do is get it to the level and we look at it as a percent of net income. I'm not going to go into the specifics, but we're trying to get it to the level that we think is appropriate. And from there, we will continue to increase it on an annual basis. Buybacks are opportunistic. So this took a lot of time our capital allocation plan, but we're really happy where it landed. And you should expect that it'll vary based on share price, and we're in the market back in the game on buybacks.
Nick Todorov: Okay, thanks. And last one from me. Phil. Just on Maxim. Can you dive a little bit on the strategy to replace the gross growth dollars from that end? Can you give us some timeline? I'm guessing you're sold out on Maxim for the next few quarters, help us understand the timing of transition into commitment there. Thanks.
Phil Gallagher: Yes, sure, Nick. Thanks. Yes, on Maxim, we actually putting the script at roughly 3% of our total revenues we did a few weeks ago. Internally, just you know, we're not doing any re-budgeting, we don't see it anticipated affecting our earnings over the next few the balance of the fiscal year. And frankly, beyond, we have plans in place, we've got great supplier partners that have parts of that technology, and we're mapping it over. And that's going to be the goal for the team. So this one is again relatively small. We see it as an opportunity for us to go replace it, but it won't be not an issue. And Nick, we got a great line card. We got great technologies to fill the gaps.
Nick Todorov: Got it. Thanks. Good luck.
Phil Gallagher:.:Tom Liguori: Thanks, Nick.
Operator: Thank you. Our next question comes from Matt Sheerin with Stifel. Please proceed with your question.
Matt Sheerin: Yes, thanks. Good afternoon. Phil, I just wanted to ask about the supply environment, everyone has been talking about supply constraints, a lot of your big EMS customers are all missing guidance, because they can't get parts. They're talking about de-commits from semi-suppliers. Could you give us a color and what you're seeing and I noticed your inventory was up slightly, but I imagine you'd probably want to have more if you could get it. So are you having issues getting parts as well? Could you just give us color there?
Phil Gallagher: Yes, Matt. such a broad spectrum of commodities. As you particularly know, some parts are more readily available than others. As a standard, the lead times I'm looking at now across the commodities have not really expanded out a whole lot since the last quarter, but they're still pretty far out there. Pretty much across the board. We're expediting everyday different commodities. The $50 million roughly as you point out, or inventory being up is we're like really fine with that. And our days of inventories. We'd like to have more, right? No question about it. But we're - as we were last quarter, we were fine with the inventory going up. And of course, you saw that play out in ages numbers where they really blew out the number. So yes, it's a tough call Matt. It's customer-by-customer. But overall, we saw good growth, we're pleased with that, can always do more if we got more inventory for sure. Tough to say exactly how much, but there is still a lot of pain in the supply chain. There is no doubt about it.
Matt Sheerin: Okay, thank you. And on the gross margin, which was down sequentially. I imagine that was mostly on mix. But I also would think that you're benefiting in addition to premiere Farnell, but your core business a little bit on the pricing side in terms of a margin. So what should we expect for December, looks like backing into the number, it looks like that it should be up sequentially the gross margin?
Phil Gallagher: Yes, Matt. flattop and in the current quarter, the gross margin was makes right? This is - Europe is generally slower. But they did a great job this time. They were not slower. But Asia really - this is a big quarter for building electronic components. The good news is if you look at every one of our businesses year-over-year, their gross margin is up.
Matt Sheerin: Right. Okay. All right. Thanks very much.
Phil Gallagher: Thanks, Matt.
Operator: Thank you. Our next question is from Ruplu Bhattacharya with Bank of America. Please proceed with your question.
Ruplu Bhattacharya: Hi, thank you for taking my questions. Congrats on the quarter and on the strong guide. My first question has to do with Farnell margins. I think Tom, you said on the prepared remarks that of the 260 basis points sequential improvement, 200 of those basis points was from pricing. And I also see that you had a good ecommerce transaction quarter 69% of transactions were ecommerce. The question I have is - do you think this is sustainable given, it's a demand constrained environment, and so pricing is strong. Do you think there is room to increase further pricing on the Farnell side? And then just going forward I mean, when should we think about 15% as the next target? Is that something you can achieve in fiscal '22? But just puts and takes on this things that made it strong this quarter? And if that can sustain going forward?
