Avnet at KeyBanc Forum: Strategic Insights and Growth Challenges

On Tuesday, 12 August 2025, Avnet Inc. (NASDAQ:AVT) participated in the KeyBanc Capital Markets Technology Leadership Forum, shedding light on its strategic direction amid a mixed performance across global markets. While Asia shows promising growth, challenges persist in Europe and the Americas. The company is employing various strategies to mitigate tariff impacts and optimize operations.

Key Takeaways

• Avnet’s Asia business grew by approximately 12% in fiscal year 2025, contributing to 50% of the company’s revenue.
• Tariffs pose operational challenges, particularly in the Americas, but Avnet is mitigating impacts through dual sourcing and regional optimization.
• The Farnell business, a high-service segment, is a key differentiator with plans to enhance operating margins through operational efficiencies and sales growth.
• Avnet aims to reduce inventory days to the 80s, with current levels at 94 days.
• There is cautious optimism regarding market recovery, though challenges in customer demand forecasting remain.

Financial Results

• Asia represents around 50% of Avnet’s business, with a significant 12% growth in fiscal year 2025.
• The growth in Asia was broad-based, with Taiwan, China, and Japan as major contributors.
• Europe and the Americas experienced declines but are showing signs of stabilization with modest sequential growth expected.

Operational Updates

• Avnet is focused on reducing inventory levels, targeting a reduction to the 80s in inventory days from the current 94 days.
• The company is managing tariffs, which are less than 3% of Americas sales, through strategies like dual sourcing and leveraging foreign trade zones.
• Farnell, representing less than 10% of Avnet’s business, historically contributed 20% of operating profits and is a focus for operational improvements.

Future Outlook

• Avnet plans to improve Farnell’s operating margins by enhancing e-commerce conversion rates and cross-selling with Avnet’s existing customer base.
• The company is focusing on global diversification, cost control, and supply chain optimization to navigate market uncertainties.
• There is a concerted effort to encourage customer forecasting to better align supply with demand.

Q&A Highlights

• Avnet executives emphasized the importance of Asia, noting its growth from 40% to 50% of the business over five quarters.
• The company is not planning to increase inventories but aims to work down elevated levels to improve cash flow.
• Farnell’s high-service business remains a key differentiator, with potential for higher gross margins due to its speed and convenience.

In conclusion, Avnet’s strategic focus on diversification and operational efficiency positions it to navigate ongoing market challenges. For further details, readers are encouraged to refer to the full transcript.

Full transcript - KeyBanc Capital Markets Technology Leadership Forum:

John Vinn, Analyst: Obviously, you’ve got kind of very good perspective on just what’s going on within the semiconductor industry. It seems like everybody is just talking about kind of the recovery that we’re starting to see more broadly speaking. Maybe just give us your perspective of what you’re seeing from a semi cycle perspective. Are you starting to see signs of a recovery? Maybe just talk about what you’re seeing from a bookings, book to bill, backlog and just inventory perspective.

Ken, Executive, Avnet: Yes, thanks. I think maybe I’ll first point you know, our Asia business and we just ended our fiscal year in June. Fiscal twenty twenty five, you know, grew roughly 12%, four straight quarters of growth in Asia. So we feel pretty good about that sign and that was pretty broad based in terms of the recovery there. Typically, in cycles, all this one has been more prolonged than ones in the past.

You know, it typically begins in Asia and starts in Asia and prior to the growth we’ve seen this last fiscal year, we were down six straight quarters in Asia year on year. So, we feel pretty good about that and again, our Asia business is heavy, Taiwan, followed by China, then Asian and then Japan. But, feel pretty good about the recovery there and across multiple end markets. From a book to bill perspective, as we exited the June, above parity in Europe and Asia and then kind of at parity in The Americas, so a pretty good sign, right? We’ve been running below parity in the West and so we feel pretty good about that.

We are seeing a lot of orders within lead times and we call that our turns business, but as we get customers within lead times, you know, to us that’s a really good indicator that inventories have been depleted, right? And, you know, they don’t have the inventory on the shelf and they need it. And then the backlog is improving. So, and that’s just near term backlog that we see in the turns business as well as, you know, backlog up to one hundred and eighty days. And so all those things point to us that we’ve kind of obviously already have growth in Asia and we’re nearing the bottom here in the West and are optimistic with our September guidance.

Sequential growth expected both in Europe and The Americas, although it’s modest, it’s still not declines. And so, we’re looking forward to seeing how things shake out here. September should be a good indicator for us in Europe. As they’re on their holidays in July and August when they come back in September, it gives us a pretty good indicator of how strong the December should be.

John Vinn, Analyst: Great. Thanks for that overview. Maybe just one quick clarification. How big is your Asia business? And then you talked about seeing heavy turns business.

I think a lot of the semiconductor companies at this conference have also commented on that. What do you make on that? Is that kind of unusual at this point in the cycle? And is that also limiting kind of your visibility in some of the out quarters at this point?

Ken, Executive, Avnet: Yes, I think, I mean, first of all, right now, Asia is roughly 50% of our business. But if you go to, let’s say, five quarters ago, it was closer to 40%. So what’s happened is significant growth in Asia and then significant declines in primarily Europe but also in The Americas. So we kind of had a mix swing, which is not necessarily great for us because of the fact that we get a higher margin in the West versus in Asia. But the good thing about all of our business units is they’re pretty broad based.

