Avnet, Inc. (NASDAQ:AVT) Q2 2022 Earnings Conference Call January 26, 2022 4:30 PM ET Company Participants Joe Burke - Investor Relations Phil Gallagher - Chief Executive Officer Tim Liguori - Chief Financial Officer Conference Call Participants Nik Todorov - Longbow Research Melissa Fairbanks - Raymond James Matt Sheerin - Stifel Ruplu Bhattacharya - Bank of America Jim Suva - Citigroup Operator Please standby. Our presentation will now begin. Welcome to the Avnet Second Quarter Fiscal Year 2022 Earnings C ...

Financial Data and Key Metrics Changes - The company achieved sales of $5.6 billion, up 7.6% sequentially and 17.5% year-over-year in constant currency, with a 32.9% year-over-year growth when excluding TI sales and the extra week in the prior year [10] - Adjusted EPS was $1.22, exceeding guidance, with a gross margin of 11.8%, slightly down from 12.3% last quarter but improved by 88 basis points year-over-year [16][18] - Operating margins reached 3.2% for electronic components and 10.9% for Farnell, with a goal of sustainable operating margins of at least 3% to 3.5% for total Avnet [17][23] Business Line Data and Key Metrics Changes - Electronic Components segment revenues were $5.1 billion, with sequential growth across all geographic regions, particularly strong in Asia [11][19] - Farnell achieved record revenues of $455 million, with 53% of revenues and 69% of total transactions attributed to e-commerce sales [13][19] - The company added 18,800 SKUs in Farnell, reflecting continued progress on a plan to add an additional 250,000 SKUs through fiscal year 2022 [15] Market Data and Key Metrics Changes - Demand was robust across vertical segments, with industrial, automotive, and communication segments serving as significant drivers [10] - The company reported a positive book-to-bill ratio in all regions, well above parity [12] - Inventory levels remained relatively flat, with net working capital days decreasing to 69 days compared to 79 days a year ago [21] Company Strategy and Development Direction - The company is focused on margin expansion by accelerating the growth of high-margin businesses while improving efficiencies in core distribution [8] - Strategic investments in digital capabilities and e-commerce are expected to continue benefiting performance, particularly in Farnell [13][19] - The company plans to maintain a balanced approach to capital allocation, with approximately half dedicated to reinvestment and half to shareholder returns [22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in sustaining current margins despite ongoing supply chain challenges and inflationary pressures [10][23] - The company anticipates continued strong demand and supply constraints in the second quarter, guiding revenue in the range of $5.3 billion to $5.7 billion [22] - Management emphasized the importance of maintaining strong relationships with customers and suppliers to navigate the complex operating environment [75] Other Important Information - The company reinitiated its share repurchase program and increased its dividend by 9.1% in the quarter [22] - The impact of the Analog Devices decision to discontinue its distribution relationship is expected to be minimal, as it accounted for only about 3% of total sales [12] Q&A Session Summary Question: What are the near-term goals for margins? - Management expects to sustain current margins and highlighted levers such as investments in Farnell and e-commerce capabilities to drive further improvements [25][26] Question: How to balance increasing dividends and share buybacks? - Management indicated a commitment to increasing dividends annually while also being opportunistic with share buybacks based on market conditions [28][30] Question: What is the strategy to replace revenue lost from Maxim? - Management noted that Maxim accounted for a small percentage of total revenues and expressed confidence in replacing those dollars through existing supplier partnerships [31][32] Question: What is the current supply environment? - Management acknowledged ongoing supply constraints but indicated that lead times have not significantly expanded, and they are managing inventory effectively [34][36] Question: Are there any more share shifts expected in the semiconductor industry? - Management noted that industry consolidation is ongoing, and while they cannot predict specific outcomes, they are focused on executing their value proposition [50][51] Question: Is the company over-earning on components due to shortages? - Management clarified that while there are some benefits from pricing increases, they aim for sustainable operating margins of 3% to 3.5% [52][54] Question: What are the targets for e-commerce sales in Farnell? - Management did not specify exact targets but emphasized the importance of increasing e-commerce sales as a percentage of total transactions [62][64] Question: What is the demand for supply chain services? - Management reported increased demand for supply chain services, indicating that these services are sticky and typically yield higher margins [66]