Tom Liguori: Yes, Ruplu thank you for the question. So for now, they had a stellar growth, operating margin and gross margin quarter, and the 200 basis points is so in other words, if you take out pricing benefit that would have been 8.9%, which is still a strong quarter, and keep in mind, there was a pricing benefit, the quarter before and the quarter before that, right? So this isn't anything new. So to us, they're performing very well, we think without the pricing, they will they can get to 10% or higher. We're not going to give targets, their peers operate at much higher levels, but the puts and take are number one continue to invest in skews, that is bringing new people to the website, and you're seeing that in revenue in number two, continue with our investment in systems in ecommerce. And e-com, web order is cheaper to process, and is generally less price sensitive. So we're very happy on that. I did mention to I think it was with Nick, they have some headwinds with as every business does with fuel and freight costs. And we think over time those will subside, and it helps them even more. So just really good things happening with Farnell.
Ruplu Bhattacharya: Thanks for that, Tom, I appreciate the details. Then on - I wanted to ask you about OpEx. You've done a good job controlling expenses. Can you give us an update on your restructuring efforts? And is there any more opportunity to have more operational efficiencies, take more cost out? How should we think about SG&A going forward?
Tom Liguori: Yes, we've really focused on and we've got everybody in the company focused on really their operating expense as a percentage of gross profit dollars. And the reason for that in a growing market, we're going to need more cost for freight out for logistics, for sales commissions. So the good news is, that was one of the slides OpEx as a percent of gross profit dollars come down for five quarters in a row set the low 70s 72% I think it was - we like to get that into the high to mid-60s. We think that's very doable. Are there specific things that we can - we continue to work on to reduce costs? Yeah, there's certain things we're outsourcing. But those are view those more has reinvestments, dollars available for reinvestments in the business and to deal with an inflationary economy.
Phil Gallagher: Yes, Ruplu let me. This is Phil, just jumping out with Tom. There's the hard black and white cost energy efficiencies, right. And we talk a lot about the digital side of the equation. And even you just brought it up Farnell close to 70% of their transactions, over 50% of their dollars being generated online. Well, the same thing taken out to the core as well, right. So not just an e-commerce, but digital automation about customer self-serve, a technical support online to as an adjunct to our FAE community. So a lot of is, in those areas where we can get efficiency. So as we grow, we can automate a lot more of that.
Ruplu Bhattacharya: Okay, thanks for that. And if I can just please one more in for Phil. Can you just remind us of the TI revenue that you're trying to make up? Where does that stand? How much more do you need to make up based on your target? And then with the Maxim is there - I mean, do you have a similar target of how many - how long it can take for you to make up that revenue? Thanks.
Phil Gallagher: Yes, Ruplu. The TI are kind of - it's kind of in the rearview mirror at this point in time. I mean, most regions have recovered, most, if not all. Then we got to help with the market there for sure. But if you look at Asia for example, we had a record quarter in Asia without Texas. Parts of our divisions in Europe had record quarters, all-time record quarters without those guys. So we're kind of moving on and off of that. As far as Maxim, we don't. Again, we just said it's not going to have any effect. We don't believe in the next several quarters to our earnings. And as we plan for fiscal '23, it'll be just a net number that we planned for and baked into the budget. So we're - no re-budgeting on this end for Maxim.
Ruplu Bhattacharya: Okay. Thank you for all the details. Congrats again.
Phil Gallagher: You got it.
Tom Liguori: I should look.
Operator: . Our next question comes from Jim Suva with Citigroup. Please proceed with your question.
Jim Suva: Thank you very much. And I have two questions. You can ask any order you want. And then I'll be finished and get off the mic. But the question is, there's been over the past handful of years, fill a handful of share shifts of relationships. And with that, are there any more and works other than Maxim or do you think we're going to come to an end here? Or what the semiconductor is still doing more and more integration? Do you think that we could enter some more share shifts, because it seems like that's my one question? The second question is everybody asked, are you over earning on components given the shortages? And maybe if you can just answer that elephant in a room question and why or why not? Thank you.
Phil Gallagher: Yes, Jim, I'll take the first one. Supplier, you really talking about share - a subpar consolidation, right? And with subpar consolidation put right out there. Sometimes you win. Sometimes you lose. And sometimes they're neutral, right? But it's not new. I've been around for four decades. And when I started general electric in inner so and Fairchild and national were the top lines. Motorola, and they're all gone, right? They've been acquired and merged. And, this most recent one, okay, decision went the other way. But if you look at Cypress acquired by Infineon. We've got that Microchip acquired Microsemi, but that back Renesas acquired IDT and dialogue and that's in the Avnet house. So they kind of go back and forth our jobs to adjust to that. We can't predict, what we can do is go drive and execute to the value proposition we're bringing to the marketplace from design, okay, through supply chain being the center technology. So, again, tough to predict, frankly, we don't sit in the boardrooms. But we feel if we execute well, we'll be on the winning side, for as many as we possibly can. So again, don't know, Jim, it's got to continue. There's no question, there's going to be something else happening out there. And to be around 100 years, you just got to adapt and move on. And that's what we're doing with this one. It's, the mindset is on offense, no issue. On the earnings - the over earnings. I'm assuming you're talking about Tom can jump in. And I know he jumped off the mic. ASPs assumes what you're bringing up?
