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

Going to get started. Thanks for everyone. Thank you for attending our technology conference, which is in person first time after COVID. So really happy to have all of you here in person. I want to give a warm welcome to Phil Gallagher. You know him from Avnet for many years. I mean, he has a lot of experience in the industry. He's been I think 40 years with the company.

This November.

This November. So really, he's seen all of the ups and we're looking forward to a really great conversation with them. And of course, we also have Tom Liguori who has been CFO since 2018, I think. But really, if you go back into his resume, he's got 30 years of experience in finance, accounting and he's worked at many different companies. So I think at Mflex and Advanced Energy. So really a lot of experience on the stage and looking forward to the conversation.

So with that, maybe, Phil, I'm going to start by asking you about demand trends. So for both the core business as well as for Farnell, if you can talk about what you're seeing on a regional basis in the 3 regions as well as in terms of the verticals. Just talk to us about demand. I mean, how -- is it strong? Is it weak? What are you seeing?

Yes. So thanks, Ruplu, thanks for all of you being here interest in Avnet. So the demand, as we talked about in our last quarterly earnings are pretty consistent across the board. I mean, we had a growth in the end of March quarter, 35% year-on-year, 40% year-on-year here in the Americas, which was particularly positive as we continue to accelerate our Americas business. But it's been really consistent. I mean Asia, typically in the March quarter, you see a downturn because of Chinese New Year and some other things going on in Asia. That didn't happen. We had a really, really strong quarter in Asia across the board. Europe, as sad as it is the situation with the Ukraine, restaurant situation continues to be strong, strong industrial base in Europe. And in the Americas, which we've been very open about, the needle movers, we call the Americas when we had some issues over the last 5 years, where we're seeing consistent acceleration in growth and share gains as well. So it's kind of like all cylinders hitting on the core, and we continue to see positive book-to-bill as we sit here today. And when you go to Farnell. Farnell -- I mean, Farnell is 8% roughly of our revenues and 25% of our profits. So if anybody is wondering, if we're going to continue to invest in Farnell? The answer is yes. And they have continued to grow share as well and strengthening our position in e-commerce and our digital footprint. Farnell's roughly 72% of all their line items are done online now, 72%. So that's a great productivity and efficiency metric and customer satisfaction metric. It's over 50% of the revenue. So really excited things going on all of those. As far as verticals go, industrial is still really strong in our focus. Always that's kind of go back 100 years. The origination really is that long tail of industrial applications and electronics has become an even more pervasive across the industrial space. Transportation -- and we expand the transportation, not just automotive because it's everything from cars to trucks, tractors, e-bikes, golf carts. That whole sector for us and verticals continue to grow more plan bigger and bigger role, probably closer to up to 20% of our business now is in -- I apologize, about 15% of our business and is somewhere in that transportation business. And then you equate that defense aero consumer, we don't play as much in consumer, which is probably a good thing. But that's how we're seeing it right now. It's still positive.

So it sounds like demand is strong across the board. Maybe just on that, if I think about Asia, it's been unusually strong, I would say, right? And so do you think -- what are some of the reasons for that? And do you think that continues? And just on book-to-bill, did you say that it's positive in all regions at this point?

Book-to-bill is still positive in all regions going out in the March quarter, and we still see that now. As far as Asia goes, yes, if you go back several quarters in a row, we just have seen really explosive growth in our Asia business. We're also picking up share, is what I've got to say. The China business is solid despite the challenges with COVID that we're all wrestling with, with across Asia Pac, our business continues to go uninterrupted. At this point as we sit here today, we've not had any -- not one day of shutdowns in any of our logistics centers in Asia-Pac. But we break it into China and Greater Taiwan and Japan. Japan is strong in Southeast Asia. And you got all regions within Asia Pacific are pretty consistently flowing right now.

So maybe a question for Tom. Is there a way to quantify the impact from the COVID lockdowns in China and from the war in Ukraine, I mean, how has that impacted your revenues and margins?

