安富利 (AVT) 2021 Q2 法說會逐字稿

Our presentation will now begin. Welcome to the Avnet Second Quarter Fiscal Year 2021 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.

Thank you, operator. Earlier this afternoon, Avnet released financial results for the second fiscal quarter of 2021. The release is available on the Investor Relations section of the company's website. Copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet's website.

Lastly, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict, in particular the scope and duration of the COVID-19 outbreak and its impact on global economic systems and our operations, employees, customers and supply chain. Such forward-looking statements are not the guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation.

Today's call will be led by Phil Gallagher, Avnet's CEO; and Tom Liguori, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Joe, and thank you, everyone, for joining us for our second quarter fiscal year 2021 earnings conference call. I hope everyone is safe and healthy and that your 2021 is off to a good start, all things considered.

2020 was a challenging year, to say the least. And of course, we continue to manage some lingering COVID-related headwinds. But speaking for myself, I can say it's nice to have some momentum moving into the new year.

Despite the challenges, we persevered and produced solid second quarter results. Our success is due in no small part to the hard work and dedication of our incredible employees. Our team's ability to continue to provide uninterrupted service at a global scale and supply chain visibility is remarkable. This demonstrates the invaluable role Avnet continues to play for our customers and our suppliers.

As I've highlighted in past calls, our employees' continued hard work has been supported by renewed commitment to our primary value proposition here at Avnet, bridging the worlds and accelerating the success of our suppliers and customers. Our efforts have been focused on streamlining the business, leveraging the core in Farnell and investing in our value-added businesses, including the likes of IoT and Avnet Integrated. We have continued to add SKUs to the Farnell inventory, add sales people in FAEs in selected geographies, invest in employee development programs, strengthen our supplier engagement teams and embrace digital capabilities. All of these actions put us on track to grow revenue streams, capture market share, enhance our global digital footprint and extend existing customer and supplier relationships.

While it's still early innings, our efforts in driving tangible results across the board. I'm heartened by the performance this quarter and excited to tackle the challenges and opportunities in 2021 and, by the way, our 100th year in business, pretty amazing, our 100-year anniversary in 2021.

Now turning to Slide 5. You'll see evidence of this progress. Our continued emphasis on execution, coupled with strong market conditions across Asia and improving conditions in the Americas and EMEA enabled us to drive revenue and adjusted diluted EPS well above guidance. We are well positioned today to execute even in volatile conditions.

In the quarter, revenues were $4.7 billion, up year-over-year and up sequentially if we exclude sales from the additional week in the prior quarter. Revenue grew 9.3% year-over-year and 9.7% sequentially when excluding TI revenues from the prior quarters and adjust it to reflect constant currency and the additional week of sales in the first quarter. Our adjusted operating income increased 22% from the prior quarter. And our operating margin also increased sequentially, even with Asia being heavy in the revenue mix. We're pleased with how we did in the Americas and EMEA and are encouraged by the early results we are seeing at Farnell with improved operating margins.

To top that off, the Asia region, and I do mean the whole Asia region, produced record sales in the quarter. It will be a surprise to no one on this call that we saw strong demand in the auto and industrial sectors in Asia and, frankly, globally. Tom will discuss our financial performance in further detail a bit later.

We truly are hitting on all cylinders and competing favorably across the board. While we are proud of the results that we achieved this quarter, we must remain vigilant and humble in the face of the continued uncertainty associated with the pandemic.

So before we take a deeper look at our core business lines, let me take a minute to speak about the widely reported chip shortages. Regarding some of the comments in the market about lead times and shortages of certain products, remember, Avnet has a broad and diverse portfolio across franchises, and we are not overly exposed to any one product category. As we always have and will continue to do so, we are managing our backlog tightly and staying close to our customers and suppliers. Continuity of supply and supply chain visibility are key assets of Avnet's value proposition.

Our teams have established relationships unmatched in this industry by remaining in constant contact with our customers and suppliers, working collaboratively upstream and downstream with both to manage forecast and mitigate supply chain risk. We remain committed to putting customers first and are pleased to see that focus reflected in our improving Net Promoter Scores, which is our customer engagement scores.

Additionally, we are seeing that suppliers are responding favorably to our approach as we continue to gain traction or what I'd like to call winning with the winners. It's worth noting our relationships with our top suppliers extend several decades across the board, clearly demonstrating the value Avnet brings to these partnerships.

We also announced earlier this month that we have rejoined the Electronics Components Industry Association, known as ECIA, as a distribution member. I'm very excited to take part and more directly contributing to enhancing the efficiency and effectiveness of our industry and look forward to furthering our industry relationships through that partnership.

Looking at our core electronic components business on Slide 6. Revenues were up year-over-year in the quarter at $4.3 billion. As mentioned earlier, we realized record results in Asia, our largest segment, posted 9% growth sequentially. We are confident our China growth plan is working and that we are gaining share in the entire APAC region, which is really encouraging.

