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

Great. Let's get started. Good morning, and Happy New Year, everyone. Thanks for joining Citi TMT West Virtual Conference today. My name is Tim Yang, and I cover tech distributor sector at Citi. I also support senior analyst, Jim Suva, on tech supply chain coverage. For this session, we are pleased to have Avnet's CEO, Phil Gallagher; CFO, Tom Liguori; and the VP of Treasury and Investor Relations, Joe Burke, joining us to share their insights about Avnet and the industry. As a background information, Avnet is the third largest semi component distributor globally with sales in America, EMEA and Asia. A few housekeeping items from Citi Research side. There are disclosures associated with this event for you to review. All clients subject to MiFID II are reminded. They need to have research agreement in place. We will go through the questions we prepared for the event. And if there's additional time, you can ask a question by e-mailing me at [email protected]. Media and press are not allowed. So if you are media or press, please disconnect. Before we dive into questions, I will hand over to Joe Burke for safe harbor statement. And then Phil will give a quick overview of Avnet. Joe?

Thank you, Tim, and good afternoon, everyone. Today's discussion may include forward-looking statements that involve 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 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 obligation to update or supply new information after this call. So with that, I'm pleased to hand it over to Avnet's CEO, Phil Gallagher, for some opening remarks. Phil?

Yes. Thanks, Joe. I appreciate that, and thanks, Tim, for hosting the event. Much appreciate it. I'll just take a few minutes, if you don't mind. No slides, just a few minutes to go through a quick high level on what's happening at Avnet. So again, thanks for the opportunity, Tim. Appreciate that and to have time with all of you today that are participating in the event. And I hope everyone had a safe and, particularly this year, healthy holiday season, and 2021 is off to a good start, and all the best of luck. Before beginning, I thought I'd just provide a few quick comments. As you know, I've been with Avnet now for 38 years. By the way, we're celebrating our 100th year anniversary in 2021. So I've been in roughly 40% of the company's lifetime, which is scary in a way. Assumed the interim CEO position in August, and then the permanent announcement came out in November. And we've been pretty busy. So I would say there's been a few changes recently, and let me just share a little bit on what some of those are, again, at a high level. And then we'll get into the Q&A that Tim mentioned. One out of the gates, we know clearly that Avnet needs to drive growth, okay? That is a mantra for us. Scale does matter in distribution, we know that, and we need to drive growth. And I think we've been doing some of that in different ways in the past 5 or so years. And we've been doing some M&A that's been more focused around what we've called internally the ecosystem, again, predominantly around areas like IoT and software. And I think all that's going to play key for us moving forward. You'll hear the word probably today during Q&A that we'll probably just have a little bit of a rebalancing of some of the priorities and continue with that, but really drive a lot more of the growth back into what we call the core distribution, which includes our Avnet Embedded as well as Farnell, which I know there'll be some questions on. We're excited about Farnell. We're not where we need to be with Farnell, but we think there's a lot of excitement there and a great value proposition. And Avnet Integrated. We talked about Avnet Embedded, that's really embedded, no pun intended, in the core. So what we want to take is some of the things we've acquired, some of the things that we think are value and drive it through the core and into Farnell and then drive really closer than ever before our supplier relationships and our customer relationships. I know that sounds obvious, but sometimes when you're doing a lot of different things, you can take your eye off the ball of some of the fundamentals. I think everybody [ likes anything ] around sports, once you lose -- if you don't have the fundamentals and the foundation, it can affect other things certainly negatively. But the -- the customers, supplier, employee relationships, obviously, can drive profitable growth. So what are we focused on? We're focused on our financial and competitive performance in the marketplace, building Avnet's core distribution business, as I just talked about, investing more and doubling down in Farnell and in our core. And we believe we've already made some notable progress on our objectives. From an internal perspective, we've progressed on defining our organization's guiding principles. Structure follows strategy. And we've streamlined the organization, flattened the organization to drive -- aligned more of the operations with the strategy around driving efficiency, productivity and growth. And again, structure follows strategy. We're strengthening, as I said, our existing relationships externally with our suppliers and our customers. We've had several events similar to this with our suppliers and customers over the last several months. We've had hundreds of attendees. And we believe the messages are resonating what they want us to do and need to do as an extension of them in driving demand creation, design chain through supply chain on a global basis. And supply chain, some take it for granted. We don't, okay? I think in this last pandemic, people realized how critical continuity of global supply chains are more than ever. One of the silver linings is it's been positive for us and we're seeing more and more opportunities come in our way because of the supply chain capabilities that have been uninterrupted at Avnet through the whole 2020 in the pandemic. From an external business operational perspective, we've progressed. We're already increasing market share, and it's a proven public data. We're further strengthening our position in the Americas. We know we took a bit of a hit there, and we're very pleased with the progress we're making there. As we spoke in the past quarter, we've improved our operating income dollar performance. Return on capital, I know, is a question. We've driven the working capital, thanks to Tom and Joe and the whole team, capital days to below 80, which has helped generate $657 million of cash flow from operations in the 12 months ending in the last several quarters. We've improved our demand creation. This is still a big differentiator. Design chain, the supply chain, our FAEs, our digital offering, our Farnell offering. Our Centers of Excellence around design have increased -- enabled us to increase our design registration count in the past quarter, September quarter, to a record number going back previous to 2018, record numbers of design registrations. It's almost kind of an oxymoron, given the fact that we're not physically seeing people as much as we were prior. And strengthened our cash and debt positions. And we reached our lowest debt level since 2010, okay, and maintained solid cash and cash equivalent positions in the last quarter. So I'm confident of the steps we're taking. I'm excited and honored to have the opportunity to lead Avnet after being here for 38 teams (sic) [ years ]. We have the right team. We've got a great team. We've got an experienced global distribution team, who understands the business, understands what we need to do and are aligned with the goals and actions that we have moving forward. So with that, Tim, I'll turn it back over to you. I just want to kind of tee up where we were, where we are and where we think we're going as we get into 2021. And thanks again for your time and consideration to meet with Avnet.

