Avnet, Inc. (AVT) Earnings Call Transcript & Summary

Okay. Thanks, everybody, for joining here today. My name is Adam Tindle. I cover the IT supply chain here for Raymond James. And very happy to have the team from Avnet here with us today. We're going to have CEO, Phil Gallagher, newly minted CEO, Phil Gallagher, and Ken Jacobson is going to pinch it as a corporate controller for some of the finance questions. [Operator Instructions] We will go through just a couple of high-level slides, 5 minutes or so at the beginning, to give you a feel, Phil will take you through. And then the vast majority of the remaining 35 minutes or so will be a fireside chat. So with that, I'll turn it over to Phil and Joe.

Okay. Hi, everyone, this is Joe Burke. Today's discussion may include some forward-looking statements involving risks, uncertainties and assumptions that are difficult to predict, and actual results could differ materially. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent filings with the SEC and include the scope and duration of the COVID-19 outbreak and its impact on our global economic systems and the company's operations, employees, customers and supply chain. Any forward-looking statements are only as of the date of this investor call, and Avnet undertakes no obligations to update or supply new information after this call. So I'm pleased to turn the presentation over to Avnet's CEO, Phil Gallagher. Phil?

Thanks, Joe Burke. Appreciate that. Adam, thank you as well. Very much appreciate the introduction and the opportunity here today to speak to all of you. And I hope everyone is doing well, staying safe and healthy in this crazy 2020 year that we're all enduring and experiencing, more than likely most of us looking forward to 2021. I just thought I'd take a few minutes, Adam, if I could, before beginning Q&A and provide a few quick comments about the path ahead for Avnet and the opportunities I'm most excited about as we move forward in my tenure as CEO, which I'm honored and humbled and thankful for the opportunity to lead Avnet. And it's a special year too as we go into 2021, we're going to be celebrating our centennial. So it will be 100-year anniversary, and I'll be part of the leadership team that takes us in to that next journey. I've been here for 37, 38 years, minus a year or so for some sabbatical, I guess, I'll call it. And it's really exciting. Hard to believe I've been here for about 40% of the company's history or existence, I should say, which is really neat. Well, I'm really looking forward, and again, I'm not going to read through all the slides, and building on the progress in the last several months as I went from interim to permanent CEO. We worked a lot on our strategy and structure. I just believe structure follows strategy, and we've made many, many moves already to help flatten and streamline the organization. I'm sure we'll get into more details of that as we go through what's on your mind, which is most critical today in the Q&A -- through the Q&A session. We sit in the middle of the supply chain, technology supply chain. And we're proud of that. We believe we're at vital link, even became more vital, frankly, and there is a silver lining with this terrible virus and COVID situation we've all been dealing with as people rely even more on distribution in the supply chains to be secured. And we certainly have proven that, not shutting down 1 day through the whole COVID. But in that, we take in thousands of MRPs forecast from both our customers and our suppliers and feed them, I call it, upstream and downstream. So we got tremendous amount of data and information. We're continuing to build. It's only going to allow us to further leverage the value and unlock the value that we can bring to the market. And of course, all of our stakeholders, including those on the line here today. Particularly proud of last 8 quarters, the company has generated positive cash flow. We segue into a COVID, we wanted -- we always want to protect our balance sheet, so we have absolutely done that. So as uncertainty remains, whether it's upside or not, okay, Avnet is well positioned from a balance sheet standpoint and the cash and liquidity standpoint to maximize on that growth. Joe, next slide. So as we begin the next chapter for Avnet, real time, we're just finishing up, well, finished up our first quarter halfway through, if you will, our second quarter. Just thought to take a few items and share them with you. On the top left is increased design activity. We talked a lot about demand creation. What does demand creation mean? Why is that so critical for us? Well, it's effective where our technical teams align with our suppliers' technical teams and go in to customers and impact design. And we get registrations that then become design wins and then protects our revenue no matter where it goes in the world at a higher margin. We -- it's ironic, this past quarter, September quarter, we actually had a record number of design registrations, almost kind of an oxymoron how that can happen, when we have effected of this lockdown and you can't visit face-to-face the customers as much as you certainly could in the past or at all. But through technology like we're using today, the other side of the coin is it's a lot more of the technical communities inside our customers get that much more readily available. So actually, the registrations are going up. And today, roughly 30%, 35% of our business is demand creation revenue. So it's revenue or we have a registration and design that turns to revenues. On the right-hand side, you can see we had a really good quarter. In the September quarter, the numbers speak for themselves. So we're really pleased that we hit guidance and looking forward to hoping that continues in the future. And then you can see improvements into working capital. So we've got less than 80 days working capital days. It's the lowest since 2016. Our longer-range target is more in the mid-70 day, but we're extremely proud of getting less than 80 days in working capital, which then leads to the bottom right with a strong cash position, as I just talked about, with the lowest level of debt since 2010 and cash and cash equivalents with $1.5 billion lines of credit. So again, well positioned from a balance sheet, well positioned for growth. Go ahead, Joe. And then, really, the last slide is just our road map. It's about performance. It's about growth. It's about execution. At the end of the day, it's about our people. And we'll continue to build on the core distribution business. What does that mean? That's our core distribution business plus Farnell. We're just dialing down some things, while dialing up others. And we've got to have a solid foundation, and we'll continue to invest on top of that with IoT, Avnet-embedded and other such things around digital and e-commerce and whatnot. I already talked about the structure line into the strategy. Growth is going to be a huge focus for us this year. We've got to drive growth, okay? And in distribution, scale does matter and growth matters. And then, of course, leverage our strong team. We've got an amazing team of leaders in place that have great experience and tenure in distribution, and that matters. Like somebody told me a long time ago, distribution is simple, but it's really, really hard because there's a lot of moving pieces, and you need to understand the business. And this team, we've put together and aligned, understand the business. So I want to just tee it up with that, Adam, if that's okay. I want to thank you again for being here today. And hopefully, we get all your questions answered satisfactorily.