Tom Liguori: Yeah, exactly. Yes, the ASP exactly.
Phil Gallagher: Okay, good. You're still there? So hopefully, I answered your first question. We're looking at that, because some a poor some of the lift it's an ASP inflation, right? I mean, as we get cost increases from the suppliers, which then by the way over 50 plus suppliers. And there's been multiple iterations of price increases. So you can imagine the effort on the part of our teams, which we're really proud of. And we work to pass those on to the customers as quickly as we can. Every supplier handles it a little bit different. But you need to keep in mind, it's not on 100% of our portfolio, right? It's on a 30% or 40% or whatever that number might be exactly. Then the bounce of it is prices are flat, and others are still competitiveness in the marketplace. So 3% to 5% might be something in that range. And we're looking at that by SKU by the way, year-on-year, quarter-on-quarter trying to nail that down how much is inflationary ASPs versus not. But it's not as not as much as you would think. Tom go ahead, yes.
Tom Liguori: Jim, that's what we're saying 3% to 3.5% operating margins on a sustainable basis. As Phil said, in the core, there's a little benefit, but you're passing on not really, you're not profiting that much from the price increase. And Farnell we are, right. Again, as 200 basis points, but they do have headwinds with their freight out. But again, that's where we're just trying to be transparent, 3% to 3.5% on a sustainable basis, we realized that there are some benefits here to pricing. I was going to say near-term, but it's hard to say, right? Everybody's got different opinion on that, but that 3% to 3.5% sustainable basis. Okay Jim.
Jim Suva: Thank you so much for the details and clarification. That's greatly appreciated. Thank you.
Phil Gallagher: Thanks, Jim.
Tom Liguori: Thanks, Jim.
Operator: Thank you. Our next question is from Melissa Fairbanks with Raymond James. Please proceed with your question.
Melissa Fairbanks: Hi guys, thanks for taking my question. I just had a quick question on the capital allocation slide. A couple of things that we noticed, this is the first time in a while. It's been a while since you've done M&A. And now that's one of the things that you highlighted as one of your priorities for capital allocation slide. A couple of things that we noticed, this is the first time in a while. It's been a while since you've done M&A. And now that's one of the things that you highlighted as one of your priorities for capital allocation, what are potential targets that you're looking at? I know you mentioned benefiting Farnell and accretive to margins? Is this a shift in the strategy as related to, growing the business or is it just kind of business as usual? And then as a follow-up to that, with the sharing - excuse me share buyback reintroduced, do you have a target for optimal capital structure, like with the leverage, normalized capital returns, any kind of color that you can provide there? Thanks.
Phil Gallagher: Sure, thanks Melissa and welcome to Avnet. We're glad to have you on the call.
Melissa Fairbanks: Thanks very much.
Phil Gallagher: The M&A capital allocation, it's a slight refinement, maybe we've said smaller strategic refinement, more year to growing our higher value add businesses. So that's what we mentioned Farnell. That's why we mentioned IP&E which is passives interconnects, which is slightly higher margin. And we added, I don't think we've talked too much about embedded systems, but these are chips, board software, things that we do that we think that can benefit and is going to that to make Avnet a better company by bringing out a few. Yes, we have targets internally, we're not going to share them. But yes, we do. On the capital structure, we look at our leverage as more the mid-twos is desirable. Depending on where you're in the cycle, it could be three, it could be below two, but our target through the cycle is more mid two times gross leverage. And that's important because net leverage is less. That answer your question?
Melissa Fairbanks: It sure does. Thanks very much.
Phil Gallagher: Thanks, Melissa.
Operator: Thank you. Our next question is from Joe Quatrochi with Wells Fargo. Please proceed with your question.
Joseph Quatrochi: Yes, thanks for taking the question. Curious on the Farnell pricing benefit of the 200 basis points you talked about, what was that last quarter and then also, is there a goal in terms of just targeted e-commerce percentage sales for that business over time?
Phil Gallagher: I think last quarter, we said it was about 150 basis points. So this is not new, Joe. They recall it within that range. So continued benefit going into this quarter. We haven't publicized a goal for the web orders only to say that. Yes, they're more efficient to handle. They're typically better pricing. And then there's room for Farnell to grow.