It's had an impact -- really, we've navigated well through it, and that means our customers and suppliers as well. On the China lockdowns, they seem to be easing, Time will tell. Our revenues have held up, and I think that's maybe a tribute to people coming to Avnet to work through these things, right? That makes us more important because we have multiple ways in China to deal with that. As far as the war in Europe, it's well publicized that that's had an impact on auto production. But even that, it seems that, others in particular, but the supply chain has kind of worked through that. And this is reflected in our guidance, but the EMEA team is still very strong revenues and very strong operating margins. We said at Investor Day, they are a very profitable business. So I think the team has worked through both of those very well.

Yes. I mean, you just had your Analyst Day, and you get some pretty strong guidance for revenues and margins and I want to talk about each of those. But before we get into that, maybe Phil, I want to ask you some more high-level questions. On lead times for both semiconductors as well as passives, I mean, are lease times still extended, which parts are hard to get, which parts are easier to get? And it's a hard question, but when do you think supply and demand comes into balance here?

So lead times, in general, we've not seen any meaningful change on lead times. I mean some might become a little bit more. We just met with someone says they're hearing products become more available, not much. And a lot of it is still in that -- it's not all products. A lot of it is in the higher-end technologies that we've been all talking about in high-end controllers and some of the FPGA and some of that area. But again, there's no meaningful change. Tom said it well, in our Investor Day, which was Monday, which we covered a lot of this all online, too, by the way. We're not really growing inventory much. So we've been in the last several quarters, trying to grow inventory. We know you guys always don't like when we do that, but we think inventory is a good thing, and we've not been able to grow our days of inventory, right? So that's just a sign right there. We had our operations call on Monday and the outtake from all of our materials folks across the world is it's kind of steady as she goes. So in the passives area and connectors, you got to look at -- it's really, again, people that all passives the same, well, they're not. They've got different types of capacitors, different types of applications, and they can kind of go up or down, but not anything meaningful that we're seeing an improvement in lead times. When does supply meet demand? I mean, because that's the $64,000 question we're all trying to figure out. But right now, the demand still looks really good. And probably we're getting supply. I mean, we grew 40% -- 35% year-on-year. So we're getting some supply. And a lot of that is unit increase as well. Just the demand is up pretty much across so many different verticals at one time.

You guys are at the center of the semiconductor space, so maybe can I ask you another high-level question. Where do you think we are in the semiconductor cycle? And from a pricing standpoint, are you seeing suppliers still raising prices? Should we expect another round of price increases? And can you talk about what happens when that happens for you guys? Like how do you react to price increases? And at the same time, when prices go down, how does Avnet react to that?

So I think the short answer, and then we can elaborate is pricing continues to go up. As we speak, we have a handful of the top suppliers on the semi side, raising prices 10% plus. And the same with the IP&E and the connectors more in the single-digit range. But I think it's important for everybody to understand. Pricing continues to accelerate because of the supply-demand imbalance. And we really don't see any change in that in the foreseeable future. So how does that affect us? Well, on the core, the high-volume distribution, we work with the suppliers. We have a lot of mechanisms that help both parties in up markets and down markets. So the way to think on the quarter is, hey, if somebody has a 5% supplier cost increase, we pass on 5%. So it helps our revenues, but it's being matched by costs. So there's a slight increment in the gross profit dollars. And Farnell, that's a business-to-business e-commerce site. So every day, prices can change, its market prices. So if I go on to Farnell today, I'm going to pay today's market price, so they benefit, right, because we may have bought that inventory a while back. And we want to be very transparent on how it affects our margins, but I think people have somewhat misinterpreted. That today, Farnell is close to a 15% up margin. And we said, hey, this price increase. If you took all of it out, you'd be at 12.5%, with the point gets very, very healthy, yet there's no reason to take the pricing out because pricing continues to accelerate. So at Investor Day, many of you are your longer-term investors, you want to know what do these margins look like through a cycle with pricing? And the way to think of Farnell, it's like a 10% to 15% operating margin. So when we gave our longer-term targets and a framework, we're assuming Farnell is operating in the 10% to 15%, not at the peak. But it's a strong market we are benefiting it from it, but there's a lot of things we're benefiting from besides pricing, which is the things like our demand creation is now 30%. We're operating in the high-growth semi markets, the auto and industrial. We've done a great job. The team has done a great job on keeping their costs managed, right? And all of these factors together support our strong operating margins. But pricing primarily Farnell. Does that answer your question?