We’re heavy transportation, heavy industrial. We do have some in the compute and the communications area. So, we feel pretty good about being broad based. No single supplier technology accounts for more than 10% of our portfolio. I mean, I think we are running into challenges probably over the past year of the semi companies need customer forecast to figure out what to build.

And, you know, there’s just been a reluctance for probably several reasons of why customers haven’t been willing to give us that. I do think some of the increase we’re seeing in the backlog is more longer term visibility outside of lead times, which I think is a good sign, you know, but we really still need to be able to dial in what to build. And so, that’s part of our role is aggregating that customer demand and giving that visibility to the semiconductor and IP and E partners. And so, you know, we’re still encouraging customers, give us your demand, right, get in line. And as demand upticks, you could see pressure on lead times and things like that.

We’re not seeing that today. But just because you give us a forecast doesn’t mean you’re hooked and have to buy the product. I think there’s still some reluctance coming out of a you know, forced take kind of environment that they don’t want to give us more than they really need. But, you know, again, lead times are one thing, but cycle times are much longer. And if we run into, you know, extended demand, you know, we could run into some challenges.

John Vinn, Analyst: Yes, that’s an interesting point. Several of the companies that you wrap that have been presenting at our conference have been saying they’ve been sending out notifications and letters to their customers and warning them and encouraging them to kind of get ahead of these lead times that could be extending and maybe start placing more orders into backlog. Are you seeing kind of any sort of customer being receptive to that and maybe booking a little bit further out in response to some of this some of these kind of letters that are being sent?

Ken, Executive, Avnet: Yes. I think some customers are. I think it’s getting more progress, but it’s been several quarters we’ve been asking for that visibility. I guess what I would say is customers that have more near term demand or where they see that own demand on their side will be more likely to put the orders in, right, making sure so customers dealing in the AI space, for example, they know they’re running pretty hot. They need to get assurance of supply.

It’s probably a mixed bag. Some of the larger OEMs are maybe more sophisticated in how they deal with their supply chain. So they’ve got line of sight to some of these things. And there’s lots of buffer stock and kind of regional stock that customers can put in place to kind of help mitigate that. So I think in general, customers that are viewing the different signals and signs are kind of erring on the side of caution, but there’s still some more room to go in terms of that visibility.

We’ve typically had even going back prior to COVID, we would typically have one hundred and eighty day plus kind of visibility, and we’re kind of seeing more near term. But again, I think progress in the backlog.

John Vinn, Analyst: Great. Maybe can you give us kind of your view on just what you’re seeing in terms of demand trends via kind of different end markets right now?

Ken, Executive, Avnet: Yes. So this last quarter, we saw growth, I would say, in the compute, the communications and the transportation kind of end markets. From a regional perspective, right, we’re still seeing industrial pretty down. Our Asia and European business is pretty heavy industrial. We have some strength in aerospace defense in The Americas, which has held up relatively good, but it’s a little bit of a mixed bag.

I think Asia, in general, across all kind of markets was pretty good for us, And most markets in the West were weaker, but starting to see signs of stability. So our view is the trends are pointing to a positive direction. It still may be a little uncertain of how quickly it recovers and how many more quarters. But I think at least hitting bottom and kind of working our way out for there feels pretty good. And again, think our diversification helps give us not any over concentration in any one market.

John Vinn, Analyst: Great. A question that I get a lot from investors these days is not just your results, but just broader results. Like if you look at your results, how much of your results do you think are being driven by tariff related pull ins versus just kind of the broader cyclical recovery?

Ken, Executive, Avnet: I would say, from a financial standpoint, tariffs aren’t largely impactful. But it has operationally been a challenge. And our team continue to work really hard to react to announcements and to try to implement, first of all, mitigation techniques, but then secondarily, making sure we pass those through if we’re incurring a tariff and have to pass it on to a customer so we don’t get stuck. I think maybe when you look at regionally in Asia, I would say we’ve seen a little bit of demand pull in. That’s probably over the past three quarters just due to uncertainty with some of the trade environment.

So it’s less about having to pay a tariff and more about, am I going to be able to get this part into the country? Might as well on the side of having some stock. So we’ve seen anywhere from 50,000,000 to $100,000,000 in the broader Asia business each quarter for that, we’ll call it, pull in from customer uncertainty. But not a whole lot of impact and there’s not a lot of U. S.

Product that we sell that goes into China that’s subject to tariffs. I would say our biggest impact is in The Americas with China produced products, although more countries are becoming part of the tariff regime. This last quarter, about 3% or less than 3% of our Americas sales was actually tariff billings. And globally, it’s less than 1%. So, you know, pretty nominal, you know, a little bit of impact on gross margin, but not much.

And so, you know, we still think there’s more opportunity to not only mitigate, which is our key priority is mitigate and try to avoid them, try to sell products where the customers aren’t subject to tariffs, but if we do, how do we minimize the tariff? And so we’ve got, you know, we can do business in 140 countries. We’ve got warehouses in Mexico as well as The U. S. Our U.

S. Warehouse is foreign trade zone, So it’s not subject to tariff until it actually ships out of the warehouse if we receive product into the foreign trade zone. So there’s lots of things we continue to do to help mitigate and minimize the impacts.