Part I [Business](index=3&type=section&id=Item%201.%20Business) Avnet is a global technology distributor with two segments, Electronic Components and Farnell, serving 2.1 million customers across 140 countries with design to production support - Avnet operates through **Electronic Components (EC)** for high-volume and **Farnell** for lower-volume, e-commerce customers[16](index=16&type=chunk)[18](index=18&type=chunk)[22](index=22&type=chunk) Sales by Major Product Category (Fiscal Years 2019-2021) | Product Category | FY 2021 Sales (Millions) | FY 2020 Sales (Millions) | FY 2019 Sales (Millions) | | :--- | :--- | :--- | :--- | | Semiconductors | $14,722.8 | $13,440.3 | $14,973.3 | | Interconnect, passive & electromechanical (IP&E) | $3,649.0 | $3,146.0 | $3,516.0 | | Computers | $640.6 | $572.0 | $533.1 | | Other | $522.3 | $476.0 | $496.2 | | **Total Sales** | **$19,534.7** | **$17,634.3** | **$19,518.6** | - Main competitors include **Arrow Electronics**, **Future Electronics**, **World Peace Group**, **Mouser Electronics**, and **Digi-Key Electronics**[26](index=26&type=chunk) - As of July 3, 2021, Avnet employed approximately **14,500 people**, a slight decrease from the prior year[30](index=30&type=chunk) - The Board of Directors is **36% diverse**, and the total workforce is **45% female**, reflecting an emphasis on human capital[33](index=33&type=chunk) [Risk Factors](index=9&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including customer demand shifts, supplier disruptions like the TI contract termination, international operational complexities, financial liquidity, and IT security threats - Sales of semiconductors represented approximately **75%** of consolidated sales in fiscal 2021, tying performance closely to the semiconductor industry's fluctuations[42](index=42&type=chunk) - The distribution contract with Texas Instruments (TI), accounting for **9%** of total sales in fiscal 2020, was terminated in December 2020, potentially leading to lower sales and gross profits[46](index=46&type=chunk) - International operations, comprising approximately **78%** of sales in fiscal 2021, expose the company to risks like currency fluctuations, trade restrictions, and complex tax laws[48](index=48&type=chunk) - The COVID-19 pandemic has negatively impacted the global economy and Avnet's operations, increasing logistics costs, fluctuating demand, and extending lead times[80](index=80&type=chunk) - The company faces liquidity and capital resource constraints, with cash needs dependent on operations and financial markets, and the LIBOR phase-out potentially increasing financing costs[64](index=64&type=chunk)[65](index=65&type=chunk) [Unresolved Staff Comments](index=17&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) This item is not applicable as the company has no unresolved staff comments - Not applicable[90](index=90&type=chunk) [Properties](index=17&type=section&id=Item%202.%20Properties) Avnet owns 2.1 million and leases 4.4 million square feet globally for operations, with key facilities in Arizona, Belgium, Germany, and the UK Summary of Key Facilities | Location | Footage (sq. ft.) | Owned/Leased | Primary Use | | :--- | :--- | :--- | :--- | | Chandler, Arizona | 400,000 | Owned | EC warehousing and value-added operations | | Tongeren, Belgium | 390,000 | Owned | EC warehousing and value-added operations | | Leeds, United Kingdom | 360,000 | Leased | Farnell warehousing and value-added operations | | Poing, Germany | 300,000 | Owned | EC warehousing and value-added operations | | Phoenix, Arizona | 180,000 | Leased | Corporate and EC Americas headquarters | [Legal Proceedings](index=17&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal matters, but management believes no specific disclosure is required and expects no material adverse effect on financial position or liquidity - The company has concluded that no particular pending legal proceeding requires specific public disclosure under SEC regulations[93](index=93&type=chunk) - Management believes the resolution of current legal matters will not have a material adverse effect on the company's financial position or liquidity[94](index=94&type=chunk) [Mine Safety Disclosures](index=17&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[95](index=95&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Avnet's common stock trades on Nasdaq (AVT), with **$469.0 million** remaining for share repurchases, and its 5-year return underperformed the Nasdaq Composite - The Company's common stock is listed on the **Nasdaq Global Select Market** under the symbol AVT[97](index=97&type=chunk) - As of July 3, 2021, the Company had **$469.0 million** remaining under its share repurchase authorization, with no shares repurchased in the fourth quarter of fiscal 2021[105](index=105&type=chunk) 5-Year Cumulative Total Return Comparison | | 7/2/2016 | 7/1/2017 | 6/30/2018 | 6/29/2019 | 6/27/2020 | 7/3/2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Avnet, Inc. | $100.00 | $98.17 | $110.29 | $118.55 | $69.87 | $110.11 | | Nasdaq Composite | $100.00 | $128.30 | $158.57 | $170.91 | $216.96 | $315.10 | | Peer Group | $100.00 | $127.74 | $121.27 | $121.78 | $119.17 | $259.50 | [Reserved](index=26&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information - Item 6 is noted as [Reserved][106](index=106&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Fiscal 2021 sales grew **10.8% to $19.53 billion**, with