No, it's good, Tom. It's great.

And your answer in the cycle. I mean, again, to call this time you're right. I've been around a long time. And if you go back to some of the other cycles, we were much more as an industry top heavy in '99, 2000, very top heavy to the data center, Y2K, PC, networking. And when the market turned, it was pretty, pretty harsh. This when you look around today, we're just looking at this room today, right, the amount of electronics and applications are limitless, right? So from a smart LED light bulb that has 20 chips to your mattress at home, it's got chips in it. That wasn't the case in 1999, 2000. So I think the -- that's why this cycle is how different nobody is really going to know. But it definitely feels different because it's just that pervasiveness of applicability. And automotive. I mean the combustible engine, the amount of technology, that goes to the EV, what 4x the amount of technology in chip content and component content, it's even got the chargers, right? And it's just the whole ecosystem in and of itself, okay, around automotive and transportation, that's changed that dynamic on the market. So tough to call where we are in the cycle. I think what Tom says, hey, yes, we're getting some benefit, but the team -- we got to focus on our execution and fundamentals and our expense to margin and our drop-through, which we measure maniacally to make sure we're getting that throughput on the organization.

Got it. Just in terms of supplier consolidation. In the last couple of years, Avnet has been hurt by that. But it looks like you've recurred extremely well. So can you talk about the strength of your line card today? Have you also gained some suppliers? And are you gaining share in any market? So if you can just talk about the strength of the line card and how you're doing?

Yes. Look, these suppliers -- first of all, we cannot control what supplier is going to buy who. I mean we can't. So it's not new to the investors that are maybe newer to the industry, this is not a new thing. I can go back to 1982, where our one supplier in a line card was General Electric, then we had Synatix, Motorola, National, Fairchild. None of them are around anymore, okay? And we've seemed to navigate that pretty well. More recently, there's been a couple that the bulls didn't bounce our way. You know what I think we're clear from get go. We're moving on, okay? We've got -- you can't look in the past just look forward. So that's the line card we do have is why I get in trouble because I am going to miss somebody. We got online cards phenomenal. I mean we just had we just had our Investor Day. We had Renesas. We're the #1 distributor for Renesas and don't have that line, ST, Infineon, Xilinx, we were exclusive with Xilinx, Broadcom, prior to those guys RockSolid were one of the hot ones and what not, Marvell, we had. I can go right on down -- #1 worldwide. NXP, #1 worldwide. Then you go over to the connectors TE, [indiscernible]. We've got [indiscernible] to replacement in the analog space. There's plenty of detail out there. There's plenty of share within the customer, go get it. We didn't change comp plans, just everybody knows, we lost the line, go find it. And we've got a lot of lines. We up behind us. We haven't -- what we've not done as those lines decide to go a different route, which is their prerogative. We've not reduced our resources in those spaces. So our field application engineers, our account managers, our inside sales, our digital automation, which is big for demand creation, particularly right now, we've continued to double down on. And it's paying off. It's -- in my opinion, it's well in the rearview mirror.

Got it. Maybe now I'd like to kind of shift the discussion to the revenue and margin targets that you recently gave at the Analyst Day. Let's start with the revenues. So if I look at the last 5, 6 years, from 2017, fiscal '17 to fiscal '19, revenues were mostly flat. Then the pandemic hit, fiscal '20, your revenues were down by 10%. Fiscal '21, back up 11%. And this year, fiscal 2, I think, is growing 23% year-on-year. And at the Analyst Day, for the next 3, 4 years, you've given a target of 5% to 8%, so can you help us kind of unpack that. How much of that is coming from market growth? How much is coming from you taking share? How much is pricing? Just help us understand how you came up with the 5% to 8% number?