John Vinn, Analyst: Okay. Can you talk about more specifically what are some of your mitigation strategies? And also maybe just talk about China, what percentage of your revenues are from China?

Ken, Executive, Avnet: So we do roughly $10,000,000,000 a year in Asia and about $3,000,000,000 of that’s earmarked for the China business. So roughly $3,000,000,000 which is 10%, give or take, a little bit less than that a little bit more than that, sorry. Mitigation techniques start with dual sourcing, working with our supplier partners to figure out if they’ve got product that’s produced in China and produced elsewhere, okay, bring the China stuff for China and bring the non China stuff into The U. S, right, mitigate that way. Secondarily, we would look at where the end location is, right?

Although our hub is in The U. S, we wouldn’t necessarily bring product in The U. S. If we don’t have to, right? We can bring it in Mexico, other places.

So really just trying to optimize the regional footprint and figure out where the end demand is. And so the dual sourcing helps a lot. There’s been a lot of evaluation as of late with more tariffs coming into place about what the country of origin or country of diffusion is because depending on what that conclusion is, subjects you to a tariff. But again, it’s a little bit of a moving target. Our hope is as we get more stability in the tariff space, we can continue to optimize and reduce the impact.

John Vinn, Analyst: Are there any questions? I’m wondering if you could just talk about just kind of your gross margin mix across regions. Obviously, with Asia being such a big percentage of your business, you are seeing a little bit of margin dilution there and it’s half of your revenues. What are you trying to do to kind of offset that dilution?

Ken, Executive, Avnet: I think maybe the important thing to emphasize is, you know, Asia is a critical part of our global footprint and, you know, over time, more and more manufacturing is done there. I still think even in this tariff regime, when you think about a China plus one, it’s alternative locations within Asia. So, you might have Vietnam, you might have Malaysia, you might have India. So, Asia is a critical market to us and our supplier partners, right? They’ve got pretty good concentration there too and those are key markets where the demand is and where the growth is.

And how we measure our Asia businesses, how do they expand their operating income dollars and how do they get the return on capital. And so although it’s a more competitive environment there, there’s lots of competition which tends to yield a lower gross margin, you know, they can make up for it in volume and still expand, you know, the key metrics we look at, which is operating income and ROWC. You know, we do believe the West will recover, and therefore, they should have higher growth in Asia as that happens. Again, longer term, perhaps everyone grows together depending on the end markets and things like that. But we do see some tailwinds coming just from some recovery of the West, which has a higher gross margin, which should benefit operating margins as well.

And the other thing we haven’t talked much about is Farnell, which is our high service business, and that commands a really premium margin relative to our core business. And so we’ve got some trajectory of growth there that should help the overall portfolio’s operating margins.

John Vinn, Analyst: Great. Can you talk about what your long term operating margin targets are? And what are the levers for you to get there?

Ken, Executive, Avnet: Yes. I think in general, with our model and again, the last couple of years have been sales declines, but it’s one of scale. So we need to get back our scale in terms of sales growth. We think the end markets we serve on a medium term basis have high single digit kind of growth rates, at least mid single digits, a lot of them like industrial and even aero defense should have higher than that. So we believe we’re well positioned to take advantage of that growth.

And we really have done a good job controlling costs. We were very careful about not going after cost too much in this downturn to kind of cut into the bone in terms of the sales force, the front end resources because we want to be well positioned to capitalize on the recovery. So I think it’s a growth story with controlling costs pretty well and we can drop through a lot of that to the bottom line. Farnell is going help with that a lot. There’s a lot of things in Farnell that we’ve done.

We have corrected the cost model there. There’s still a little bit of room to go there. But there’s also some revenue synergies we can continue to get out of Farnell. A couple of things I’ll point to would be, first, from an e commerce, it’s a high service kind of website kind of based business. And our conversion rate isn’t where it probably should be.

We get lots of traffic to not only the Farnell properties, but Avnet properties, but there’s still some opportunity to kind of meet industry standards in terms of conversion rate, which as we improve the website proposition and some of the underlying content, think we can get there, as well as synergies with the Avnet customer base. You know, there’s lots of large size customers that Avnet has strong relationships with that Farnell does very little business with. And so really, we refer to it as the Power One, really just trying to bring the Farnell high service proposition to some of our best customers and getting some of that share of wallet, which is pretty sizable for these big large customers.

John Vinn, Analyst: Yes. So you brought up Farnell. Can you give us an update on just what you’re doing specifically with the Farnell improvement strategy? And then maybe just talk about the Farnell operating margins, how do they compare to your overall corporate margins?

Ken, Executive, Avnet: Yes. So Farnell is our high service business and think about it as speed and convenience whereas the core Avnet may sell into the supply chain organizations of a company producing products with electronics. Farnell would typically maybe sell into the engineering group there that’s doing the R and D, that’s working with the next technology. And so it’s smaller quantities, overnight or two day kind of delivery cycles. And so that speed and convenience demands a higher gross margin, right?

More like two or 3x what the core business does. And so as kind of the shortage market was occurring, what was happening is people were coming and getting parts from Farnell. It was upping their sales and they were able to command a little bit more premium on the margin. And so we lost out on some opportunities to kind of look operationally and kind of fix some of the operational things they had going and the tides were kind of rising. But Farnell, you know, at its peak was running north of 30% gross margins as well as, you know, north of 14% operating margin.