Thank you. That's a great overview. There are really information that we'll dive into. But let's start maybe the macro, big picture questions. Apparently, macro environment has been very uncertain for Avnet in 2020. For 2021, Phil, can you maybe just talk about the demand trends in the near term as we recover from -- sort of recovering from the pandemic?

Yes. We -- so I guess I'll use the word at this point encouraged and encouraging. Now as we came out of the September quarter and our October earnings call, we talked about Asia starting to show some recovery in that quarter with positive book-to-bills in Asia Pac. We see continued momentum there. Europe, coming out of pandemic, were kind of going through the July, August months, which many on the call know, Europe still does their time off. But even coming out of the September quarter, in Europe, in the month of September, we started to see a positive book-to-bill trend in the Europe market. And as we know, they've been hit a little bit harder with some of the resurgence, if you will, of the pandemic, and we're all dealing a little bit with now, but continue to show some, I'll use the word, resiliency in our Europe market. And Americas has been pretty steady as she goes. So yes, I would say, optimism. I'd say encouraged. As we saw in the September quarter, we started to see some of the industrial segment come back across the Asia Pac as well as in Europe. We saw the -- obviously, the automotive, we like to call it transportation, which is a sizable business for Avnet today, start to rebound in September quarter and appears to be continuing. And then I talked about the design activity. It's always good to see the design activity being as high as it was coming out of the September quarter, and we expect that to be similar in the December quarter. So that's how we're seeing it right now as we enter 2021. I'll use the word optimism.

You mentioned several -- the book-to-bill numbers. And I believe that you mentioned book-to-bill was about 1 during your last earnings call. Can you maybe just give us an update on book-to-bill by regions and by verticals?

Not sure I can -- it's positive. So we're seeing -- we just closed the quarter. And Joe, you can certainly help here, if you like. The trends in all regions are moving in the right directions, Tim, and continued to improve from the September quarter, as we talked about on the October earnings call. What we are always doing, being through these different cycles -- and this is, I would believe, anything but a normal cycle because of the pandemic and all the other issues that we're managing, that we just really track closely the customer backlog. We get thousands of customer forecasts on a daily, weekly, monthly basis, MRP to MRP, EDI, comes in all different formats. And we're tracking that forecast. And what we look for is not only in the hard bookings, but in the forecast, what's the cancellation rates, what's the backlog adjustments, are we seeing any major anomalies up and down. And I would just say, across all regions, it just seems to be pretty steady as she goes in a positive direction. And we can give, obviously, a lot more detail in a few weeks on the by-region book-to-bill, but it's positive.