So -- if you -- we look at the markets that we serve, Ruplu, and we looked at the third-party market forecast for the next 3 years. And what's important to know is the two fastest-growing semi markets are industrial and auto. And those are about a hair under 40% of our total revenues and is expected to grow at 7% to 10%. And then we're also in aerospace and defense. And if you do a weighted average of where our revenues are and what the market, you come out to about 5% market growth. So that was the initial baseline. On top of that, as Phil said, we're making investments in Farnell because we think this is a great business and the difference between Farnell and our core businesses, I thought Chris said it well on Monday, when you need thousands or anywhere in the world, the core business does that. When you need 30 and you need them tomorrow, you go to Farnell, okay? And it's e-commerce is online, it's higher margin. We've made a lot of investments in Farnell in the breadth of inventory available. And today, when you go on to the Farnell website, you have more than twice as many SKUs available as you did a few years ago. The buying experience is better. The weekly visits to that website are higher, and we see that this can continue to accelerate. So in the Farnell when we bought the -- Joe and I were talking about this yesterday. When we bought them, the revenues were a little over $1 billion. Today, they are $1.8 billion, we bought them 5 years ago. So the revenue target, we think we can get to $3 billion in 3 to 4 years at mid-cycle operating margin. So that adds to it. In Americas, we think there's an opportunity to continue to take share. So that should be a little bit right above that 5%. Then what we felt really good about it at Investor Day is I think people are starting to understand our embedded business. Up to now, I think it's been a word and not fully understood, but this is a really exciting combination chip on the board displays, got software in there. It's headed by one of our strong leaders. And although it's a smaller dollar, it can be a double-digit operating margin as well. We said, well, that can go from $600 million to about $1 billion over 3 to 4 years. And then you have demand creation. Demand creation, the team has done really well over the last 4 years, increasing not only just the size of demand creation, but the percentage of our total business and we see that continuing. So when we think 5% to 8%, 5% is really the growth -- the external forecast for growth rates of the market we serve. And then on top of that, Americas Farnell embedded. I didn't mention IP, which is our connectors passes. But that's how you get to that revenue target. So it's important to note, the targets are based on doing that basically in 3 years, right? Because just do it for 3 years. But we all know things never work as planned. So that's why we said 3 to 4 years, right? If there's a hiccup in the middle, we can get to these targets in 4 years, not 3, but that's how we put it together.

No, that makes sense. So let's talk about margins. And I think this is an area where you guys have done phenomenally well. I mean if I -- again, I look at the history of this -- of the margin trends in Farnell, five quarters ago, that was at 6%. And last quarter, you did 14.9%. And even the core, like 5 quarters ago, that it was like 2.6% and last quarter, you did 4.4%. So can you talk to us about what drove that margin improvement? How much of that was structural? And how much of that do you think you'll have to give back?

Yes. Most of it was structural. And again, we've been very transparent about this. Farnell is at close to 15% and structurally there at 12.5%, and that's because of adding the SKUs, making it a better buying experience, getting more people on the website. The other thing that's important to know, it's in e-commerce. So there's a lot of data analytics behind it, right? Like we have history, we know the customers coming on. We know what they typically buy. We know what we should suggest to them to buy, pricing analytics, things behind that. So when we put together the targets we put them together, like, let's assume a mid-market for Farnell. When you look at core over the last quarters or years well, really what's driven that is the demand creation. Demand creation is 300-plus basis points higher gross margin than the base business. So if you're growing that at a faster pace, that's margin accretive. And I think the chart said that 4 years ago, demand creation was about 25% of revenues, now it's 29%, and it's on a much bigger base. So that's really helped. And then the team, to Phil's term, drop-through, which is another way of saying, hey, grow your revenues, grow your gross profit, but let's not add a lot of expense. And this is my favorite set compared to 4 years ago. If you look at Avnet, our quarterly revenues were up $1.7 billion, but the OpEx is only up $30 million, right? So the team has done a really good job. And that's because we had some cost opportunities, the team did it. But what's most important about that is there's now a way of doing work. There's a culture with an Avnet where people are focused on maintaining a very competitive cost structure. So that's all structural, right? That's structural, and that's here to stay.