Tom Liguori: Yes, Joe yes absolutely on e-commerce side, we're really pleased. We broke over to 50% in revenue and closer to get the 70% of the transaction that really lifts a load off the team. So an exact goal when published, but it's obviously to continue to increase that. And what's helping with that, obviously is our increased one, right? So we committed to put over 200 plus 1000 new skews in and the more we do that, that's going to drive the automation, if we will e-commerce, which we've got many initiatives behind the scenes to go with it, if you will with the low touch high service model, and then put some of that over to the core business as well, take the best of what Farnell does, we're not leveraging across the enterprise, which we're beginning to do as well.
Joseph Quatrochi: Thanks, that's helpful. And then just as a follow-up, I was wondering if you could maybe talk about the demand that you're seeing for your supply chain services given all the disruptions that we're seeing out there, I assume that's relatively sticky in higher margins?
Tom Liguori: Yes, I'll take down on supply chain services are certainly picking up as I like to say that people don't worry about supply chains until they can't get what they need. So we're getting calls from for many Tier-1s and many of our suppliers for assistance. And we're actually increasing our supply chain architects because they're near capacity, they velocity. So yes, they are more sticky for sure. We're seeing some unique opportunities as well which is exciting. The margin that a lot of those are, it depends on the margin Joe, we model those own returns, so they also have, they typically have a higher returns model. Margin might be a little bit different, but the returns are well above the corporate goal of net over 20%, 20%, 25%. So it's good business but to your point is very sticky. Typically the global okay, which is great. But we've had quite a few calls.
Joseph Quatrochi: Thank you.
Tom Liguori: Thanks, Joe.
Operator: Thank you. Our next question is from Nick Todorov with Longbow Research. Please proceed with your question.
Nick Todorov: Yes, just one follow-up but do you guys see a change in the volume or breadth of expedite requested by customers? There were some suppliers that talked about us, so and if you do, why do you think it is driving that?
Phil Gallagher: Nick, this is the same earnings call and you jump back in again. Yes, I would say this past quarter was as interesting as any as far as expedites go. So they're not declining by any stretch, I'm involved in quite a few myself. People have to talk to in many years, frankly, and a lot of Tier-1s calling us next. So I think it's just a sign back to Matt's question, what products are tighter than others and what's causing the issues and this time it's just so broad. Again, lot of products are fine and available, but certain in a controller space, certain analog, certain discreet, certain power, sensors are just really, really tight. So it's causing this some of disruption that was asked earlier in the call. But I think it's going to get a little tighter for here short-term.
Nick Todorov: Got it. And last question just on Asia, very strong performance in the quarter. What do you think in terms of order trends there? Some people are seeing a softening or moderation call it specifically coming out of China. What do you see, from your perspective in Asia, particularly in China and do you see any, you hear about any impact from the power shortages there too? Thanks.
Phil Gallagher: Yes, great question. Yes, we've had an amazing number of quarters in Asia-Pac. And it's really across the Asia. So it's not just China or Greater China, which is really, really good news, because it's more diversified, if you will from a revenue stream. I think moderation is probably the right word. I mean, yes, so the book-to-bill are still positive on pretty much record doubling numbers. So a moderation there's probably not actually a bad thing. Okay. So just starting to maybe normalizing and moderation is the right term. But again, we'll see how this quarter goes, then you get into next year, last year, Chinese New Year was effectively canceled, it won't be this year. So there's a lot more variables to map into over the next three, four or five months in Asia-Pac but still overall, pretty strong with our team there.
Nick Todorov: Got it, thanks.
Operator: Thank you. There are no further questions. At this time, I'd like to turn the call back over to Phil Gallagher for any closing comments.
Phil Gallagher: Great, thank you very much. I want to thank everybody for attending today's earnings call. Appreciate all the questions. It's pretty incredible that this year we'll be wrapping up our 100th year anniversary celebration, it's a century in businesses, pretty outstanding accomplishment that not many companies achieve. In my time here, I've certainly seen our company adapt, persevere and evolve, excited for what's to come in the future in the next 100 years. As we said as we look ahead to next quarter, we expect the current operating environment to persist. Our priority remains staying close to all our customers and supplier partners and continue to demonstrate that Avnet's role at the center of the global technology supply chain is more vital than ever. We've made significant durable changes over the past year that positions us to capture growth, continue to invest in our business and sustain at least a 3% to 3.5% operating margins for total Avnet in any type of market, internally driving our ability to deliver steadily increasing shareholder returns. We believe our results the past year reflect the impact of these changes, and we will continue to execute and capitalize on the current market to capture additional upside opportunities. With that, I hope everyone stays healthy and safe. I look forward to speaking to you again in January for our fiscal year 2022 second quarter earnings results. Have a great day. Thanks.
Operator: Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time and thank you for your participation. Have a wonderful evening.