Perfect. No, that was a great overview, Phil. [Operator Instructions] But I figured for the purposes of our audience, maybe we'll start at a high level and then drill down to some Avnet specifics, but at a high level, we're at a tech conference, and I'd be remiss. I know a lot of people care about semi-cycles, where we are. You're nearly $20 billion in revenue across the business with exposure to many major regions. So maybe just to start, if you could update us on the pace of business as we sit here approaching mid-December with some color by region? And if you want to support that with any leading indicator trends like book-to-bill, cancellation rates, et cetera?

Sure. Let me jump in on that, Adam. And then Joe and Ken can chime in. As we discussed in the earnings call back in October, we saw positive book-to-bill trends. And I'll give it to you by region, what we saw then, okay, and what we're looking to commit to per our guidance on that call back in October. So of course, history, right, Asia went into the COVID first, followed by Europe and then the Americas. While Asia has bounced back, as I talked about, really nicely. And it's China, it's Greater China. But it's really across Southeast Asia. Japan has shown some good signs right now as well. And we got above book-to-bill in Asia Pacific and still looking good as we sit here today, okay? So that's positive news. Driven mostly, but not all, mostly by automotive and the industrial segment across Asia. But again, pretty diverse view at this point in time. Then we talk about Europe. In Europe in July, August, September, right? So they still took -- there might be some Europeans on the line here. They still took the summer holiday a bit even though coming out of the virus, of course, now it's all ticking back up again, which I'm sure we'll talk about. But coming out of September, we actually saw some really positive signs in Europe, which is really, really good news. So coming out of the quarter, the book-to-bill started to turn, Central started to get stronger. You have Germany effectively, again, driven mostly by automotive and industrial. And that seems to be continuing as we speak right now. Of course, to Joe's point, that it's -- there's so much uncertainty right now. But right now, feel pretty good about Europe. And the Americas, for us, has kind of been steady as she goes. I mean, we all know what we're going through with the shutdowns and whatnot with the virus, but the book-to-bills were positive September quarter and continue as we sit here today. So overall, it's kind of ironic with what's going on in the markets and shutdowns and whatnot, but pretty positive. But -- and you talk about seasonality, Adam. I mean, what is normal seasonality? So it's really a tough call because you're trying to figure out the real demands out there. Is it replenish inventories, new demand? We're watching all that, as I said in the introduction. We're taking in all these forecasts. We bounce them against our typical cancellation rates on a daily basis, what should they look like, cancellations, reschedules. And right now, the booking activity looks pretty solid, okay, as we sit here today. Joe, anything you want to add it or to Ken? Good? Or you, Joe? Okay.