Great. How do you think the pandemic has shaped the underlying driver for the growth outlook for your end markets in the next probably 2 to 3 years?

Well, I think -- again, as I said earlier, I think the positive here is Avnet's -- the reliance, if you will, on Avnet's global supply chain capabilities. I mean we have seen more opportunities come our way than we were even seeing prior due to people realizing that supply chain may or may not be core to them, but it's certainly core to us. And again, I'm proud of our operations teams. Obviously, like everyone on the call, you put safety first, but we've not had any disruption at all to any of our logistic centers on a global basis. So I think one silver lining is just sometimes people take for granted supply chains. And even in our personal lives, we did until you couldn't get certain commodities that everybody likes to kid about now, whether it be toilet paper or meats or whatever it might have been, I would say, really, wow, supply chains do matter and they are a differentiator. And that's still a big part of our business. And the other piece is the optimism and the positive results we saw in the September quarter with design registrations. So I think it's really interesting that we're seeing registrations and design activity actually go up. And by the way, it's roughly 30 -- percentage of our revenue spread between 30% and 35% of our revenue dollars are tied to a part we did something around design and got a registration authorized from a supplier. And they have record numbers going back to 2018. It's pretty interesting. And as Tom likes to say, I still believe in boots on the ground, now a lot of it's boots on virtual calls like this right now, but we still have the FAEs. And I think what's going to -- what's really a positive is the acceleration of the digital world, right? So how we do design online, self-service tools, Centers of Excellence. So we found ways to optimize and drive more productivity, okay? And it's an and, not an or. We're absolutely not planning on any reduction in FAEs. We're looking to add there [indiscernible] augment that with these digital tools. I think that will be really key in how productive and efficient we can continue to become in the next 2 to 3 years is obviously going to be a differentiator.

If I remember correctly, the design activities, they have higher margins than the corporate average. And can you maybe just remind us like how much to compare the design activity margins versus corporate average? And then you said the design activities picked up a lot in the past quarter. How soon would that to reflect in your revenue and profit dollars?

Yes. So depending on the region, because every region's margins do run a little bit different in Asia versus the West, et cetera, it's between 300 and 400 basis points higher margin, sometimes a little bit higher than that, maybe sometimes a little bit lower. Because sometimes it depends on the type of design it is, which supplier, which commodity. But in general, Tom, you can correct me if I'm wrong, it's between 300 and 400 basis points of margin. As far as the impact of the design registrations, and it's always an interesting one. We talk to our own Board about this, because it's so intriguing. It's -- depending on the part and depending on the technology. A high end FPGA might be 1.5 years to 2 years, right? A lower-end microcontroller might be 12 months or, by the way, 9 to 12 months. So it really depends. But on average, we always look at somewhere between 12 and 24 months when that revenue -- where that registration will turn into a design win, which then turns into revenue. But I think what everybody needs to remember is that as you're winning these new designs and -- registration and design wins, you may have others dropping off, right? So you're driving these registration and design wins. So you're maintaining and capturing, continuing to strengthen your position at the customer or with the supplier while driving new incremental organic growth as well.

Great. I would like to ask several questions regarding recent component shortages. So can you maybe just talk about what types of components are in shortages and in which end market?

Well, 2 different questions here. One, the types of products right now, as we talked about in October, we're still real-time closing out December and looking at where different impacts of lead time changes, because they can change daily, weekly for sure. Where we saw most of it was -- in the October and November time frame was in the high end 32-bit controller space, tied a lot around automotive, has that bounced back, okay, and 5G, okay? But we're going to track that because there's more supplier activity, again, depending -- you've got the largest supplier. I mean one supplier would have 20 technologies. So it could be 2 or 3 within that whole portfolio. So that's what we're managing now. But for sure -- and looking at now. But for sure, we're starting to see some lead time extension across certain key commodities. And one most notable has been in the controllers and, within that, the high-end 32 bit.

Is that mainly in automotive? Or is it more broad-based like industrial...

Automotive clearly is driving a lot of it, and that's in all regions, by the way. 5G is driving some of that as well. And the high end wouldn't be in the consumer space as much as the -- when I say automotive, I mean automotive, transportation, because you've got automotive, you've got all the other vehicles out there, electronic vehicles, the grid, ADAS and the electronics within it. So it's pretty broad. But definitely, that was one of the bigger drivers. No doubt about it.