No, I'll add to that. Thanks, Tom. Going back several years ago, we realigned the organization structures or follow strategy, and we were just a little bit -- it should be very clear to every business leader what the responsibility is. You own this, period. Everyone in the organization is paid on profit get in some way, shape or form. But the two things that we talked about, we've been very transparent that we call them the needle movers, right? So we go back several years ago, we had two needle movers for our EPS and OI, which was Farnell, which you just articulated really well for us to get to 14%, let's call it, between 12% and 15%, whatever that number is going to end up being, but from where they were. And the other one is the Americas. We came very straight. I mean we had some issues that were challenges in the Americas, some self-inflicted, some ERP. That's all behind us. And we said, hey, we need to drive the Americas up. And proud to say they're probably 70%, 75% where we need them to be from an operating income standpoint. So they know they've got a little bit more runway to go at a $4 billion, $4.5 plus billion clip and do some math. We've got some more accretiveness to go there. So those two were the two big. Europe, we've really -- Tom mentioned rock-solid performance continuously in Europe, steady as she goes to Asia. Same thing, those two businesses were the two we've really maniacally focused on.

One thing you talked about is demand creation. And I think it's important that for those or new to the story, can you just kind of elaborate on why do suppliers use you for demand creation? On one hand, you've got like companies like Texas Instruments are going in-house, right? But what is the value add that you provide? And to grow the demand creation revenues, I mean, do you need to do investment? And how should we think about the pipeline of opportunities you have there?

So I'll take that one. Tom can jump on. So we're the definition of creation, where we help and/or do the pure design on behalf of the supplier, right? And then they award us a registration then that becomes a design win after you sell a certain amount of parts to an end customer. Then that design, when it's covered and you're protected for several years, no matter where -- this is really important, a matter where it ships in the world, it's designed in the U.S. or Europe or ship to China. We've got protection when it goes to China, Singapore, Guadalajara, wherever it might end up, that's Avnet's business. Now we've got attractive, but we're protected on it. And to Tom's point, it's roughly 300 basis points higher margin depending on the region and the application. We have ever a couple of thousand field application engineers. Combine that field application engineers, software engineers that have over 600. So we're doing in the embedded space. Tom just talked about, we're actually doing design and manufacturing of embedded boards that go into end customers' applications. So it's in demand creation, design chain through supply chain. This has covered really well on our panel on Monday. And, again, is public knowledge. And I couldn't have said it better than Chris Alexander or Paul [indiscernible] from Renesas, they do not have the reach that we have. When I talk about the pervasiveness of electronics, and we'll see what happens with the other guys and the decision they made over time. You won't know that for 4 to 5 years, but other suppliers or no indication at all of any other suppliers trying to do what they think they can go do. So I'll leave that alone, but the suppliers recognize we have the scale and reach. They just can't get to all the customers. And there's so many applications just impossible. They need companies like Avnet. Because we go in, we're not just selling one chip, or 1 board. Customers more and more today, and Chris Alexander said it great, selling so they want solutions. And then they don't hoist go for one chip. So we bring an agnostic view, okay, with the technology we have across the board to bring them those solutions. Then we complement that our FAEs, called feet on the street, with the digital self-serve tools. So we have a tool called, AVAIL. It's an online design tool that have hundreds of thousands of block diagrams and applications for customers to go help them with their designs. And our suppliers support those block diagrams and help sponsor the AVAIL tools. So it's exciting where we are. Tom's point, we got to roughly 30% of our revenue demand creation. That's without those other guys, okay? They dropped off. We made up that gap, okay, with the current line card that we have. And what's happening now in the IP&E space, you interconnect passive -- electromechanical space, there's a lot more technology there, too, and they are now getting into the demand creation business. And they getting like sensors, right? And you can argue or they passive? Are they active? So those types of applications. So that's why, I mean, the scale and reach we're still the best value proposition for our suppliers.

Yes. No, that makes sense. So at the Analyst Day, you've guided for the next 3 to 4 years, about 100 bps plus margin improvement. So 4% fiscal '22 going to 5% plus in 3 to 4 years. Can you help us unpack that? What are some of the drivers for that? And what's giving you the confidence that you can get there?

Yes. It's mainly changing its growing Farnell embedded IP&E faster than the base. And the way to think of this is, semiconductors keeps growing every year, right? It's in your home, your office, your electric vehicles. So the pie is getting bigger, but we believe we can increase the percent of our gross profit to over half of the total from Farnell embedded IP&E. So if you do that with your higher margin businesses, that's the predominant uplift. But the secondary is just -- it's a base, hey, if you have more sales and you're controlling your cost, again, you go to the term drop-through and that will help. But the main thing is really grow our higher -- investing in our higher-margin businesses, so they can grow faster.