Yes. So that's -- it's a good point because on seasonality, it's a tough one because you've got extra weeks to account for. You've got a supplier headwind, right? But when you back all those things out, I think you kind of initially guided for flat sequentially, ex all that sort of stuff in a December quarter, which is actually somewhat normal, if not a little slightly stronger than that. So maybe just the process going into guidance and how you feel sitting here in mid-December.

Yes. So yes, and that is a close typical guide, Adam, even with the puts and the takes because Asia Pac will come down a little bit. Then the West will -- well, Europe will be okay, and the Americas will pick up a little bit. So it kind of washes it out. And right now, as far as an update on that, Joe, you can help me out here, but we're just committed to the guidance we gave back in October coming out of the September quarter. So we feel positive about that.

Yes. The guidance is $4.2 billion at the midpoint.

Yes. Thanks, Joe.

And we think if you take out the extra week from Q1 and some of the TI business comes basically flattish, maybe a little bit up to where we would have been organically at the end of Q1.

Got it. That's helpful. And then as we think on a go-forward basis, there's kind of 2 components that investors will think about for semiconductors broadly. Both related to inventory levels, Phil. And I'd be curious if you could maybe touch on this restocking trend that you've seen at the customer level, how long we should expect to see tight supply conditions? And then for the distributor inventory, your own inventory levels, and maybe that's something that Ken would want to touch on. But what do they look like now? And when does it -- when do you attenuate those? So customer inventory and then distributor Avnet's inventory.

Yes. So one really feeds the other. I mean, we get our -- we don't have all the end customer or our customers' inventory levels by any stretch of your imagination, but we do get their feeds. So obviously, on their forecast and what they're looking for. And right now, as I kind of alluded to earlier, when we take those forecasts in, we look -- we got a ton of analytics around. We look for any things that are kind of out of whack, if you will. If all of a sudden someone's ordered 100 [ months ], they don't want 1,000. We stopped that or we go -- we catch that and then go back to the customers to verify, do you really need that? Or are you concerned about lead times going out, you want to make sure you got the inventory. So we're not seeing a lot of that. So the feeds that are coming in and we look at the bookings in the pipeline, it's pretty consistent and we think very accurate right now. So I think the inventory levels are in pretty good shape now. Some of the automotive and all they are looking for an Ford F-150, I understand, they are tough to find, things along those lines. So there's definitely some replenishment going on in some of the spaces. But I think the inventory level is actually in pretty good shape. Our inventory levels, we're confident and comfortable with our inventory right now. We'll work with -- again, so as we get these feeds in, we're doing the same thing into our suppliers. And right now, I'm very -- you never get comfortable. We're certainly confident that we have the right inventory levels in the right pipelines out through 2021 to cover the customers' needs. As far as lead times go, we mentioned in the last call, for short or some lead times that's on the higher end, 32-bit stuff, if you will, and then some power and some discretes in certain areas, but it's not like it's all -- the lead times have all gone totally out that much. Now it can change quickly, but -- and we watch that pretty much daily as well. Right now, they're overall not too excessive other than the, as we said, some of the high-end 32-bit controller.

Got it. I would just add, Phil, sorry, Adam, we feel pretty good about the inventory levels. But as we get poised for growth, right, we may need to invest in inventory, but at the same time, we're focused on execution, and there's things we can do better in the inventory space in terms of efficiency and effectiveness to help kind of offset some of that growth in inventory, right, and make sure we have the right kind of inventory when we need it.

Yes. And certainly, we have a really strong operational focus. As you might suspect and expect, we have a weekly operations call, a weekly materials management, asset management call with all of our leaders around the world, being sure we're not only looking at the data. Because you can -- you get the black and white of the data. But then, okay, what's the data? What's it telling you? And what's really happening out there? So we've -- we think we've got a good handle on it.