So when we compare to current shortages, maybe we're in early stage of the shortages versus the shortages in 2017 and 2018, which one do you think is more severe and more -- maybe more disruptive to a supply chain, in your view?

Yes. It's a -- that's a tough -- that's a great question, by the way, and one that obviously can change within a week or 2, Tim, because of the market dynamics. In 2017, 2018, a lot of it was -- there was a lot of shortages, a lot of it was around MLCCs and the different applications that these went into. And that was like the hottest commodity because nobody wanted to have a $0.05, $0.10, $0.20, $0.01 capacitor holding up their whole -- their cellphone or their EV or whatever it might have been. This was -- I think this is a little bit different. I mean time will tell us. I think everybody would agree that a normal seasonal or cyclical cycle right now is kind of an oxymoron, which we don't really know. It's still early. Coming out of the COVID, we had -- the March-June time frame was a little tight. September started to bounce back. Was it end inventory that -- OEM inventory that was just reduced, okay? And is it replenishment of the inventories? Is it that plus increased demand? Either way, it doesn't matter, it's going to drive more lead times. And you also had some of the suppliers -- we don't talk about supplier by name -- that had some packaging issues in Asia and whatnot because of -- that were impacted by the COVID. And some were more impacted than others. And that would also affect the output in the lead time. So clearly, we're talking -- there's a probably enough public information out there on which suppliers are communicating what. But we'll know a lot more even by our earnings call in several weeks, okay, as we get through end of January. Manage through this backlog I talked about, the forecast management and putting our analytics around it and be able to have a few more details on that. But hard to compare to '17, 18 yet. Could end up there, because it doesn't take much, doesn't take much spike in certain technologies and certain applications that could drive a shortage. I've been around 38, 39 years. You can see that turn up pretty quickly.

Yes. Back in 2017, 2018, we saw a lot of EMS companies, basically, they are your customers, placing rush orders, double ordering or just trying to get a component [indiscernible] as many as possible because the shortage is everywhere, and then they don't want to have supply chain disruptions. Are you seeing that right now? Or is it just like too early to tell?

A little too early to tell. I know what you're talking about. We didn't really try to track the double ordering, as does our suppliers. So -- and you're right, EMS customers are great partners of ours, and we build business with all of them. And I think everyone is behaving well at this point in time. I think the -- I don't think it's broad brush enough yet to understand the real potential lead time expansions across the board. But we do look at -- I mean just to reiterate, we take in the forecast. And let's say, Tim Yang, Inc. is buying 100 pieces a month of this part, okay? All of a sudden, that goes to 1,000 or goes to 500. We try to catch it, and most times, do catch it, say, wait a minute, does that company really need 500 or are they just kind of trying to buffer their stock, because at this point, rightly so, supplier is going to hold us accountable. And this is what we talked about -- we talked of this on the March earnings call after the pandemic hit, right? We got to really manage our backlog. We have a -- Tom is the one that leads a biweekly call with our asset teams, making sure that, hey, what customers need, they're saying they need to take it, because if there are constrained parts coming out, those suppliers want to make sure, rightly so, rightly so, that we're going to take it, it goes to an end customer for point of sale. So we're working collaboratively with our, I call it, upstream and downstream with our customer suppliers constantly. And we've got a lot of analytics around it. I think we've all gotten a lot smarter over the years. Does that mean we're all going to catch everything right away? No. But we certainly watch. And just the next question would be the broker market or the aftermarket or the -- we've definitely watched the crawlers come in. We make sure that the inventory is not out online. If it's tight inventory, to be sure somebody doesn't come in and suck all our inventory out. So we definitely have security around that. Where 15, 20 years ago, we could have possibly gotten wiped out, not just us, anybody overnight, because this stuff happens quick. So we red tag it in an automated fashion on a system when parts start to get tight.

Yes, we just received a question from investors, but probably it's more of a clarification. Phil, you just mentioned that you saw the automotive component shortages, again, in all regions. Is it just your Avnet or is it just like for -- from Avnet standpoint? Or it's just like a more broad-based that you're seeing the shortages in automotive market? And do you think you will recover, like, soon? Or is it just like it will get worse?