operating income at **$281.4 million** (up from a loss), though operating cash flow decreased to **$90.9 million** due to working capital needs Fiscal 2021 vs. Fiscal 2020 Key Metrics | Metric | Fiscal 2021 | Fiscal 2020 | Change | | :--- | :--- | :--- | :--- | | Sales | $19.53B | $17.63B | +10.8% | | Gross Profit Margin | 11.5% | 11.7% | -23 bps | | Operating Income (Loss) | $281.4M | ($4.6M) | +$286.0M | | Adjusted Operating Income | $407.0M | $302.9M | +34.4% | - Organic sales in constant currency, excluding the impact of the terminated TI distribution contract, increased **14.8%** year-over-year in fiscal 2021[121](index=121&type=chunk) - Cash flow from operating activities was **$90.9 million** in fiscal 2021, a decrease from **$730.2 million** in fiscal 2020, primarily due to cash used for working capital to support sales growth[135](index=135&type=chunk) - As of July 3, 2021, the company had combined availability of **$1.64 billion** under its Credit Facility and Securitization Program[145](index=145&type=chunk) - The company has suspended share repurchases due to the impacts of the COVID-19 pandemic and the need to manage liquidity and leverage[150](index=150&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=41&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Avnet faces market risks from interest rates and foreign currency, mitigating currency risk with hedges; a 10% currency change could impact contracts by **$170.0 million** Debt Profile as of July 3, 2021 (in millions) | Debt Type | Carrying Value | Fair Value | Average Interest Rate | | :--- | :--- | :--- | :--- | | Fixed rate debt | $1,201.2 | $1,291.4 | 4.3% | | Floating rate debt | $23.1 | $23.1 | 1.2% | - The company uses derivative financial instruments, primarily forward foreign currency exchange contracts, to reduce risk from transactions in non-functional currencies, serving as economic hedges, not for speculation[171](index=171&type=chunk) - A hypothetical **10%** change in foreign currency exchange rates on contracts outstanding at July 3, 2021, would result in an approximate **$170.0 million** impact to the fair value of the contracts, generally offset by the underlying exposure[171](index=171&type=chunk) [Financial Statements and Supplementary Data](index=43&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Avnet's audited consolidated financial statements for the three fiscal years ended July 3, 2021, with an unqualified opinion from KPMG LLP on both financials and internal controls Consolidated Statements of Operations Highlights (in thousands, except per share data) | | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Sales | $19,534,679 | $17,634,333 | $19,518,592 | | Gross Profit | $2,240,630 | $2,063,456 | $2,486,102 | | Operating Income (Loss) | $281,408 | $(4,628) | $365,911 | | Net Income (Loss) | $193,114 | $(31,081) | $176,337 | | Diluted EPS (Loss) | $1.93 | $(0.31) | $1.59 | Consolidated Balance Sheets Highlights (in thousands) | | July 3, 2021 | June 27, 2020 | | :--- | :--- | :--- | | Total Current Assets | $7,163,421 | $6,328,806 | | Total Assets | $8,925,422 | $8,105,197 | | Total Current Liabilities | $3,055,238 | $2,280,366 | | Total Liabilities | $4,841,238 | $4,378,799 | | Total Shareholders' Equity | $4,084,184 | $3,726,398 | Consolidated Statements of Cash Flows Highlights (in thousands) | | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $90,949 | $730,182 | $534,770 | | Net cash used for investing activities | $(61,196) | $(135,017) | $(25,212) | | Net cash used for financing activities | $(314,013) | $(644,550) | $(582,676) | Segment Sales and Operating Income (in millions) | Segment | FY 2021 Sales | FY 2021 Operating Income | | :--- | :--- | :--- | | Electronic Components | $18,030.5 | $454.8 | | Farnell | $1,504.2 | $86.9 | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=92&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There were no changes in or disagreements with accountants on accounting and financial disclosure during the period - None[358](index=358&type=chunk) [Controls and Procedures](index=92&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including CEO and CFO, concluded disclosure controls and internal control over financial reporting were effective as of July 3, 2021, with no material changes reported - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the reporting period[358](index=358&type=chunk) - Management concluded that the Company maintained effective internal control over financial reporting as of July 3, 2021, based on the 2013 COSO framework[359](index=359&type=chunk) - There were no changes to the Company's internal control over financial reporting during the fourth quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, the controls[361](index=361&type=chunk) [Other Information](index=92&type=section&id=Item%209B.%20Other%20Information) This item is not applicable - Not applicable[361](index=361&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=92&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The information required for this item is incorporated by reference from the company's definitive proxy statement for the Annual Meeting of Stockholders scheduled for November 18, 2021 - Information is incorporated by reference to the Company's definitive proxy statement[362](index=362&type=chunk) [Executive Compensation](index=94&type=section&id=Item%2011.