And so we believe the business and their competition can achieve that again. But the first thing we focused on is with some changes in the management team to really bring in a few more operational efficiencies in terms of the OpEx. So we took some OpEx out and really trying to get the operations right sized. And then I really focused on looking for opportunities to kind of continue to grow the business. And Farnell is a lot of businesses on the board components.

Mean, what do you need to create an electronic board, but they’re also into test and measurement as well as maintenance and repair type of products. So think about anything an engineer does on their workbench to design or develop a product, they sell all that proposition. And so although we’ve seen steady recovery in some of the test and measurement and maintenance and repair, we have not seen the recovery yet in the on the board components, and that will command a higher margin as well as the conversion rate we talked about on the e commerce side of things and the opportunity to kind of cross sell with Avnet. So those are all kind of tailwinds that we believe are coming our way. But operationally, we’ve fixed a lot of other things, but there’s still some room to go there.

John Vinn, Analyst: What percentage of your revenues does Farnell represent? And when we think about the growth going forward for Farnell, is there an opportunity for that to see outsized growth? Or should we be thinking about what sort of growth rate?

Ken, Executive, Avnet: Yes. I think, is the answer. So Farnell right now represents less than 10% of our business. At its peak, it was 7% or 8% of our business, but 20% of our operating profits. And so, we believe with the Farnell growth, it’s going to come an improvement to the mix.

The margins at each product level category are pretty stable there, including for on the board components. So we have ways to go there as they get the growth. They’ll get the mix improvement as well, which will help gross margins and expand operating margins. But I do think with the other initiatives we have within our control, we’ll have equal to or higher growth than the core business.

John Vinn, Analyst: Right. Can you talk about where your inventories are? And just given where we are in the cycle, are you contemplating increasing inventories at this point?

Ken, Executive, Avnet: I wouldn’t say we’re contemplating increasing inventories. I would still say we have pockets where it’s a little excess than where we’d like it to be or relative to the current sales levels. So the first priority is continuing to work down the inventory where they’re elevated, and we know those areas. I would say we’ve made really good progress, maybe not as quickly as we’d like, but good progress in terms of the composition of inventory, whether it’s aged inventory, whether it’s pockets that weren’t moving, been able to kind of turn that over and get to the product categories that we will be able to sell and will enable growth in the business. Still some room to go there, but we think we have enough inventory in terms of dollars to support any near to medium term growth, but we still need to make some progress in getting the right inventory

And that’s continually our challenges. Let’s make sure we have the right product and only hold as much as we need to support what the customers’ needs are. So still some room to go there, but we did make some progress this year with a little bit more progress to go.

John Vinn, Analyst: Okay. What how many days of inventory you had and what’s

Ken, Executive, Avnet: We’re roughly ninety four days of inventory. I think our goal exiting fiscal twenty twenty five was to have lower than $5,000,000,000 of inventory when we started the year. When you normalize for currency, we’re about 5,050,000,000 so about $50,000,000 short, did make some progress towards that. So I would say we want our inventory days to be in the 80s as kind of the near term goal here. And it’s still going take a few more quarters to continue to work things out there, but we definitely have line of sight, and it’s a priority for the team.

But again, we want to emphasize that as a distributor, inventory is kind of the lifeblood of our business. We need to have the right inventory to fit customer needs, especially when you talk about this turns business improving where there’s near term customer demand within lead times. If you have that product on the shelf, that yields a sale and a lot of times, that yields a higher margin for us. So we want to make sure we’re well positioned as lead times extend out, if they do with demand increasing, be ready to kind of take our fair share.

John Vinn, Analyst: Right. Can you talk about what you’re seeing from a pricing perspective right now?

Ken, Executive, Avnet: I would say pricing has generally been relatively stable, right? We went through a period where we were having multiple price increases in a given year, but feel that ASPs are pretty steady now. With the demand environment where it’s at, I think there’s competitive pressures in terms of a customer wants a better deal and shops it and to keep your customer entanglement, you might have to do some things on price. But I think that’s in general, we’re seeing puts and takes there, but nothing of note. We think margins overall pretty stable regionally, but ASPs are holding up, which is good.

We don’t see anything that would indicate any near term or even medium term move to lower ASPs as wholesale perspective. Even we’ve even heard rumblings of price increases in certain specific technologies. So we feel really good about where pricing is at. And there was a lot of customer energy and outburst over tariffs. And of course, no one wants to pay a tariff.

And I think we’ve worked through some of that, although we still want to minimize the impact of tariffs. So we look at it year over year on each region. Gross margins held up pretty good. So from fiscal twenty twenty five to fiscal twenty twenty four across all three regions, including Farnell, generally margins holding up pretty well. A little bit of puts and takes, but feel okay about that.

So really focused on getting the regional mix improving and just getting back to growth across all regions.

John Vinn, Analyst: Yes. I think last question for me is just when you think about just competition, can you just talk about from a differentiation perspective, how do you differentiate yourselves from some of the other big distributors out there like Arrow or the World Peace?

Ken, Executive, Avnet: Yes. There’s lots of competition out there, although it’s a big market. I guess our first differentiator I’d point to is Farnell. We’re the only broad line global distributor with a high service business, and we do think high service has a long term future in the broader component supply chain. Farnell is well positioned in Europe, and we’ve made some investments to make that a better business.