Got it. I want to talk about inventory now and both -- at two levels. One is inventory in the supply chain in general and then specifically your Avnet inventory. So the first question I have is when you look at other distributors at EMS, would you say that inventory in the supply chain itself is lean and that could be because supply is still less than demand, right? The demand is very strong. But if we look back in history, it's been very few times that supply is actually matched demand and inventory always overshoots or undershoots. So what is your -- what's the danger that we'll have, at some point, an inventory correction while everybody now is thinking there are shortages. So just your thoughts on that. Is this time different than before?

Well, I guess that's kind of the question really. And we don't have perfect visibility into all our end customers' inventory advantage traction. Now those that are public, even in the EMS sector, that we can see the inventory and some of those state inventories might be going up because they've got some product on the way, and I'll wait for that last chip, and it's been called the golden screw the last chip from component to finish out those builds, and we're in contact with them constantly. And when you speak to those, and they're all going very well by the way they're great customers of ours. They're saying, demand is real. They're going back to their OEMs and other OEMs and customers are really -- the demand is real. So it's really tough Ruplu, to see that. What we do control what we see, as I said earlier, our inventories aren't really going on. So I can't speak for other distributors other than the one that's public, and we'll see what they announced, but their inventories haven't really gone up dramatically. So I don't believe there's that much more in distribution, okay, inventory or OEM suppliers inventory. So we will see where that plays out. What we track -- when we take in thousands of customers forecast on a daily, weekly, monthly basis around the world, we manage those and we look for the ups and downs in the forecast, and we go back and we challenge them. And I can just tell you, and we got like does, hey, you really need these products. If you don't, we've got someone else that needs they know like no, I need it, it's absolutely. So as long as people are being responsible, I think we're going to be okay. But that's all we can view is what we see. And the other thing we track daily is our cancellation rates. We look at the pushouts, pull-ins, cancellations. And in a normal time, it's, call it, 18%, 20% of our backlog is constantly adjusted. We would kind of become -- we're like a shock absorber for the industry. And that's the role we play. That's fine. Those numbers aren't changing, which I mean, there than 1% or 2%. So that's what we watch is an early indicator. That starts to go up and something is going on. So we're tracking it closely. You're right. Similarly, there might be an inversion there, but it's just tough to call.

Got it. So let's talk about Avnet's on inventory. I think at the end of the last quarter, it was about $3.7 billion. So it's up 33% year-on-year. Now is most of that inflation -- I mean, just prices of products have gone up. How much of that is actual pieces of inventory you have -- are more in inventory right now? But also, how should we think about working capital and cash conversion cycle over the next couple of quarters?

Yes. It's a little of both, right? I mean there's definitely been cost increases on top of volume. We always look at our working capital in terms of days, and we're a little bit below the average today, right? And that's why we say, hey, if we could get more inventory, we would, and I would call it we ship out fairly quickly, but it's at a good level. And in general, if you look at our working capital in total, 4 years ago, we said it should be less than 70 days. And today, it is less than 70 days. And we came off a high point of over 90%. So the reason for bringing that up is, it did generate cash, but the process to get there put a lot of good processes and discipline throughout the organization. Phil has a biweekly meeting that I'm on Joe, all the Presidents and we talk about inventory. We talk about what's on order. And these are good processes just to have. So I think in the foreseeable quarters -- 2, 3, 4 quarters, we're going to hover about where we are. It may go up a little -- working capital is measured on 1 day out of 90 in the quarter. So it's always hard to really pinpoint, but I think the more important thing is, and we said this at Investor Day is, if you look at over 3 to 4 years, we still believe there's about $300 million to $400 million in working capital that we can take out of the balance sheet and use it to invest in the business, do shareholder returns and that's not inventory related. That is doing programs for receivables, for supplier financing on payables and different tools.