Well, we certainly have seen an increase, no doubt about it. Again, we're pretty strong in the automotive part, particularly in the Tier 2, Tier 3 guys. But in Europe, we play a lot in the Tier 1s as well. We do some value-added work there and some supply chain work. My comment was more around certain parts that go into the automotive, which would be more of a general comment, okay? And there's a lot of controllers in the cars. It's on a 32-bit controller. So I was talking more in general. I don't have the view of everyone else's backlog and what they're dealing with. But we certainly have seen an uptick Avnet has in automotive. And we know that our suppliers, in some cases, are calling for as far as some lead time issues. And that's pretty public data at this point. And the foreseeable future for automotive, we think it's positive. I have a European leader in Germany [indiscernible] say, people aren't going to start walking everywhere. So he believes there will be a demand for automotive. It just depends how fast and how high.

Yes. My next question is probably for Tom or for Joe. How should we think about the margin implications from the shortages for your component business? Some of your vendors increased price. And can you benefit from that?

Yes. So when prices go up, our job is to pass on the prices -- price increases. That said, Phil would be the first to say, maintaining relationships during the process is absolutely critical. So yes, there have been a number of -- now this isn't Avnet unique. There's been a number of discussions in the press about price increases from various suppliers. Our job is to pass that on in a reasonable way to maintain the relationships with our partners. In some cases, we have contractual arrangements, which may prevent or inhibit some of that effort. But overall, a tight market, increasing prices, probably good for Avnet, definitely good for Farnell, right? So that's how we view it. Phil, would you agree with that, anything to add?

It's a really good question. And ASP inflation is a positive thing, whether it increases the -- just the revenue/GP dollars and/or the GP percent. So where we have -- some of it just depends on the contractual relationship we have with the customer and how quickly we can even move the price on. And it depends also how the suppliers handle. It's very complex. All of them use a ship and debit process. So it depends if they go back and cancel shipment debits and then start new or let the production order run out and then start new. So it's -- everyone is a little bit of a one-off. But there's a number of suppliers now coming, and it's pretty much public that they're starting to raise the prices. It's a classic supply-demand curve. And as things get tighter, naturally, resales go up, and we manage it on a customer-by-customer basis.

Speaking of Farnell, I mean, shortened lead times have been a major issue for Farnell margins in the past 1 year or 2 years. With lead time stretching, how should we think about Farnell margins this year? Do you have like near-term goal? And the long-term goal, I think, is double-digit mark, maybe 10% or low teens. But near term, maybe for this year, do you have a margin target for Farnell?

Phil, do you want me to answer that?

Yes, go ahead, Tom.

Yes. Tim, we said this on our last earnings call, our goal is to get Farnell to a 10% operating margin. It's going to take some time. Most of this is under our control. We gave an expectation of about 100 basis point improvement in a quarter, meaning that last quarter of September, Farnell was at 3%. We expect to be at 4%. That's what our guidance was for December, building up 5%, 6% as we get into the summer of this year. Why does it take a while to get Farnell margins back up? The main thing is our distribution center in Leeds, and that was something that was scheduled to come online in January. When the pandemic hit and new work rules and freight restrictions, that slowed our ramp. When the Leeds DC is up and running, it's a $19 million cost savings per year. But today, because of the delay in ramping, we're actually shipping from 2 different distribution centers. We have split shipments. It's affecting our cost. And that's weighed on Farnell. So new lockdowns in Europe are not helping that. The Brexit resolution will help that. So we got some -- we still feel -- first of all, we were very confident we're going to get to 10%, but we're confident we can do the 100 basis points. The other things that play into that, the distribution center, it improves our capabilities, things like lot traceability, things that customers want. We continue to add SKUs to Farnell. And the reason is, when that engineer comes out in Farnell, they have a bill of material, they want one of everything, they want another desk tomorrow. And if you do that, we earn a 30% gross margin. So here it's really important. We still earn a 30% gross margin today. The operating margin issue is more on the cost side, right? And it's also on the macro side. Farnell is a European company. If you're in the U.S., yes, you probably know Mouser and DigiKey as a brand name better than Farnell. If you're in Europe, it's just the opposite, you know Farnell. So as Phil said, book-to-bills in Americas are improving. They were a little below parity at kind of our earnings call in Europe. As that improves, that's going to help Farnell. To your question, when we talk about a 100 basis point improvement per quarter, that's assuming a stable macro. And I think what you're getting at, Tim, is today, we're seeing -- no, you know what, it's tight, prices are going up, lead times are getting extended. Those are things that are good for Farnell as far as finances. And we view those as -- there's a potential upside to the speed of our recovery. I don't want to get ahead of ourselves, but that's more or less where we are with Farnell. Phil, anything to add on that?