Next, I’d say our line card. There is nuances with our line card versus some of the competition. We really excel at the high end technologies. And where we do have competing lines, we’re usually number one in some of those lines. So we feel pretty good about that.

That’s been a key focus area for the last several years to really be well positioned with the suppliers. And what we need to deliver as a distributor is we need customer count growth and overall revenue growth. And if we can deliver those, that we’re in good graces with the supplier partners. I do think our leadership team is pretty tenured. We just did announce the transition in Europe.

And so, you know, we’re excited about that, but at the same time, you know, we’ve had a pretty stable leadership environment at each of our business units, you know, not only in Asia, but in Europe, but also at the CEO helm. Phil has been with us for forty three years. So we think that’s important because we understand the value distribution provides, and we’re trying to just be the best value a distributor would be not something that we’re not, right? And so we understand our customer space, understand our supplier space and want compete well in the distribution space. I think in markets like Asia, we’re a little stronger in Taiwan, which we’re comfortable with as a good market, right?

And so those are probably the key factors I’d point to. But again, we have really good competitors, and I do think there’s room in this space for everyone to kind of rise, especially with the proliferation of electronics we expect over the next several years.

John Vinn, Analyst: Great. Thanks very

Ken, Executive, Avnet: you very much. Appreciate it.

John Vinn, Analyst: Hey, well good afternoon everybody. My name is John Vinn. Hey Ken, maybe just starting off obviously you’ve got kind of very good perspective on just what’s going on within the semiconductor industry. It seems like everybody’s just talking about kind of the recovery that we’re starting to see more broadly speaking. Maybe just give us your perspective of what you’re seeing from a semi cycle perspective.

Are you starting to see signs of a recovery? Maybe just talk about what you’re seeing from a bookings, book to bill, backlog and just inventory perspective.

Ken, Executive, Avnet: Yes, thanks. I think maybe I’ll first point to our Asia book business, and we just ended our fiscal year in June. Fiscal twenty twenty five grew roughly 12%, four straight quarters of growth in Asia. So we feel pretty good about that sign and that was pretty broad based in terms of the recovery there. Typically, in cycles, although this one has been more prolonged than ones in the past, it typically begins in Asia and starts in Asia.

Prior to the growth we’ve seen this last fiscal year, we were down six straight quarters in Asia year on year. So, we feel pretty good about that. And again, our Asia business is heavy, Taiwan, followed by China, and then Asian, and then Japan. But, you know, feel pretty good about the recovery there and across multiple end markets. You know, from a book to bill perspective, as we exited the June, above parity in Europe and Asia and then kind of at parity in The Americas, so a pretty good sign, right?

We’ve been running below parity in the West and so we feel pretty good about that. We are seeing a lot of orders within lead times. We call that our turns business but as we get customers within lead times, you know, to us that’s a really good indicator that inventories have been depleted, right? And, you know, they don’t have the inventory on the shelf and they need it. And then the backlog is improving.

So and that’s just near term backlog that we see in the turns business as well as backlog up to one hundred and eighty days. And so all those things point to us that we’ve kind of obviously already have growth in Asia and we’re nearing the bottom here in the West and are optimistic with our September guidance. Sequential growth expected both in Europe and The Americas, although it’s modest, it’s still not declines. And so we’re looking forward to seeing how things shake out here. September should be a good indicator for us in Europe as they’re on their holidays in July and August when they come back in September, gives us a pretty good indicator of how strong the December quarter should be.

John Vinn, Analyst: Great. Thanks for that overview. Maybe just one quick clarification. How big is your Asia business? And then you talked about seeing heavy turns business.

I think a lot of the semiconductor companies at this conference have also commented on that. What do you make on that? Is that kind of unusual at this point in the cycle? And is that also limiting kind of your visibility in some of the out quarters at this point?

Ken, Executive, Avnet: Yes, I think, I mean, of all, right now, Asia is roughly 50% of our business. But if you go to, let’s say, five quarters ago, it was closer to 40%. So what’s happened is significant growth in Asia and then significant declines in primarily Europe but also in The Americas. So we kind of had a mix swing, which is not necessarily great for us because of the fact that we get a higher margin in the West versus in Asia. But the good thing about all of our business units is they’re pretty broad based.

We’re heavy transportation, heavy industrial. We do have some in the compute and the communications area. So we feel pretty good about being broad based. No single supplier technology accounts for more than 10% of our portfolio. I mean, I think we are running into challenges probably over the past year of, you know, the semi companies need customer forecast to figure out what to build.

And, you know, there’s just been a reluctance for probably several reasons of why customers haven’t been willing to give us that. I do think some of the increase we’re seeing in the backlog is more longer term visibility outside of lead times, which I think is a good sign. But we really still need to be able to dial in what to build. And so that’s part of our role is aggregating that customer demand and giving that visibility to the semiconductor and IP and E partners. And so, you know, we’re still encouraging customers, give us your demand, right, get in line, you know, and as demand upticks, you could see pressure on lead times and things like that.

We’re not seeing that today. But just because you give us a forecast doesn’t mean you’re hooked and have to buy the product. I think there’s still some reluctance coming out of the forced take kind of environment that they don’t want to give us more than they really need. But you know, again lead times are one thing but cycle times are much longer. And if you run into, you know, extended demand, you know, we could run into some challenges.