Only comment I'll add to that, as Tom said well, he's extremely involved in our inventory calls is the quality of the inventory. Why do we have? We manage that by nonmoving, we have a certain amount of inventory in nonmoving, the quality of our inventory is as good as it's been. And that's as important as any.

Is there any risk that you take in inventory? I mean do you think some of that won't ship? I mean will we get stuck with inventory. I mean what are the puts and takes there?

Well, we're in the risk business, right? I mean so -- but we moderate the risk with tight contracts. So I don't see us having any more risk today than we have in the past. I actually feel better about it. I mean what's happening up was this supply chain crisis because that's what it is, right, has really renewed the value. We've always done value we bring to management supply chains and being the orchestrator, but more and more customers are coming to us because there's been transparency lost from the OEM to the end customer and the outsourcing whatnot, bringing us in to help bring them more visibility and transparency. So actually I feel better about the risk that we're taking today.

Got it. And the time that we have left, I want to cover 2 or 3 questions. And -- so one thing is at the Analyst Day, you talked about total shareholder return of 15% to 18%. Talk to us about how you're going to get there? What are the individual parts -- key parts there?

It's really a good point. And we practice that. If you're an investor, you're looking at the share price, those -- Phil and I can't predict the share price. But we can talk about like the types of returns we think we can deliver to our shareholders. And the spirit of the conversation was, if the market is growing 5% and we can grow our revenues 5% to 8% because we gain share and we grow Farnell and Avnet faster, well, we should be able to grow our net income dollars and then income dollars 12%, 13%, 14% a year. On top of that, we did announce that the share repurchase authorization increase, and that is about 13% of our total market cap today, and we said our intent is do that over 3 years. So you could take a net income dollar increase of 12% to 14% and then every year add 3%, 4% from production in shares, which would get you close to 15% EPS type growth. On top of that, our dividend is very important. And we've used the terms, we are on a steady and reliable to shareholders through the cycle. And this is something we worked on with our finance committee for many meetings. So it's difficult to predict a yield, but it's been between 2% -- close to 3%. So you can then take a net income dollars, production and shares buyback, get to 15%, get 2% to 3% dividend yield on that, that gets you to the high teens. On top of that, we are looking at smaller tuck-in acquisitions. And the purpose of the acquisition strategy is make Farnell a better business, larger, more profitable, make embedded get them to their goals faster. Well, that could be 1% or 2%. And that's how you get to the 20%. But it's all based -- it's based on revenue growth, changing the mix, buybacks, dividends, go ahead, Phil.

You're good. You covered it well.

Let's also talk about CapEx. So for an investor who's looking at the balance sheet or the cash flow statement, your CapEx is going from like $50 million. It's now you're predicting $100 million over the next couple of years. So where is that investment going into? And if it's to new warehouses, is there any danger that between the time that you get the facility and demand that's coming in, could you lose any revenue. So help us understand the dynamics of CapEx. What is -- what you're investing in and how that is going to flow in?

It's mostly distribution centers for efficiency and expansion and systems and business by business, make sure it's upgraded. And Farnell to do e-commerce. So when you think of distribution centers, though, the efficiency part is important, too, right? We're not doing it just for growth, although we needed for growth. The example we gave is, well, actually, let's look at what we did with Farnell, right? Like we built a new distribution center. It's automated with the intent that we were always talk about deal some efficiency improvements we should be able to get out of the facility. Well, next up is in EMEA, and we talked about it at Investor Day. Today is basically in a high-cost location, and we move it to a low-cost distribution hub that other people are using. So we think these are just good business decisions to make. And when we talk about the CapEx, that's like a net cash CapEx, meaning that what is the cash outlay for this? Because as part of this, you're selling old facilities, you're building facilities, you might be leasing or there's a lot involved, but it should be about a net cash CapEx of about $100 million per year.

Got it. I think we're out of time. So I just want to close by saying that, look, I think you guys -- the management team here has really turned the business around. You guys have done a great job I mean really, given the struggle you had with the revenues with 2 suppliers going away, but really, you've done a great job with both revenues and margins. So I want to congratulate you on that. And thanks for everybody coming here today. Thanks, Phil. Thanks, Tom. We appreciate all of the information today.

Thanks for the interest from all the investors.