Well, I think you said it well, Tom. And Tim, look, we are doubling down on Farnell. We believe in Farnell. We know a lot of the folks on the call, I think, are questioning where are we, why don't we move further on? To Tom's point, we got to double-digit operating margins 18 months ago and the market hit, and we all know that the history here the last 12, 18 months. But we are bullish on Farnell. It brings us a differentiated value proposition between the core and Farnell, where we've got lead sharing going back and forth. There'll be really positive announcement coming out soon on a major new line we're bringing into Farnell. You've got to remember, we -- just in the last year, we brought on Micron, IDT, Renesas. There's lines that we'll continue to add, leveraging the Avnet relationship with core suppliers. Farnell never had access that the other guys did. So anyway, we're bullish, and I think Tom answered it well. Some of this is -- most of it's under our own control, and we just need to see quarter-on-quarter, year-on-year constant performance, and that's the charter.

Is the Leeds distribution center ramping on track for January or -- still for January? Or because of the lockdown, you need to delay that a little bit?

Yes. I'll touch on that, Tom. So as Tom mentioned, we're a little bit delayed due to the -- again, to what happened in 2020. We are very positive on the progress we've made, particularly through the month of December to today's report. I get a daily report on our U.K. one Leeds distribution center. And we were committed. I think it's important. We could have pushed it. I mean we could have gotten it open earlier, but it would have had service level issues, and it's just not worth risking $0.01 to lose a buyer. That's crazy. So we decided to eat the additional cost, to Tom's point, of 2 distribution centers until we felt confident we can ramp, scale and deliver to the performance our customers expect with that distribution center. In the last several weeks that we've been at, at par or above par to the goals we've set for what we call same-day ship. Order comes in, has to go out 99.95% of the time same day. And once they get to that point, they're there, we can start scaling it. Some will be COVID related, because we know the U.K. has got some additional issues right now with the pandemic. But the goal would be through this -- through the March quarter, we start to really ramp up. Will it be done? Probably not, because you want to be careful. But we should be well on our way with the U.K. one.

Got you. And then the 100 basis point margin improvements of Farnell includes the delay of the Leeds distribution center and some of the actual cost that you need to ship in 2 different distribution centers, right? And then maybe the new U.K. lockdown as well.

We will see improvement in those as we go forward.

Got you. Okay. That's very helpful. So on TI transition, I think you mentioned previously that $900 million revenue out of that $1.6 billion TI business could be replaced, driven by demand creation, share shift and pin replacement. Can you give us an update on like what's the percentage that you have done with this replacement? And how should we think about that for the revenue generated from the non-TI business in 2021?

Yes -- no, you nailed it, Tim, those 3 areas. The pin-for-pin, design, demand creation, that's the longest, again, [indiscernible] because you're having to design next-generation part out that's going to take 12 to 18 months or more, 2 years possibly, to see production. Then you've got the share shift. And we're still tracking that. We're in progress to what we said, but it would take about 2 years. We've probably got 12 to 18 months left from a backfilling standpoint. I don't have the exact numbers through December, but the funnel is well over that because you want to identify -- let's use $1 billion. You've got to get the funnel to $1.4 billion, $1.5 billion because it's not -- excuse me, at least $1.5 billion, because it's not all going to drop through, right? So we've got the funnel that's built out on each 1 of those 3 areas that we're continuing to track. And we're pleased. Once we get -- we might be able to talk about it on the next earnings call. In a particular region, we might have already outpaced the gap, okay, which we're really positive about. So we're tracking it by -- globally, by region, by country, by city, by account manager, by account. And we have -- that's a benefit, by the way, to a lot of other suppliers who, hopefully, will be listening to this call. And they've been all working with us extremely well to help us work on replacing that business.