Despite the Americas revenues being down this quarter, we're encouraged by the incremental improvement driven by cost-saving initiatives and initial recovery in the region. Revenues were down in the EMEA region as well, which was largely impacted by Brexit and lockdowns in the U.K. Overall, we were pleased with the gross margin improvement we saw across both regions.

We exited the quarter with strong book-to-bills in every region. We're continuing to tightly manage our backlog, and our teams are working closely with our customers to extend visibility, which we are sharing with our supplier partners. We continue to see strong design activity coming off record registrations in the first quarter.

Turning to Farnell on Slide 7. We're encouraged by the improvement we're seeing with Farnell. While Farnell sales were down sequentially and year-over-year with higher gross margins and reduced operating expenses in the quarter, we were still able to increase our operating margins to 4.5% from 3.5% in the prior quarter, tracking well towards our goal of 10%. We're continuing to invest, adding 49,100 SKUs through the first half of the fiscal year, progressing on our plans to add up to 250,000 SKUs through fiscal year 2022. Earlier this month, we also announced that Farnell was appointed as a national instruments authorized distributor. Significantly expanding its product portfolio to include NI software, connected test and measurement solutions for customers of all sizes.

Amidst ongoing lockdowns in the U.K., we continue to carefully manage the ramp-up of the Leeds distribution center. We know it will take time. Over the fully operational Leeds facility, we have the potential to realize $19 million of cost savings per year. That number alone speaks to the value we see in this business.

Turning to Slide 8. Before I turn it over to Tom, I just want to reiterate how proud I am of our team. They have truly demonstrated resilience, adaptability and perseverance, a tenet of Avnet's core and ability to evolve and deliver value over the past 100 years. As I mentioned last quarter, 2021 kicks off Avnet's 100-year anniversary celebration, which is a rare accomplishment for any company. But Avnet has proven time and time again its ability to adapt and grow. I've certainly seen that in my going on 40 years with the company, and I think many of you are watching that story to unfold today. I'm confident the steps we are taking will continue to deliver value and that we have the right team, experience and strategy to build on our recent momentum.

With that, I'll turn it over to Tom to walk you through the financials for the quarter. Tom?

Thank you, Phil. Good afternoon, everyone, and thank you for attending today's call.

Associated, despite some sustained macro headwinds, we produced strong results this quarter and made notable progress sharpening our execution in our primary distribution operations. Revenues of $4.7 billion exceeded our guidance and grew from $4.5 billion in the prior year's quarter. At this point, we fully implemented our $75 million OpEx reduction plan and our near end completion of our $245 million plan. As our top line has grown, our adjusted operating expenses as a percent of revenue have continued to decline, hitting 9.25% this quarter, down from 9.55% in the previous quarter.

And we achieved our goal of reducing working capital days. We started this initiative over 2 years ago when our days were in the mid-90s. Today, working capital days are at 75. As a refresher, each day is worth approximately $50 million of working capital. And to date, we've reduced working capital by nearly $1 billion. We are very proud of our team's progress and that we've been able to use the cash over the last 3 years to reduce our share count by almost 20% and pay down debt. Going forward, while we expect to invest cash in inventory as the economy and revenues recover, we remain focused on our net working capital days targets.

On Slide 11, you can see the early progress we have achieved. As noted, revenues of $4.7 billion and adjusted EPS of $0.48, both came in above our guidance range. Cash flow from operations totaled $85 million, our ninth consecutive quarter of positive cash flow, further demonstrating our team's execution of managing cash and working capital as we continue to navigate an unpredictable market. We use the cash flow to reduce our debt to $1.21 billion, and net debt to $831 million. We also continue to support our dividend and return $21 million to shareholders in the quarter. We're pleased with where our debt levels stand today. In fact, our debt is at the lowest level it's been since 2010.

Looking at the income statement. Gross margin of 11% was flat sequentially, primarily due to higher Asia revenues. By business, gross margin performed in line with our goals, increasing across the Americas, EMEA and Farnell. Adjusted operating expenses of $432 million were down by 4% sequentially. As I highlighted earlier, our $75 million operating expense reduction plan was fully implemented in the quarter, and we are tracking well against our $245 million plan. We have about $40 million to complete on that plan, which predominantly lies with 2 projects already underway: an effort to outsource transaction processing performed in finance to an outside service provider and progressing on our Leeds facility. As you heard Phil stated earlier, we have faced strong COVID-related headwinds in getting the Leeds facility up to full production capacity. But we're pleased with how the team has managed in light of those challenges, and we're happy with both on our gross margin and operating margin results in the quarter.