And one of the other near-term dynamics that investors have focused on that has become maybe more top of mind last week was the idea of potential inflation or raising of prices from the supplier standpoint, which would make sense, if demand is tighter. Maybe, Phil, you've been through a number of these cycles. You've seen this play out before. How does this typically work? How much price inflation can the market bear? What ultimately happens? What are your observations this time around?

Yes, yes. We're certainly here into some of that right now. Not a lot of it's being acted on, but it's certainly being talked about. And it's a classic when you have a lot of financial folks on the Zoom today, but you got the -- it's supply and demand. So as supply does get enough and demand increases, if lead times go out, yes, we'll tend to see a pricing inflation as we saw in the last go round around MLCCs. As an example, that was a public-wide commodity that was a shortage, okay? And we're not seeing that today, yet, that can change. So it's just a really classic supply/demand curve. And the challenge there, we sometimes have -- we will obviously try to pass that on, depends how extreme it gets, depending on the contract engagement we have with our customers, how much can we pass on? At what time can we pass it on? And most of the suppliers, we don't mention them by name, they work with us on that as well to make sure that we're not -- they don't typically cancel your existing costs and raise it, but it's kind of -- there's kind of a move forward on new orders coming in. Here's what going to happen to the ASP or the average selling price. So I don't see anything atypical at this point. If things get really tight, sure, that's going to happen. And then we need to pass it on as best we possibly can.

Okay. And the other dynamic is some talk or noise around suppliers, hoping that distributors could shift some demand from Q4 into Q1 because there's no allocation in Q4. I guess, to what extent can you do something like that? Is that occurring? Or is that just a little bit far fetched?

Yes, I'm not -- no, I'm not as up to speed in that. I would assume that'd be a supplier that's, I guess, you're assuming they're sold out for the quarter. Is that what they're saying basically? They got to move the demand out to the March quarter. That's interesting. Well, we've got, as I said, some areas in the 32 bit. We're expediting like crazy, but we haven't had that phenomenon at least with any supplier that I'm personally aware of. I mean, the asset teams are, but that I'm personally aware of. It sounds like whoever that supplier is sounds like that they might have some constraint issues. But I'm not -- again, I'm not aware of it. If it was an Avnet customer, trust me that needed parts and have lined down and we're moving out to margin. I'm sure my phone will be ringing by now. So -- and the CEO in tough times becomes Chief Expedite Officer as well, right, as the old saying goes. But right now, I haven't seen that, Adam.

Yes, that makes sense. I think it's a supplier that's mattering less to Avnet as the quarters go on. So I want to go into some of the opportunities that are more Avnet specific and bucket them in 2 separate ways. It's kind of the core Avnet business and then Farnell business to separate. Maybe we'll start on core Avnet. I don't know if I told you, congrats on being named permanent CEO. But if not, certainly, formal congrats. I think the investor base was very excited. I know the employee base is very excited from what we're hearing.

Thank you.

So -- but as you and the Board have looked at the business, maybe just talk about major assessments of strategic options. And I mentioned that because in prior times at Avnet when we had CEO change, it's selling TS and buying Farnell, major changes that have occurred. Are there any options like that, that might make sense at this point?