John Vinn, Analyst: Yes, that’s an interesting point. Several of the companies that you wrap that have been presenting at our conference have been saying they’ve been sending out notifications and letters to their customers and warning them and encouraging them to kind of get ahead of these lead times that could be extending and maybe start placing more orders into backlog. Are you seeing kind of any sort of customer being receptive to that and maybe booking a little bit further out in response to some of these kind of letters that are being sent?

Ken, Executive, Avnet: Yes. I think some customers are I think getting more progress, but it’s been several quarters we’ve been asking for that visibility. Guess what I would say is customers that have more near term demand or where they see that own demand on their side will be more likely to put the orders in, right, making sure so customers dealing in the AI space, for example, they know they’re running pretty hot. They need to get assurance of supply. It’s probably a mixed bag.

Some of the larger OEMs are maybe more sophisticated in how they deal with their supply chain, so they’ve got line of sight to some of these things. And there’s lots of buffer stock and kind of regional stock that customers can put in place to kind of help mitigate that. So I think in general, customers that are viewing the different signals and signs are kind of erring on the side of caution, but there’s still some more room to go in terms of that visibility. We’ve typically had even going back prior to COVID, we would typically have one hundred and eighty day plus kind of visibility, and we’re kind of seeing more near term. Again, I think progress in the backlog.

John Vinn, Analyst: Great. Maybe can you give us kind of your view on just what you’re seeing in terms of demand trends via kind of different end markets right now?

Ken, Executive, Avnet: Yes. So this last quarter, we saw growth, I would say, in the compute, the communications and the transportation kind of end markets. From a regional perspective, right, we’re still seeing industrial pretty down. Our Asia and European business is pretty heavy industrial. We have some strength in aerospace defense in The Americas, which has held up relatively good, but it’s a little bit of a mixed bag.

I think Asia, in general, across all kind of markets was pretty good for us, And most markets in the West were weaker, but starting to see signs of stability. So, our view is the trends are pointing to a positive direction. It still may be a little uncertain of how quickly it recovers and how many more quarters. But I think least hitting bottom and kind of working our way out for there feels pretty good. And again, we think our diversification helps give us not any over concentration in any one market.

John Vinn, Analyst: Right. A question that I get a lot from investors these days is not just your results but just broader results. Like if you look at your results, how much of your results do you think are being driven by tariff related pull ins versus just kind of the broader cyclical recovery?

Ken, Executive, Avnet: I would say, from a financial standpoint, tariffs aren’t largely impactful. But it has operationally been a challenge. And our team continue to work really hard to react to announcements and to try to implement, first of all, mitigation techniques, but then secondarily, making sure we pass those through if we’re incurring a tariff and have to pass it on to a customer so we don’t get stuck. I think maybe when you look at regionally in Asia, I would say we’ve seen a little bit of demand pull in. That’s probably over the past three quarters just due to uncertainty with some of the trade environment.

So it’s less about having to pay a tariff and more about, am I going to be able to get this part into the country? Might as well on the side of having some stock. So we’ve seen anywhere from 50,000,000 to $100,000,000 in the broader Asia business each quarter for that, we’ll call it, pull in from customer uncertainty. But not a whole lot of impact, and there’s not a lot of U. S.

Product that we sell that goes into China that’s subject to tariffs. I would say our biggest impact is in The Americas with China produced products, although more countries are becoming part of the tariff regime. This last quarter, about 3% or less than 3% of our Americas sales was actually tariff billings. And globally, it’s less than 1%. Pretty nominal, a little bit of impact on gross margin, but not much.

And so we still think there’s more opportunity to not only mitigate, which is our key priority is mitigate and try to avoid them, try to sell products where the customers aren’t subject to tariffs, but if we do, how do we minimize the tariff? And so we’ve got, you know, can do business in 140 countries. We’ve got warehouses in Mexico as well as The U. S. Our U.

S. Warehouse is foreign trade zone. So it’s not subject to tariff until it actually ships out of the warehouse if we receive product into the foreign trade zone. So there is lots of things we can continue to do to help mitigate and minimize the impacts.

John Vinn, Analyst: Okay. Can you talk about more specifically what are some of your mitigation strategies? And also maybe just talk about China, what percentage of your revenues are from China?

Ken, Executive, Avnet: So we do roughly $10,000,000,000 a year in Asia and about $3,000,000,000 of that’s earmarked for the China business. So roughly $3,000,000,000 which is 10%, give or take, a little bit less than that a little bit more than that, sorry. Mitigation techniques start with dual sourcing, working with our supplier partners to figure out if they’ve got product that’s produced in China and produced elsewhere, okay, bring the China stuff for China and bring the non China stuff into The U. S, right, mitigate that way. Secondarily, we would look at where the end location is, right?

Although our hub is in The U. S, we wouldn’t necessarily bring product in The U. S. If we don’t have to, right? We can bring it in Mexico, other places.

So really just trying to optimize footprint and figure out where the end demand is. And so the dual sourcing helps a lot. There’s been a lot of evaluation as of late with more tariffs coming into place about what the country of origin or country of diffusion is because depending on what that conclusion is, subjects you to a tariff. But again, it’s a little bit of a moving target. So our hope is as we get more stability in the tariff space, we can continue to optimize and reduce the impact.