When we announced the $245 million cost reduction program over 2 years ago, we had an adjusted quarterly OpEx run rate of $483 million. And today, we're at $432 million on just about the same level of revenue, so we've reduced our quarterly operating expense run rate by about $50 million without cost in salespeople, FAEs or any market-facing staff. This positions us well as the market recovers, so we can focus on growing revenues with lower operating expenses without the cost of adding people.

Interest expense continued to decline and is now lower by $12 million or 37% compared to a year ago due to lower debt. Foreign currency expense was $5 million this quarter, an improvement from the prior quarter due to the weaker U.S. dollar. And our tax rate remains below 20%.

On Slide 12, we highlight results across our 3 geographic regions and from our 2 business segments. Total revenue growth was largely driven by record sales in Asia, up 16% year-over-year while we saw signs of recovery across the Americas and EMEA.

Looking at electronic components. We achieved revenue of $4.3 billion, increasing 3.3% versus the prior year. The electronic components segment operating margins were 2.4%, a 46 basis point improvement from last quarter due to our lower operating expenses.

Farnell revenues for the quarter totaled $326 million, down sequentially and year-over-year, primarily due to there being 1 extra week in the prior quarter and due to a slow recovery from the U.K. lockdowns. The segment had an operating margin of 4.5% in the quarter, meeting expectations. We expect Farnell operating margins to continue to improve over the next 6 quarters, as we work toward achieving a steady state 10% operating margin.

Importantly, Farnell gross margins also increased sequentially and were over 30% in the December quarter, illustrating the continued value that Farnell provides to engineers by having SKUs in stock and the ability to deliver to their desk within 2 days. We're optimistic that with the Brexit resolution and improving economy, we'll be able to realize the full potential of the Leeds facility and continue driving Farnell forward.

Turning to cash, liquidity and the balance sheet on Slide 13. Our liquidity position remains strong and puts us in a good position to fund operations as the macro environment continues to recover. We ended the quarter with cash and equivalents of $376 million and with $1.6 billion of available lines of credit. Our gross debt leverage was 3.0, and net debt leverage was 2.1. Our net book value per share was $39, and our tangible book value per share was $30.

Turning to Slide 14. Before moving on to guidance, I'd like to briefly touch on the progress we've made upon implementing our strategic priorities. Let me share a few examples of how better execution in the December quarter resulted in improved financials. We are beginning to see the gross margin benefits of the Farnell's team wide adoption of the pricing analytics tools implemented earlier last year as well as the stabilization of inventory reserves. Our Americas team implemented a number of cost actions that led to expanded Americas operating margins, a key initiative for us as we work to capture market share across all 3 core regions. Our Asia team has replaced just about all of their tax system instruments revenue, the sales of other supplier product lines to new and existing customers.

At the same time, we reduced our net working capital days in total. We've managed our customer backlogs and have added about $100 million of inventory in the first half of fiscal year 2021 to meet growing demand despite a tight supply situation. Even with the additional inventory, our electronics components segment reduced working capital days to below 70. Phil said it well, though we're still in the early innings here, we're pleased with the improved execution by our teams in managing our business.

Turning to Slide 15, I will wrap up with some comments about our expectations for the next quarter. For our fiscal Q3, we are guiding revenue in the range of $4.3 billion to $4.7 billion and adjusted EPS in the range of $0.52 to $0.58. Despite the seasonally lower revenues in Asia for the March quarter, we are guiding higher EPS. Asia tends to have a seasonal low in the March quarter due to the Chinese New Year, while our higher-margin Americas and EMEA regions are expected to grow revenues sequentially. Coupled with our cost reduction programs, we expect to drive higher profitability in the March quarter.

In summary, we're on pace, and we'll continue to take actions in line with our priorities. We are aligning our operations and processes to improve the top line trends and gain market share in key areas while maintaining our commitment to enhance profitability and improve return on capital.

With that, let's open the line for Q&A. Operator?

(Operator Instructions) Our first question comes from Adam Tindle with Raymond James.

Okay. Phil, I just wanted to start off with a strategic question. You've had a little bit of time to analyze the portfolio. I think there's kind of 2 paths that investors are potentially thinking about. On one path, you conclude you have the right portfolio, you're going to pursue organic margin improvement and cash preservation. Or another path could be pursue M&A in an effort to enhance the portfolio, potentially accelerate growth, aid and supplier relationships. Just hoping you could start by maybe opining on those 2 potential paths and which you're concluding is the right one to take here near term.

Yes, thanks, Adam. Appreciate that. Well, it might be an and versus an or, Adam. Short term, clearly, we're going to be driving the organic strategies. As we've talked before, the biggest needle mover for us is right here at home in the U.S., getting the Americas continue to stay on track to the their plan, which we felt good about this past quarter and making progress and continue to invest organically. Europe is frankly steady as she goes and going to continue to double down in Europe. And of course, Asia, we're really, really pleased with the progress we're making in Asia with effectively a record quarter. So that's in the core.