Right now, again, I know what you're referring to, obviously. I want to say this. Right now, I would just say we are, as I put in percentage on it, Adam, we are 80%, 85% focused on execution, okay? Anytime you're acquiring big things or divesting of things, no matter what, it becomes a potential distraction to the core business. In this case, our core business. So right now, we're 80%, 85% on percentage on driving operational focus, driving the supplier relationships, driving the customer relationships and on execution. I mean, that's it. Now we're going to continue to look at M&A at the right time? Yes. Does acquisitions happen overnight? No. So is there a list that we've gotten around certain technologies that we think are really important? Yes, for sure, okay. So we'll -- I have to say, we'll start -- of course, we're always dating, okay? But right now, the message to our organization and just by some of the moves that we've made, and we flattened the organization out, haven't been replaced myself, by the way. The regional presidents in all the regions around the world are reporting directly to me, maybe just took a layer out. We've reduced corporate, frankly, we're moving the resources back into the field, closer to the customer, closer to the supplier where the decisions are made. And there are a couple of big first steps we did. We're still doubling down on Farnell. I'm sure there'll be some questions on Farnell. We like what we've gotten for now. We think that's a differentiator in and of itself. No, we're not pleased where we are with Farnell. They know that. We know that. But we also know what we need to do to go get it right, okay, from an operating margin standpoint. So really getting those 2, the core. Okay, in the Americas within the core due to the issue from several years ago, and Farnell, they are the 2 big needle movers, I'd like to say, to drive our OI and our earnings per share and shareholder value. In addition to that, we've got the digital, we've got e-commerce, we've got IoT. That's one that I'm dialing down. I think IoT is fantastic. It's a great opportunity for us. We still have it. We just took some structure out of it, took some costs out of it and moved it closer to the business, okay? So now the IoT business is working directly for one of our regional presidents because we wanted to get it closer to the core. A lot of the opportunities are inside the core, having a separate structure. In my opinion, it didn't make sense. It made the selling motion more clumsy. Now this smooths out the selling motion as part of the toolkit, if you will, that the sales team has in their bag. And then the other one is Avnet Embedded. We talked a lot about Avnet Embedded -- Avnet Integrated. We're very excited about that as well. Same thing that will move it closer to the core because you have a lot of customers that are buying chips, connectors, capacitors, stuffing boards, they buy boards, they might buy displays, they buy some software. So how do we just -- again, through the selling motion in our core account base, how can we sell more, okay? So really, it's fundamentals. It's execution, flattening the organization, streamlining the organization. And yes, of course, we'll look at opportunities as they show themselves. But right now, the team knows we need to focus on execution.

Yes, makes sense. And you bring a long history of relationships in the core industry. There's a number of potential major jump balls at important suppliers right now. Historically, if we think back, ADI and Linear went exclusive with a competitor. TI went exclusive with a competitor. That competitor has outperformed Avnet's stock by 40% over the past 12 months. And there seems to be a view that this is a one-sided trend. What are investors missing?

Well, I think -- well, first of all, they are true statements, right? So I think where you need to continue to tell the story about is the lines that we have kept, okay, and that we do have. And then I'll come back, of course, to market situation. Xilinx is one of the most precious lines that we could have out there, differentiated value-added engineering. I think everybody knows Xilinx. Of course, they got acquired by AMD. I had a conversation with Victor Peng within a week, CEO from Xilinx. He's very pleased with Avnet, likes the Avnet strategy, likes the Avnet design services or things we're doing and reassured me personally that, hey, there will be no change in that lineup, and that is really positive. Of course, between AMD and Xilinx, we've had those 2 lines for north of 84 years combined. So we've got a lot of relationship tied up there. Marvell, we went to bake off a couple of years ago with Marvell, all right? So we got more about Broadcom. We're exclusive effectively with Broadcom. There were some lines that were lost a few years ago. Microsemi was lost. Well, we got that back with Microchip acquiring Microsemi. Cypress was lost, okay? We got that back with the acquisition by Infineon. We're Infineon's #1 distributor globally in all regions. So as you look at that, these things tend to be a little dynamic, if you will, it kind of goes back and forth. And now you've got the ADI-Maxim situation. And we're very confident, again, never comfortable, confident with our relationship with Maxim. We're effectively 90% -- 75% to 90% of their business through the channel on a global basis. Tunç Doluca is their CEO, I know Tunç very well. I've been in contact with him. Jon Imperato runs Worldwide Sales. I know John very well and Patrick Moore. Our execution with Maxim has been terrific, okay? It really has been. It's been absolutely phenomenal, and they're very pleased with what we're doing. We don't know if it's [indiscernible] ADI and other devices, we don't sit in their boardroom. So we don't know all the factors and decisions that they're going to put forth or factors that are making the final decision. Are we engaged? Or are we in contact with them? Of course, we are. And we're going to do everything we can to be sure that we maintain that Maxim relationship moving forward. But we just don't know yet. I think we've got -- what are investors missing? I think some of those stories, we've got some really good stories. We're back on a growth path. We've got a senior management team. We've got some of the best global logistics capabilities in the world. We've got great demand creation resources, okay? And that's been proven out time and again. We've got Farnell, which is going to be a great, I call it, the front-end value prop for Avnet. We combine -- continue to leverage that between our core, okay, and Farnell, that's a huge opportunity for us. Look, I just think we got a couple of things slip, okay? We have a failed ERP, which is unacceptable in today's day and age about 5 years ago. And I think we took some of our eye off the ball on some of these key executive relationships. And this business -- look, in this business, it sounds softer, relationships matter, okay? Absolutely, it does. You've got to treat suppliers as partners and not as vendors. And I believe we're back on the right track with our suppliers and very, again, confident that we'll continue to drive positive execution.