A quick follow-up on the TI, not TI, but it's more the semiconductor vendor side. Probably semi vendor consolidation appears to be accelerating in 2020 and investors generally are thinking consolidation -- vendor consolidation would give those vendors more pricing power compared to distributors. Is that the right way to think about it? If so, what's your strategy to offset those pricing pressure from vendors?

I don't know if that's right way to think about it. Well, I could have thought that back in the '80s and '90s when we were doing all the aggregation of all the other distributors out there that would give us a lot of pricing power. You could argue, we got some of it, but maybe not all of it and probably didn't maybe do as well as we would have liked to there. So I think on the supplier side, it's the same kind of thing. It depends -- I think it's more of the technology. As you go back -- and kind of a lot of history. If you go back 25, 30 years ago, a lot of the suppliers had more standard products. They had more commodity type products. And that obviously gives the market leverage on pricing one versus the other. So if you have a lot of proprietary products, then obviously the supplier has more leverage because they're controlling more of the pricing there. So I think it's more -- frankly, I think it's more of the technology, who consolidates and how they consolidate and the proprietariness, if you will, for lack of the better word, proprietary nature of the products more so than just the sheer size of 2 companies coming together.

Got it. My next question is for Tom on cost saving. Tom, can you remind us the cost saving benefit for 2021? I believe it is $80 million to $90 million that you mentioned in the conference call. But does that mean that we should take that $80 million to $90 million out of the fiscal year '20 OpEx and then to get the cost for -- I mean, the OpEx saving for 2021? And if the demand comes back, do you think -- do you need to materially increase the OpEx to support sales growth?

Thanks, Tim. Good question. So we actually have 2 OpEx programs. One we announced 2 years ago is to reduce our OpEx by $245 million. That's largely complete. We have about $40 million left. The projects to make up that $40 million are underway. One is we're outsourcing transaction processing and finance to an outside service provider that operates in places like the Philippines and Poland and just lower-cost geographies. The second part of that remaining $40 million would be the Leeds DC. I think it's important to remember that when we announced the $245 million program, we had quarterly OpEx of $480 million, and today, we're in the $420 million. So we've reduced our OpEx $60 million a quarter. And I think the Avnet team, people have worked very hard to achieve that. That said, what's very important to remember is this was all back-office, distribution center efficiency. We did not cut salespeople, field application engineers, anybody market-facing. The reason that is very important is that as we go through a recovery, we still have those people in place, and we'll be able to grow revenues without really adding a lot of cost. Now on top of that, with the pandemic, our revenues went down and we felt that additional measures were necessary in our OpEx. So we announced another $75 million OpEx reduction plan, but we were very clear. Half of that are temporary measures. So what is a temporary measure? For instance, in our December quarter, just about everybody in the company is taking a week off without pay, and that reflects a lower volume of activity. But as the macro recovers, that's not going to last a long time. That's a temporary measure. So I think our cost structure is where it needs to be. I think we're operating in the $420 million range. FX is kind of playing havoc with some of our numbers. Weaker dollars or all of our spending in Europe forces our financial reported OpEx up. But I think -- but there's an offset to that, right, on the revenue. So I think we feel good about where we are with OpEx. The most important thing to know going forward is, we may not be driving the OpEx number down, but we put in a cost structure that allows us to grow and get up to $4.6 billion of revenue, $4.7 billion of revenue and really not adding significant costs. So as we grow the revenues and we grow the gross profit dollars, most of those gross profit dollars are going to drop to the operating margin line. I hope that helps.

Yes. Sure. On the COVID cost, I think you mentioned that's probably $10 million per quarter in June quarter and September quarter. How much of that, if there's -- the vaccine is effective and there's no pandemic, how much of that $10 million would still be your cost, like, going forward?

Well, I think for the foreseeable future, we should just assume that those costs are here to stay, right? I mean we've seen new lockdowns in Europe. Our distribution people have done a great job of keeping Avnet running, keeping our customers running. And our commitment to them is to keep them safe, which is just what this cost is all about, right? It's personal protective gear. It's reflecting there's going to be inefficiencies because of distancing and things of that nature. But this is a critical thing. These are the right things for Avnet to do for our people.

Got you. Free cash flow generation has been a very bright spot for Avnet in the past year. Can you maybe just give us some color on the free cash flow generation target and your capital allocation strategies in the near term?