And then you got -- I'll call that there's really 2 though, then you've got Farnell. So they are the 2 major paths. In Farnell, we made some progress this past quarter. We're expanding SKUs and the mild progress in the Leeds facility.

As far as M&A -- and then, of course, we have added an Integrated, which is our embedded business, right? And we've -- we're restructuring that a bit and putting that closer to the core, particularly with the boards and software and displays that goes into many of our core customers. And then we'll continue to invest in IoT. But as we've talked, we just kind of took the pedal off the metal there a little bit, okay, to be sure we're getting a fair ROI based on the investments.

And Tom can jump in on M&A if you want. But on M&A, right now, we've been pretty convicted to continue to strengthen the balance sheet and protect that as much as possible while also protecting the dividend, right? Now that doesn't mean we're not going to date and look at opportunities for the future for M&A, and I'm sure that will begin again at some point in time, we're just not ready to talk about it yet. So again, I think it's more of an and than an or, and maniacally focused on execution.

And Phil, let me add just to set expectations. Any M&A would be a smaller tuck-in with a distributor that had a complementary either supplier or customer. So keep that in mind, Adam.

Okay. That's helpful. And maybe just as a follow-up, I know margin improvement is a key part of the story. I guess if we were to double click on margin improvement, Farnell is one of the big potential drivers here. I wanted to ask on that path, too. I think you said 10% over a 6-quarter timeframe. I think you mentioned in the quarter that gross margin was now over 30%, so that seems like it's quite healthy at present, and you're still kind of in the mid-single digits on an operating margin basis. So maybe help me bridge the next 6 quarters kind of doubling operating margin while the gross margin correction seems already done. Is there OpEx to come out? Is there volume on the revenue side? What are the drivers to get to that number?

Phil, should I take that?

Sure. Why don't you start, Tom? Go ahead.

Adam, I think the main thing is getting the Leeds distribution center ramp. $19 million is, I think, close to maybe 150 basis points improvement. And the Farnell team has done a really good job on OpEx management and moving things to lower-cost geographies. So there's some of that.

We're going to continue to add SKUs, which we expect will help bring people into our website and grow revenues as well as enhance our e-commerce tools and some marketing investments. But we want -- the expectations should stay the same, about 100 basis point improvement per quarter, and we feel good about where we're at with that.

Yes. Tom, last comment I'll make, Adam, is that we were there, okay? So 6, 7 quarters ago, we were at that 10% operating margin, and we're effectively reverse engineering the business back to get to that 10% in -- the math's working, now the execution has to follow, and that's what Chris and the team are working on.

Our next call comes from Tim Yang with Citibank.

On incremental margins, if I use midpoint of guidance, I think you're guiding $88 million to $90 million operating profit, which means that you are guiding profit of roughly $18 million higher with sales up $200 million on a year-over-year basis. So that's roughly 9% of incremental margins. Looking forward, how should we think about -- I mean flow-through margins or incremental margins given you have Farnell recovery and cost saving?

Well, the good thing about our financial model is that we feel very good about the cost structure. We feel very good that all of our organizations are staffed properly, that we have the proper staffing out in the field.

So we use the term drop-through. This is one of Phil's favorite terms. Right, Phil?

Yes.

And what it means is as we get gross profit dollars, Tim, we're not going to be adding a lot of cost totally go straight down and help with the operating income and the operating margin percent as well. Does that help answer your question?

Sure. So basically, so incremental dollar amount, that is generating the revenue. How much of that would flow through to your operating profit line on a year-over-year basis? I think that's my question.

We -- I think we've said in the past, 70% to 80%. It kind of depends, but that's what we target internally, so it should be quite healthy.

Got you. And then on the COVID-related costs, can you maybe just remind us like how much of that in the past quarter? And then how should we think about that forward -- going forward in the next 2 quarters?

We've given out a number, I think $8 million to $10 million. That's probably about steady. Keep in mind, we're also saving money, right, like no travel, building expense. So I think the net impact, Tim, is probably not that material.

Our next question comes from Matt Sheerin with Stifel.

Just a question, team, about just the current demand environment. If you could drill a little bit more, Phil, in terms of the book-to-bills that you're seeing per region?

And then also just commentary, you did talk about the supply constraints out there. Are you starting to see customers looking to build inventory? Do you think what you're selling is actually selling through versus some inventory build?

And then with that, basically, 2 or 3 years ago, we had a very strong cycle, and you saw some benefits on the pricing side and obviously on the margin side. Did you envision that kind of scenario given the data points out there? And would that margin environment be beneficial to you in terms of pricing?

Sure, Matt. I'll take that. Was that one question?

That was a multiple-part question.