Okay. I want to talk about the -- just wrap up on the core business and the margin opportunity that investors are intrigued by and potentially playing for upside in the stock. So I mentioned that competitor who has won some of the deals that we talked about in the past. That competitor does not have a catalog distribution business, yet has operated at 5% operating margin in the past. We just had them a couple of hours ago in their messaging to get there on a go-forward basis. So back to that 5% number. When I strip out your catalog and look at a like-for-like business, I think you're hovering closer to a 2% operating margin right now. So what are the major differences as you assess Avnet's core operations? How much of that gap can you close? And what are the key drivers?

Well, I'll touch on that, and Joe, I'll let you and Ken touch on some of the other key drivers in the waterfall, if you will. So we have a road map, Adam. We know where we were. I know where we were, okay, in -- from an operating margin standpoint. I was here back in 2009, 2010. And I know where our operating leverage points are. And that's going to be one of the key factors, is the leverage. And when you -- in distribution, like any business, when you lose some business, okay, your infrastructure costs don't all go away, whether it be HR, finance, logistics centers, IT, write it all down. So you get this negative leverage. So we lost a couple of those lines, to your point. You don't really -- it's almost impossible to take out all of that cost, right? Because you still need account managers, you still need the other things to operate the business. Conversely, when you pick it up, okay, you get all that drop-through at a really high level. So that's been -- that's just the fact. I mean, so we lost some, they won some and we had kind of a double negative for us on that. As far as the operating leverage, we need to drive growth, okay? I think we've gotten -- we took a couple of hits, but the drop-through this year is one of our key measurements, how do we drive growth, profitable growth, okay, with accelerated drop-through. And the measurement we have on the that is [ net is with a ] net GP. So we are -- by business, okay, within the business, within a region, look at our expense to net GP ratios, where do we need to double down. Do we need to double down in China? Do we need to double down on Farnell? Do we need to double down in the Americas? And the answer on all 3 of those is yes. The Americas is probably the single -- although we talk a lot about Farnell, but I think the single biggest opportunity you have is in the Americas, okay? And with the ERP, I know it's 4 or 5 years ago at this point in time, we took a pretty big hit in the Americas, which was one of our most profitable regions, okay? And you take that hit, first thing you need to do is go back and get your growth back, okay, and drive customer experience and get your Net Promoter Score back and customer confidence, supplier confidence, and we've got that now, okay? We're actually publicly held numbers region. Regionally, we've actually outgrown them. Okay. Denver, okay, in the Americas region now, we need to get the drop-through and drive the profitability. That's -- biggest gap in opportunity we have is in the Americas. So there are a handful of initiatives that we're driving, which is why we're so focused on the execution. Okay, we got to drive the execution. A lot of these are things that we have control over. Do you want to make any comments, Joe or Ken?

Ken?

Yes, Phil, I would just add that I think that's part of the reason, too. In our fourth quarter, we announced a $75 million annualized cost reduction program. I think it's important to note that when we look at that $75 million, we're focused on keeping ourselves positioned for growth, right? So we're not taken out frontline salespeople, field application engineers. But we are looking at things we can be more efficient and that cost action helps improve that margin. That's a piece of the pie, but really it's getting back to growth and then operating within that cost constraint, right? We're focused on making investments in the business, but also continue to become efficient in execution and creating that reinvestment that we need to help grow the business.

Maybe dovetailing into Farnell. Phil, can you just walk us through the last year or so on Farnell? This is a higher-margin business where your largest competitor doesn't have a presence. So it's an interesting story, unique story within Avnet, to help investors understand the economics of the business, the advantages to having this unique model with catalog and volume together and some of the trends that you've seen so far year-to-date.