John Vinn, Analyst: Great. Are there any questions? I’m wondering if you could just talk about just kind of your gross margin mix across regions. Obviously, with Asia being such a big percentage of your business, you are seeing a little bit of margin dilution there and it’s half of your revenues. What are you trying to do to kind of offset that dilution?

Ken, Executive, Avnet: I think maybe the important thing to emphasize is, you know, Asia is a critical part of our global footprint and, you know, over time, more and more manufacturing is done there. I still think even in this tariff regime, when you think about a China plus one, it’s alternative locations within Asia. So, you might have Vietnam, you might have Malaysia, you might have India. So, Asia is a critical market to us and our supplier partners, right? They’ve got pretty good concentration there too and those are key markets where the demand is and where the growth is.

How we measure our Asia businesses, how do they expand their operating income dollars and how do they get the return on capital. And so although it’s a more competitive environment there, there’s lots of competition which tends to yield a lower gross margin, you know, they can make up for it in volume and still expand, you know, the key metrics we look at, which is operating income and ROWC. You know, we do believe the West will recover and therefore, they should have higher growth in Asia as that happens. Again, longer term, perhaps everyone grows together depending on the end markets and things like that. But we do see some tailwinds coming just from some recovery of the West, which has a higher gross margin, which should benefit operating margins as well.

And the other thing we haven’t talked much about is Farnell, which is our high service business, and that commands a really premium margin relative to our core business. And so we’ve got some trajectory of growth there that should help the overall portfolio’s operating margins.

John Vinn, Analyst: Great. Can you talk about what your long term operating margin targets are? And what are the levers for you to get there?

Ken, Executive, Avnet: Yes. Think in general, with our model and again the last couple of years have been sales declines, but it’s one of scale. So we need to get back our scale in terms of sales growth. We think the end markets we serve on a medium term basis have high single digit kind of growth rates, at least mid single digits, a lot of them like industrial and even aero defense should have higher than that. So we believe we’re well positioned to take advantage of that growth.

And we really have done a good job controlling costs. We were very careful about not going after cost too much in this downturn to kind of cut into the bone in terms of the sales force, the front end resources because we want to be well positioned to capitalize on the recovery. So, you know, I think it’s a growth story with controlling costs pretty well and we can, you know, drop through a lot of that to bottom line. Farnell is going to help with that a lot. There’s a lot of things in Farnell that we’ve done.

We have corrected the cost model there. There’s still a little bit of room to go there. But there’s also some revenue synergies we can continue to get out of Farnell. A couple of things I’ll point to would be, first, from an e commerce, it’s a high service kind of website kind of based business. And, you know, our conversion rate isn’t where it probably should be.

We get lots of traffic to not only the Farnell properties, Avnet properties, but there’s still some opportunity to kind of meet industry standards terms of conversion rate, which as we improve the website proposition and some of the underlying content, we think we can get there, as well as synergies with the Avnet customer base. You know, there’s lots of large size customers that Avnet has strong relationships with that Farnell does very little business with. And so really, we refer to it as the Power One, really just trying to bring the Farnell high service proposition to some of our best customers and getting some of that share of wallet, which is pretty sizable for these big large customers.

John Vinn, Analyst: Yes. So you brought up Farnell. Can you give us an update on just what you’re doing specifically with the Farnell improvement strategy? And then maybe just talk about the Farnell operating margins, how do they compare to your overall corporate margins?

Ken, Executive, Avnet: Yes. So Farnell is our high service business and, you know, think about it as speed and convenience whereas, you know, the core Avnet may sell into the supply chain organizations of a company producing products, you know, with electronics. Farnell would typically maybe sell into the engineering group there that’s doing the R and D, that’s working with the next technology. And so it’s smaller quantities, overnight or two day kind of delivery cycles. And so that speed and convenience demands a higher gross margin, right?

More like 2x or 3x what the core business does. And so as kind of the shortage market was occurring, what was happening is people were coming and getting parts from Farnell. It was upping their sales, and they were able to command a little bit more premium on the margin. And so we lost out on some opportunities to kind of look operationally and kind of fix some of the operational things they had going and the tides were kind of rising. But Farnell, you know, at its peak was running north of 30% gross margins as well as north of 14% operating margin.

And so we believe the business and their competition can achieve that again. But the first thing we focused on is with some changes in the management team to really bring in a few more operational efficiencies in terms of the OpEx. So we took some OpEx out and really trying to get the operations right sized. And then I really focused on looking for opportunities to kind of continue to grow the business. And Farnell is a lot of businesses on the board components, meaning what do you need to create an electronic board, but they’re also into test and measurement as well as maintenance and repair type of products.

So think about anything an engineer does on their workbench to design or develop a product, they sell all that proposition. And so although we’ve seen steady recovery in some of the test and measurement and maintenance and repair, we have not seen the recovery yet in the on the board components, and that will command a higher margin as well as the conversion rate we talked about on the e commerce side of things and the opportunity to kind of cross sell with Avnet. So those are all kind of tailwinds that we believe will come in our way. But operationally, we’ve fixed a lot of other things, but there’s still some room to go there.

John Vinn, Analyst: What percentage of your revenues does Farnell represent? And when we think about the growth going forward for Farnell, is there an opportunity for that to see outsized growth? Or should we be thinking about what sort

Ken, Executive, Avnet: I think, yes is the answer. So Farnell right now represents less than 10% of our business at its peak. It was 7% or 8% of our business, but 20% of our operating profits. And so we believe with the Farnell growth is going to come an improvement to the mix. The margins at each product level category are pretty stable there, including for on the board components.