You got it, Matt. I'm teasing you. So on the book -- I jotted them down here, I think I got them. On the book-to-bill, yes, we did note in the script, well above parity at this point in time in all regions. I think we noted in the last earnings, we started to see it come out of positive book-to-bill in Europe in the September month of that quarter, and that continued strong in Europe even through December, as it did in the Americas and Asia Pac. So yes, we -- very positive book-to-bill.

And I think it leads to the kind of the next question, they're kind of combined, part of it is lead times going out, Matt, right, and I'll comment on that as well. And as lead times go out, customers do tend to book more out as well, right, to adjust for lead time. So that's what we track really closely. The total book-to-bill, bookings inside of 30, inside of 90. And then you get outside of 90, 120. Obviously, the -- statistically, the accuracy comes down a little bit, but we're tracking that. We got the mechanisms to do that. We're taking in roughly 1,000-plus customers MRPs every day, week and month. So we got the analytics around that. So feeling good there.

As far as selling through, I just know that I'm on a lot of expedite calls where customers have real demand. It's on 3 today, as a matter of fact. So -- and with the suppliers. It's hard for us to judge if they're building inventories internally. I don't sense that talking to the customers at this point in time. And I'm assuming you're talking raw inventory buildup as opposed to finished goods or maybe a little bit of both. It's tough for us to track that. We try to manage it with our customers, but there's no magic wand on that one. We do watch the MRPs for inflated demand, right? We get a customer that comes in and is using a match here and ink, using 100 pieces a week. And all of a sudden, they want 300 or 400. We try to catch that and go back and reverify that it's true demand.

So I'm not feeling that at this point in time. Our cancellation rates, push outs, all that we look at are pretty consistent right now in that 25%, 30% range, which is for those that aren't aware that, that's normal. It's the buffer and the shock absorber we take care for the -- for our customers and our suppliers as we sit in that center of technology, right? So we're seeing it on both ends.

As far as the pricing, yes. So that's been pretty, pretty public out there for many suppliers. We won't comment on any one supplier. But yes, definitely seeing some pricing increases in -- whether it be shipping debit or just commodity costs, and we do have processes in place to go and work to pass that on to our customers. Sometimes that's difficult based on the contract we have, and we need to do some further negotiation. But certainly, the plan is particularly supply. We certainly can't be the shock absorber to pick up the pricing increases. So our -- what are major price increases, Matt, supplier is going with us, and we work with the customer together to explain that.

So it's not a black and white answer. It's a challenge, but we do have the mechanisms and stay the analytics to go back and and track that to be sure that we're -- drive -- increasing fairly, by the way, we might have customers on this call, fairly, the public price increases that are being passed on to us. That -- I think I covered them all.

No, I appreciate it. Just one quick follow-up just in terms of the gross margin. Tom, sort of backing into the number, it looks like it's going to be, what, 30, 40 basis points sequentially. I know mix is part of that, TI going away is part of that. But as we look forward, when Asia comes back, is it kind of sort of be in that range for a while until you start to see more demand creation and premier Farnell contribute? Or is it different?

No, I think you're absolutely right. It will be in that range of those 2 factors and further into the method.

(Operator Instructions) Our next question comes from Steven Fox with Fox Advisors.

Just following up on the last question about where the supply chain is at. Phil, can you sort of -- if we roll this situation forward, say, 3 to 6 months, what's the buffer that sort of keeps things from getting sort of out of hand where you do get into a situation where customers are double ordering? Is it that -- do you see the demand on the other side of some of the inventory build that some of your suppliers are talking about? Or is there another catch-up here that I'm missing? But I'm just trying to understand why this doesn't become a problem, say, in 90 days. And then I have a follow-up.

Yes, Steve, thanks. Again, I think it's based on what we're seeing today and the forecast management systems we have today. And back when I say that I mean that upstream with our suppliers and downstream to our customers, so we're seeing bidirectionally. And right now just based on the activity we see, the backlog, I mean automotive, the diversification, Steve, as well, automotive, industrial, the consumer, the application technology, again, I'm not a prognosticator to go out 3, 6, 9, 12 months. We typically don't do that. But just right now, the demand looks pretty darn good. And I was on with 3 major semi guys today and particularly in certain commodities, right? But it feels pretty good.

So again, we've been around the industry a long time, so we see the cycles. And I think this is just a different type of cycle, which is maybe make it a little bit more difficult, too, because you do have the COVID issue, how much of it's new demand versus replenishment of inventory because in the automotive, for example, because they didn't have inventory. So that's what we're just going to continue to track and put our own analysis around it and analytics around it.

And I think the other word I use with customers and suppliers is, "Hey, we all need to be more responsible." What is it we really need? What is it -- do the customers really need, okay, without inflating it, right? And we need to hold ourselves a little bit more responsible in the supply chain.