Sure, sure. And we're resetting some of the expectations there. I'll let Joe comment. But as far as what we -- as I said earlier, we're definitely bullish, Adam, on Farnell. As I said, I'm also very keen -- we're not pleased with where we are at current operating margin levels, and we have a path to get back to double digit. Now Farnell post-acquisition from Avnet acquiring Farnell in the last 18 -- roughly 18 months ago, actually got to an operating margin north of 10%, got a high of 12.5% operating margin. When 2019 hit and the COVID hit, then we've had some other issues, but bottom line, we know we can get that back to between 8% and 10% over the next 6 to 8 quarters or possibly sooner. And we have a path to get there. Some of the things that we've been doing with Farnell is expanding the SKU count. So we can benchmark, obviously, where they are compared to the #1 and #2 competitors. And we've increased our SKUs by north of 100,000-plus SKUs. And SKUs for the audience are just part numbers. Because in the catalog business, where we might have a -- on the core side, it might have a narrow base of parts, but much deeper inventory. And on the Farnell side, the catalog side, speed and convenience, service, they got to have a really broad SKU count and maybe just less inventory per SKU. So we've actually been investing quite a bit in their inventory and their SKU count. Some of the challenges we've had, and we talked about this in the earnings call, is the -- we got a little bit of a delayed start on a new logistics center out of the U.K. The COVID virus caused some issues. We're probably about 6, 9 months delayed in getting that logistics center up and operational to full bore. So we're absorbing some additional costs that weren't otherwise planned for between 2 centers -- 2 distribution centers in that the leads U.K. We're hoping to get out of that or planning to get out of that in the first 3 to 6 months of 2021. And that will drive some productivity, some efficiency and hard cost savings that we're planning for that we're not seeing as we sit today. As far as the value of the model, again, Farnell services millions of contacts, okay, end customers, okay? Really, really broad range. I would venture to say that they're in -- they're selling something in every one of our customers. So it's just a major opportunity. We're not selling something in there to every one of their customers, right? So the opportunity is twofold. One, as they find new opportunities and NPI, new products introduction, we have a mechanism to score -- to track a lead, score the lead, and if it's an assigned account, get that into one of Avnet's account management teams or FAEs from CRM. If it's an unassigned account, it goes into a telesales group, if you will, that goes and does further qualification on the account. So the opportunity is a lead sharing one. Two, the other opportunity is what we call joint selling. We're -- we have major engagement on the core side with major customers, all household things from EMS to OEMs. Well, how can we help Farnell, Newark/Farnell get more traction if they not already have traction inside those customers? So we're now incentivizing our core team, if you will, to bring Farnell in, okay, and help service those customers across the board. So 2 major opportunities for us. And then the third is the MRO. I mean, it's a nice business for us. They've got a test and measurement bench type of business. It's every customer out there is using, that's a really nice business. And we'll be announcing shortly, I don't think we did yet, Joe, a new line that we'll be bringing out inside of Farnell globally in the test and measurement space. But I think it's a little preliminary to announce that yet. So there's just a few, Adam. So we're -- again, we're bullish on it. We know we're not where we need to be, but there's a road map to get there.

And as you think about that industry longer term, I mean, I think there's a couple of private competitors like you talked about. What do you think ultimately happens to catalog distribution over time?

Well, I think it's pretty solid. I think you've got to continue to -- the value props. I mean they're doing -- just like I talked about design services on the core side, you've got to have more self-serve design services, things along those lines. But I think it's a solid business platform for the foreseeable future. I think you'll start seeing this and companies already are starting to play into more marketplaces, okay? We can offer more value across a broader spectrum of products and technologies. But I think it's a great model. And those 2 guys you mentioned, hey, I know them very well. They're just not public, so it's hard to get benchmark data, is the problem, but they're great competitors, and they're not sitting still. And that's good because that makes us better. Okay. We're not sitting still either.

And smart investors backing them, too.

Yes, that's right. Yes, yes. A couple of household names there, right?

Yes. Just going to wrap up here, Ken. Maybe one for you, and I'll come back to Phil. So Ken, just on capital allocation and cash flow. Maybe first on cash flow, growth seems like it's going to be accelerating here. So how should investors think about the right level of operating cash as that happens? And then maybe touch on capital allocation. I know Phil talked about some M&A, et cetera, but what are the priorities? And what is kind of the near-term view on capital allocation, given the buyback, I think, is still paused?