Yes. So in the near term, our goal is maintain our liquidity so that we can fund our operations, especially as the macro recovers. A really good fact is we have close to $500 million of cash on the balance sheet. We have another $1.5 billion in untapped lines of credit. So we've got around $2 billion of liquidity going forward. One of our priorities is to manage our debt. Very pleased -- kudos to Joe Burke and the treasury team that our debt is the lowest level it's been since 2010. Phil mentioned that at the beginning. That said, we have lower earnings, so it's put a lot of pressure on our gross leverage. And to us, we want our gross leverage in the mid-2s. Right now it's above 3. The reason that's important is maintain our investment-grade rating. It's a very, very important thing for Avnet. Capital allocation, we're securing our dividend. We are a company that returns capital to shareholders. We are continuing the dividend. We feel very good about that. Until our debt leverage gets below 3, we are going to have a pause basically on buybacks and M&A. But we continue to invest in the business, the case in point being distribution centers, right? For now at least, you see that's a use of capital. We're happy to report that we have 8 quarters in a row of positive cash flow. And I think what's important to know about that, like even last quarter, we had positive cash flow. Yet, we still added SKUs to Farnell. And if you look at our financials, in total, we added $200 million of inventory to our balance sheet. So we are well positioned to support a recovery. The reason we had positive cash flow is our credit team, our collection team did a great job with collections, our payable teams are doing a great job. And that's what's really keeping our cash flow positive. That said, as the economy recovers, there will come a point when we probably will use cash for working capital in total. But here's our commitment to ourselves and to our investors, using cash for working capital will be accompanied by higher operating margin results, okay? And we feel, as long as we're improving our operating margin, improving our return on working capital or return on invested capital would be greater than WACC, those are good things for us to do. Hope that helps.

Yes, it does. To wrap up, Phil, Tom and Joe, can you maybe just talk about why investors should own Avnet stock? I think your stock had a good run since November last year, but still underperforming the overall market and your competitor. So in your view, what is the misperception on Avnet stock?

I'll give you a quick...

Go ahead.

Yes, people are concerned about Farnell. They saw Farnell getting under the 3% margin. I think they were starting to think maybe this is a secular decline in Farnell margins. And it's not. You've got to keep in mind that Farnell is selling to engineers, they're delivering parts to their desk in 2 days. We're earning a 30% gross margin. But we have some cost issues with the Leeds DC. We expect to be growing operating margins, both in Farnell and core every quarter going forward. That's our expectation, okay? I'm not trying to give you a new guidance. But I think investors are starting to see the execution. I think as we continue that, our share price will improve. I'm glad that today, we're getting closer to at least our net book value. Historically, distributors traded at 1.1, 1.2, 1.3 book value. I think there's a lot of upside potential here. So that's a financial answer. Let me turn it over to Phil for probably more...

I think you stole my book value comment, Tom. I've been here a long time. I've seen this below book before, and I've seen us bounce back quite strongly from being below book value. Joe has been here for, I think, 25, 30 years, too. So we both have seen that. Mine is going to be more just -- look, I know the line of sight that we have for the organization. I know the 2 biggest needle movers we have. We talked a lot about Farnell today. And the other big one is the Americas performance. And we've got line of sight to continuously see improvement there from, I would say, a trough back in 2017 to continuous improvement to get those margins back to where we need to get them and the returns, okay? So -- and I believe in the team. I believe in the team. I believe in the execution and the plan that we've laid out to go drive the execution. We've got growth initiatives. We've got operating margin improvement initiatives and return on capital. And I think it's important for the investors to also know how people are compensated. So the entire executive leadership team going 2 levels down is compensated on operating margin, operating dollars and returns, okay? So that's -- 100% of their incentive is based on that, okay? So now it's a matter of driving execution. And I think we're back to basics and fundamentals. I think that's how I started out. The fundamentals matter. We'll continue to do the other stuff that we need to do to drive digital and IoT and all those other things. But right now, it's about focused execution. And we know what we need to go do. And I'm confident that the team is going to get it done.

Great. We are running out of time. With that, I want to personally thank Phil, Tom and Joe for spending time with us today. Thanks, everyone, for joining us. This concludes the Avnet session. Thank you.

Thanks a lot. Happy New Year. Thanks, Tim.

Happy New Year. Bye.

Happy New Year.

Bye-bye.