Okay. I appreciate that perspective. And then just on the Leeds, the ramp of that distribution facility. Tom, you mentioned $19 million of eventual cost savings. Do we think about that as sort of a fairly straight line? Or is there certain humps you still have to get over before you start realizing the bulk of the $19 million? How does that play out between...

Yes, it'll be -- sorry, I didn't mean to interrupt, Steve. If you could...

I was just saying between now and, say, you're talking 6 quarters from now.

Yes, and it's going to take another quarter or 2 before you start to see the the savings. But it's designed to have higher capacity at lower total cost, and what we see is on track as far as ability to achieve the savings.

And Tom, I could add to that, Steve, because it's a great question and we're all over that, is it's also going to add more capabilities for us, okay? There's certain value-add that the new logistics center will offer our customers that in the current facility today in the U.K. we can't do. So it's not only a cost -- I mean a hard black and white cost savings, to Tom's point, but it should enable us to sell more and offer more services as well.

Our next question comes from Nik Todorov with Longbow Research.

I wanted to double click on the comment of replacing TI's revenue in Asia. Just to confirm, this is sales. Does that mean that you guys have replaced essentially more from a gross margin perspective what you were getting from TI in Asia? And maybe if you can give us a split how much of that is new program wins? And lastly, on that point, maybe how is progress on doing the same thing in EMEA and North America?

Yes, thanks. Appreciate that. The answer is really yes and yes. So we -- on the revenue side, just looking at the last 3 years while we're talking, it was, as we said, the highest number we had, and that would have had the guys from Texas in the numbers. So it's now -- it was effectively altogether and similar on the profit side, which to the earlier question drove nice drop-through for us in Asia Pac. So effectively, yes. So we got the revenue in GP. What was the follow-up question on that one?

Just the...

America and...

Oh, Americas and Asia. Yes. So in Asia, obviously, we've got some -- yes, thank you. So obviously, in Asia, we got a little bit of a lift from the market as well, right, because the Asia markets were [up] so that certainly helped us as well as organically, working with other suppliers to help drive more shift and design.

There's 3 areas we're focused on. We've mentioned this before: One is to pin-for-pin replacement. So that's in a range of 10%, 12% of the business. And that's a global statement, by the way.

And the second one is the design win. And the -- that bucket is going to be the longer pole in a tent. That will affect more of the west, okay, and be slower to fulfill in both Europe and the Americas. And even some of that might be fulfilled in Asia Pac, and we'll track that. But that number is growing nicely, and that's when you're catching the next generation of design to the customer. They're not going to typically design something out in midstream. But we got our design registration, design win tracking, and we've actually got some design wins already going into production in replacing some of that business.

And then the third bucket is what we call shift, and that's where there is -- I think that's where -- we also remember that the customers care what happens with their supply chain and their suppliers. And there's -- they like to, at times, share that business, okay? And there might be reasons they have to share it. So there's some shift inside the customer where we lost a line like this one that we can go make it up in DTAM or TAM to DTAM shift inside the customer and that we're tracking as well.

So they're the 3-pronged approach that we're getting after on TI. And we're ahead -- and to your point, good observation, we're ahead in Asia Pac versus the balance of the west.

Okay. Great. If I can follow up with one more. Maybe, Phil, can you -- I understand that there's pockets of where lead times are structuring and maybe out of pockets that are not. But maybe if you can compare and contrast the lead times relative to the prior cycle and maybe to the peak of the prior cycle. And if lead times are stretching, what do you think is customers' ability to build inventory? Because it seems like we're hearing more of the fact that they cannot get product rather than build inventory on their shelves.

Yes, that's right, Nik. And that goes to, I think, Steve's question and part of Matt's question earlier on the building of inventory. Again, tough for us to track that, although we try to with the MRP sharing.

So the lead times, yes, it's a really good question versus '17, '18. It feels a little different than '17, '18. I mean -- and I think we all need to remember this. This can change within days and weeks, okay? In '17 and '18, it was more in the passive area, the capacitor area. Not exclusive, but just if you would make a statement, it was more in that capacitor area, where today it seems to be more in the actives, in the semi after side. That's not to say it can't spread into the passives as well, but it's really a moving target. In the last call we had with everybody back in October, it was predominantly 32-bit, the high-end microcontrollers, which is predominantly driven by automotive.

That still maintains to be a challenge and a huge range because we say 32-bit -- well, there's a ton of different packages and whatnot, but it's 16 to 52 weeks lead times. We see it spreading into some of the FPGA's power. So some parts of the analog are fine. Other parts, see it hit in the power devices and certain op amps and some of the automotive ICs. 16-bits starting to leak out a little bit, it's out about 4 to 6 weeks from where it was several weeks ago. And some of the 8-bit starting to get out to extend lead times as well. So it's a bit of a moving target, but it definitely seems to be coming a bit broader, okay, than we saw even in the October time frame.