Sure. So I think we've done a great job managing our working capital and executing to generate cash 8 straight quarters. Last quarter is $122 million. Clearly, we have a countercyclical balance sheet. So if we get back to the growth mode, especially market recovery like past semi-cycles, then we understand we may need to use some cash in order to fund that inventory investment, right? We still think we can manage our working capital days, right, and be efficient at managing that investment in working capital and primarily inventory. But with that being said, likely to use some cash as we get back to growth. From a capital allocation priority, there's still some uncertainty right now. So we've really been focused on, managing our balance sheet, reducing our debt, but really maintaining flexibility, right? We want to be flexible, and we want to be able to have ample liquidity to make those investments for growth. We still are committed to our dividend. With that being said, right, M&A, buybacks, those are things that we continue to talk about. But our maybe secondary priorities from maintaining that flexibility as well as making sure we're managing our balance sheet and our leverage appropriately to maintain low interest rates. But we do feel like we're in a really good position, poised for growth, and our balance sheet is strong from -- in terms of debt as well as liquidity position. So that's kind of where we're at now, but we continue to talk to our Board about things like buybacks. And we do want to maximize shareholder value. But I think right now, the best way to do that is to be poised for growth and increase those operating margins.

Right. And it makes sense. And you've certainly shrunk share count over time as well. So maybe just wrapping up, Phil, closing thoughts, what's the key message that -- I know I had some hard questions in there, so thanks for bearing with me.

No, it's great.

So maybe just bring us home on the key message that you want to resonate with investors as they think about Avnet under your tenure.

Yes. No, Adam, seriously, I appreciate the questions. I mean, they're on your mind, they're on your investors' minds. So it's no issue at all. And there's certainly, as you could tell, they're in our minds. So I think the message to investors are we're back. I mean, we're on offense in a big way. We're focused on execution. So I talked about the upstream and the downstream. We had 350 suppliers. So upstream for us is suppliers, downstream is the customers, 350 suppliers on a VIP call. 2 days, 6 hours, just about 6 weeks ago. I think that I feel that suppliers are feeling really good about Avnet right now. I think if you do customer checks, I think you'd find that the customers are very confident with the Avnet team globally. We're seeing good growth in Asia Pac. Europe looks like it's settling in pretty positive. And as I said, the 2 big opportunities, you hit them both. And well, Farnell, you hit, for sure, a couple of times, I threw out the Americas, okay? We -- we've got to get the Americas back to where it once was prior to ERP. The revenues are coming back, no question about it. Now we need to continue to work to drop through in the bottom line. Okay. But we -- we're a streamlined organization. We flattened out. We've got good cost control as you heard Ken and Joe talk about earlier. Tom has been harping on the cost because we always need to take -- just last -- we always need to take cost -- you always got to look at costs. Every company, every good company looks at cost constantly, but it doesn't mean you're not investing, okay? So while we manage the cost, the expense, we're still making investments. CRM, pricing tools, digital online tools, e-commerce, FAEs, account managers, that we have not touched from a cost standpoint, okay? Because that's important. That's still the -- you try to drive revenues and you've got to drive profits while managing expenses. But I just want to thank you for the time. And as we say, we're 80%, 85% focused on maniacal execution. Last comment I didn't make, I guess, that our teams are paid on operating income. Our teams are paid on return on working capital and return on invested capital. That's how my whole staff and all the regional presence are paid the same way. So we had the best interest in mind of the shareholder. We're sure that we're driving profitable growth with good drop-through and good returns. And just wish everybody a great holiday season. Stay safe and healthy. And we're welcome to have a call with anybody at any time. Joe Burke and team will be glad to talk to you. So Adam, with that, I think I'll probably turn it back over to you.

Well, I think that's a good place to end it. Phil, Ken, Joe, thank you so much for the time today. Thanks for the participation, and we look forward to watching Avnet in the coming year.

Thank you.

Thanks, Adams. Appreciate it. Bye, take care.

Bye, Adam.