%20Executive%20Compensation) The information required for this item is incorporated by reference from the company's definitive proxy statement for the Annual Meeting of Stockholders scheduled for November 18, 2021 - Information is incorporated by reference to the Company's definitive proxy statement[364](index=364&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=94&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) The information required for this item is incorporated by reference from the company's definitive proxy statement for the Annual Meeting of Stockholders scheduled for November 18, 2021 - Information is incorporated by reference to the Company's definitive proxy statement[366](index=366&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=94&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The information required for this item is incorporated by reference from the company's definitive proxy statement for the Annual Meeting of Stockholders scheduled for November 18, 2021 - Information is incorporated by reference to the Company's definitive proxy statement[367](index=367&type=chunk) [Principal Accounting Fees and Services](index=94&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) The information required for this item is incorporated by reference from the company's definitive proxy statement for the Annual Meeting of Stockholders scheduled for November 18, 2021 - Information is incorporated by reference to the Company's definitive proxy statement[368](index=368&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=95&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements from Item 8 and provides an index of exhibits, including governance documents, debt agreements, and SOX certifications by CEO and CFO - The financial statements and supplementary data are listed in the index under Item 8[379](index=379&type=chunk) - An index of exhibits is provided, including governance documents, debt agreements (such as the Securitization Program and Credit Agreement), and executive compensation plans[380](index=380&type=chunk)[382](index=382&type=chunk)[385](index=385&type=chunk) - Includes Schedule II - Valuation and Qualifying Accounts, which details changes in the allowance for credit losses and valuation allowances on tax loss carry-forwards[392](index=392&type=chunk)[393](index=393&type=chunk) - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits[388](index=388&type=chunk)

Financial Data and Key Metrics Changes - In Q4 2021, the company achieved sales of $5.2 billion, representing a 25.7% year-over-year increase and exceeding prior guidance [12][16][17] - Adjusted EPS for the fourth quarter was $1.12, up from $0.64 in the prior year's quarter [16][17] - For the fiscal year, total sales reached $19.5 billion, a 10.8% increase from the previous year [17] Business Line Data and Key Metrics Changes - The Electronic Components segment generated revenues of $4.8 billion, a 23.7% increase year-over-year [19] - Farnell achieved record sales of $441 million, with an operating margin of 8.3%, progressing towards a target of 10% [14][21] Market Data and Key Metrics Changes - Strong performance was noted in EMEA and Asia, with continued improvements in the Americas [13][19] - Demand Creation accounted for approximately 30% of Electronic Components revenue, highlighting its importance for long-term growth [13] Company Strategy and Development Direction - The company is focused on enhancing its digital capabilities and expanding its product offerings, including IoT solutions [14][24] - There is an emphasis on managing supply chain risks and improving customer relationships to navigate the current market dynamics [11][24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing strong demand and the ability to manage supply constraints effectively [22][24] - The company anticipates sustainable operating margins in the range of 3% to 3.5% by the latter half of fiscal year 2022 [22][23] Other Important Information - The company increased its dividend by 4.8% in the quarter, returning $22 million to shareholders [22] - Inventory increased by $475 million to meet customer demand, with working capital days improved to 70 [21][22] Q&A Session Summary Question: Inventory build and its implications - Management is comfortable with the inventory build, noting that it was strategically planned and is of good quality [28][50] Question: Sustainability of order growth - Order growth is expected to be sustainable, driven by both pricing increases and a favorable mix of products [29][30] Question: Plans for SKU expansion in Farnell - The company plans to add approximately 160,000 SKUs in Farnell by leveraging existing supplier relationships and expanding current lines [34][36] Question: Fiscal 2022 outlook - Management is optimistic about fiscal 2022, expecting to outperform consensus estimates due to strong demand and improved operational efficiencies [42][44] Question: Balance between supply and demand - The book-to-bill ratio remains strong, indicating healthy demand, while lead times are still extended but showing signs of modest improvement [58][59]