So we have ways to go there as they get the growth. They’ll get the mix improvement as well, which will help gross margins and expand operating margins. But I do think with the other initiatives we have within our control, we’ll have equal to or higher growth than the core business.

John Vinn, Analyst: Right. Can you talk about where your inventories are? And just given where we are in the cycle, are you contemplating increasing inventories at this point?

Ken, Executive, Avnet: I wouldn’t say we’re contemplating increasing inventories. I would still say we have pockets where it’s a little excess than where we’d like it to be or relative to the current sales levels. So the first priority is continuing to work down the inventory where they’re elevated and we know those areas. I would say we’ve made really good progress, maybe not as quickly as we’d like, but good progress in terms of the composition of inventory, whether it’s aged inventory, whether it’s pockets that weren’t moving, been able to kind of turn that over and get to the product categories that we will be able to sell and will enable growth in the business. Still some room to go there, but we think we have enough inventory in terms of dollars to support any near to medium term growth, but we still need to make some progress in getting the right inventory

And that’s continually our challenges. Let’s make sure we have the right product and only hold as much as we need to support what the customers’ needs are. So still some room to go there, but we did make some progress this year with a little bit more progress to go.

John Vinn, Analyst: Okay. What how many days of inventory you’re at and what’s

Ken, Executive, Avnet: We’re roughly ninety four days of inventory. I think our goal exiting fiscal twenty twenty five is to have lower than $5,000,000,000 of inventory when we started the year. When you normalize for currency, we’re about $5,050,000,000 So about $50,000,000 short, did make some progress towards that. So I would say we want our inventory days to be in the 80s as kind of the near term goal here. And it’s still going to take a few more quarters to continue to work things out there, but we definitely have line of sight and it’s a priority for the team.

But again, we want to emphasize that as a distributor, inventory is kind of the lifeblood of our business. We need to have the right inventory to fit customer needs, especially when you talk about this turns business improving where there’s near term customer demand within lead times. If you have that product on the shelf, that yields a sale and a lot of times, that yields a higher margin for us. So want to make sure we’re well positioned as lead times extend out, if they do with demand increasing, be ready to kind of take our fair share.

John Vinn, Analyst: Right. Can you talk about what you’re seeing from a pricing perspective right now?

Ken, Executive, Avnet: I would say pricing has generally been relatively stable, right? We went through a period where we were having multiple price increases in a given year, but feel that ASPs are pretty steady now. With the demand environment where it’s at, I think there’s competitive pressures in terms of a customer wants a better deal and shops it and to keep your customer entanglement, you might have to do some things on price. But I think that’s in general, we’re seeing puts and takes there, but nothing of note. We think margins overall pretty stable regionally, but ASPs are holding up, which is good.

We don’t see anything that would indicate any near term or even medium term move to lower ASPs as wholesale perspective. Even we’ve even heard rumblings of price increases in certain specific technologies. So we feel really good about where pricing is at. And there was a lot of customer energy and outburst over tariffs. And of course, no one wants to pay a tariff.

And I think we’ve worked through some of that, although we still want to minimize the impact of tariffs. So we look at it year over year on each region. Gross margins held up pretty good. So from fiscal ’twenty five to fiscal ’twenty four across all three regions, including Farnell, generally margins holding up pretty well. A little bit of puts and takes, but feel okay about that.

So really focused on getting the regional mix improving and just getting back to growth across all regions.

John Vinn, Analyst: Yes. I think last question for me is just when you think about just competition, can you just talk about from a differentiation perspective, how do you differentiate yourselves from some of the other big distributors out there like Arrow or the World Peace?

Ken, Executive, Avnet: Yes. There’s lots of competition out there, although it’s a big market. I guess our first differentiator I’d point to is Farnell. We’re the only broad line global distributor with a high service business. And we do think high service has a long term future in the broader component supply chain.

Farnell is well positioned and we’ve making some investments to make that a better business. Next, I’d say our line card. There is nuances with our line card versus some of the competition. We really excel at the high end technologies. And where we do have competing lines, we’re usually number one in some of those lines.

So we feel pretty good about that. That’s been a key focus area for the last several years to really be well positioned with the suppliers. And what we need to deliver as a distributor is we need customer count growth and overall revenue growth. And if we can deliver those, that we’re in good graces with the supplier partners. I do think our leadership team is pretty tenured.

We just did announce the transition in Europe. And so we’re excited about that, but at the same time, we’ve had a pretty stable leadership environment at each of our business units, not only in Asia, but in Europe, but also at the CEO helm. Phil has been with us for forty three years. So we think that’s important because we understand the value distribution provides, and we’re trying to just be the best value distributor be not something that we’re not, right? And so we understand our customer space, understand our supplier space and want to compete well in the distribution space.

I think in markets like Asia, we’re a little stronger in Taiwan, which we’re comfortable with as a good market, right? And so those are probably the key factors I’d point to. But again, we have really good competitors and I do think there’s room in this space for everyone to kind of rise, especially with the proliferation of electronics we’d expect over the next several years.

John Vinn, Analyst: Great. Thanks very much, Ken.

Ken, Executive, Avnet: Thank you very much. Appreciate it.

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