Our next question comes from Ruplu Bhattacharya with Bank of America.

Tom, I think you said that there was $40 million left in the $245 million cost reduction program. How should we think about that flowing in?

And also, how should we think about SG&A trending over the next couple of quarters? Are you done with all the hiring that you needed to for sales force and engineers? And do you have enough staff to capture the end market demand? Or how should we think about SG&A over the next couple of quarters?

Ruplu, thanks for asking that. I think that's really important. I would expect our OpEx dollars to remain relatively flat with some adjustment for volume. We have $40 million left to go. Remember that half of the $75 million were temporary measures, things such as furloughs. And then as Phil mentioned earlier, we are making a number of investments.

But the good thing that we're really pleased with the OpEx is that as the market recovers, as revenues grow, we're not going to be adding dollars and other than sales commission and some distribution-related costs. And therefore, we'll get some pretty good drop-through down to the operating income dollars and the operating margin. Does that help?

Yes, it does. I mean that's very helpful. Maybe just as a follow-up to a prior question on the TI revenues. In the past, you've said that you don't have to make up the entire TI revenue that's going away because you're targeting revenues that are at a higher margin. So in that vein, is there a way to quantify how much of the revenue that you need to make up you've already made up? So like have you made up half of that revenue that you need to make up or 1/4 or 3/4? I mean is there a way to quantify how much more revenue that you need to make up to get to the same gross profit dollars?

Yes. We're probably in the range of between 30% and 35%, right? Because again, the biggest bucket is that design win registration bucket, and that's the one that's going to be further out because of just the sheer cycle time of design to fruition -- or registration to fruition, in the 30%, 35% range. And we said, just a reminder, we've always said it's roughly a 2-year period that's going to take. So we feel we're tracking.

Right. No, that makes sense. Just the last question. I don't know if you've mentioned this, but the end markets that were strong, if you can just kind of quantify. I'm pretty sure like demand from automotive was strong. But as you go forward, I mean which -- the demand that you're seeing from different end markets, if you can quantify like which one is stronger, which one is weaker.

And in that range, are you seeing any unusual demand from markets like automotive? So I mean getting back to the question of double ordering, do you think anybody like the Tier 1 versus OEMs that could be both ordering at the same time? So are you concerned about any double ordering in the -- in your backlog?

Well, again, we always track double ordering, as I said earlier. And we work with our suppliers on that because they could see it, too, by the way. They see XYZ customer placing the same part with 3 people, then they catch out as well, and they're working on that. So I don't think it's as prevailing as maybe it used to be. Sure, some out there. But the auto -- I don't -- you mentioned auto, I don't -- they're taking anything they can get right now. So I don't believe there's any buildup of -- or exaggeration there in what they need, and that's pretty public information.

The industrials come back strong. And that's still about 30%, 35% of our business, which is really -- nice thing about industrial is it's really a diverse customer set, and we need to make sure that we do what we can to protect that customer base. It tends to be much longer tail, higher mix, a little bit lower margin -- lower volume, but we bring a good value prop to them. So the margins tend to be good.

The consumer has been strong. Defense aero, we're running against our own compares there. But in aerospace, not as much, we kind of combine them. But on the defense side, definitely still strong in the defense side as well. We're not overly dependent on any one vertical really, which helps our diversification model.

(Operator Instructions) Our next question comes from David Williams with Loop Capital.

Congrats on the progress. Just want to see maybe if you could talk a little bit about the execution hurdles that are in front of you? And what are the main sticking points or the areas that we should be concerned with or potentially could hang up some of the progress that you're making and your -- the progress you're working toward?

Well, I'll go first, Tom, if you want. So thanks, David, appreciate the question. It's a good question, and we're focused on execution. So I always say we can't control the market and the size of the market or the growth of the market, but we can focus and control what we control, which is execution. So good question.

The 2 we talk about most, frankly, is the Americas. And I'm sure, Tony, our President, is on the call somewhere or will listen to transcripts. It's our biggest needle mover from several years ago. We took a couple of hits here, and we're pleased. I want to make that really clear. We've been picking up share in the Americas, and we're pleased with the progress being made there. And that's probably number one.

And then number two, we've talked about quite a bit in the script and in Tom's section with Farnell. We got the Farnell. And again, when I say Farnell, it includes Newark here in the U.S. with Uma and team leading that effort. We just added National Instruments, by the way, which is exciting. So we'll be executing on that. That should be a growth line for us as well. But those 2 are the most critical to get us back to where we need to get to, and we have line of sight in both of those businesses to get there.

And then we need Asia, and Prince and his team continue to focus on the execution Tom talked about. They've had a nice run and has done a nice job. And of course, Europe is our most profitable region, and we need Mario keep the pedal in metal in Europe in steady state and continue to drive execution there. So demand creation is key at 30%, 35% of our business today. Suppliers' value, what we bring in demand creation. It's a topic of every conversation we have with our top suppliers, and we need to continue to grow that. And then the IPD, Interconnect, Passives & Electromechanical, right? So that's a higher-margin business for us, and we got to focus on that as well.

So there's not any one, but there are 4 or 5 as we build out the new business models that'll have a bigger impact on margin as we go forward in IoT and the Avnet integrated business. Hope that helps. Tom?

No, I think you covered it, Phil. Thank you.

And one more if I could. Just maybe any color around the registrations and maybe where the activity has been the strongest, specifically within the industrial segment. I know it's been strong. But are there pockets or areas that you're seeing maybe greater degree of demand than others? Or is it really, truly just very broad based?

Yes, it's a good question. We reported last quarter, the registration act -- the income and registration was the highest we've had on record. And we're pleased this quarter that actually our design win revenue, so that's when you actually ship the product against that registration, it was the highest in 6 quarters. And so we're pleased with the progress even with some of the line losses we've had to be able to close that gap. So a positive on that front.

And then on the segments, you asked about industrial, industrial is really diversified. But clearly, test and measurement is strong. A lot of our medical falls into industrial as well as a subset effectively. But it's pretty diverse, it's not really any one. Just think about all the industrial applications out there and how diverse that is.

Our next question comes from William Stein with Truist Securities.

Phil, can you talk a little bit more about the shortages maybe in this way? What is the biggest product sort of problem area for you now? And when you talk to those suppliers, I think we all understand that these are real shortages. I'm guessing there is some double ordering going on, but there's also very low inventories in the supply chain. So it doesn't seem inappropriate, and demand is probably going to continue to get better as we go through '21. What are those suppliers telling you about their recovery plan for adding capacity for sort of fixing this? Because hopefully, it doesn't fix the other way by demand crashing.

And then as a follow-up to that, and it's another compound question, but can you talk about customer behavior in the case of their inability to get a full kit? Are they taking what they can now and then chasing the other parts for either through you or any channel they can? Or are they waiting in a way that they make sure they're always balanced?

Yes. Yes, thanks, Will, really good questions, complicated questions. And boy, I'm looking at our lead time charts here. I don't want to talk out any one supplier. But for sure, the hiring MCUs, that's consistently probably the hottest right now in the 32-bit space we talked about in October, and that continues. And it's complicated because there's so many different package sizes. And I would just say, and today, I'm expediting a power module for a major customer in the industrial segment, so a subset of the medical. I was on the phone literally about 2 hours ago. So it's kind of -- it's a tough question to answer.

But I would say, I'm probably going to pick one, okay? It'd be probably more than likely the higher-end 32-bit. But as I said earlier, it's probably leaking into the 16-bit, even some of the 8-bit right now. And that's where you're going to get into that broader customer base, particularly in the 8-bit, broader applications in the industrial segment.

As far as the -- what they're saying, and a lot of this is out there already is that's why the cycle is so much different than others because of the COVID and some of the issues that some suppliers had in packaging and whatnot over the past 6, 9 months and playing catch-up. But when you look at the front end versus the back end and the lead time just to get a fab up and running, I mean it's -- it could take upwards of 9 to 20 weeks just to get a fab up and running, and then the back end, another 10 weeks or so.

So depending on where the suppliers might be, and some of them outsource that, obviously, in that process is the moving target. So just starting now, then we're going to have a long road to go. And some are starting, some are already underway and whatnot. So it really just -- that's roughly the lead times that you'll see out there. And based on that recovery of capacity and demand, and we'll see how that adjustment plays out.

And then the follow-up was about, are they waiting to get fully balanced kits? Or are they taking what they can? Is there a prevalent answer to that question? It's something that comes up all the time when there are shortages, and we had them then when the cycle protracted. It happens every couple of years, right? So...

Yes. Sorry, Will, I wasn't avoiding that one. I wasn't avoiding that one, yes. So we track that. We're not seeing a lot of that right now. I think what you're saying is that they can't get the -- in '17, we ran into some of that, right? They can't get the MLCC capacity. They may not want the rest of it, kind of what you're saying. We've not seen that play out yet. It could on a item-by-item or individual basis, but not a whole lot. And again, we're not -- I'm not seeing the hoarding effect of inventory either on the other side to the earlier question. But I can't -- look, I can't say that there's not some of that happening. But right now, we're not tracking to it. We're not tracking it. We don't see it.

There are no further questions at this time. I would like to turn the call back to Phil Gallagher for any closing comments.

Yes. Thank you very much. I appreciate that, and I want to thank everyone for attending today's earnings call. We hope everyone stays healthy and safe during this time and wishing everybody a great 2021. Look forward to speaking to you again in April with our fiscal third quarter earnings report. Take care, and thanks again.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.