AVT - NASDAQ

Welcome to the Avnet Second Quarter Fiscal Year 2025 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President Treasury and Investor Relations for Avnet.

Thank you, operator. I'd like to welcome everyone to the Avnet Second Quarter Fiscal Year 2025 Earnings Conference Call. This morning, Avnet released financial results for the second quarter fiscal year 2025, and the release is available on the Investor Relations section of Avnet's website, along with the slide presentation, which you may access at your convenience. As a reminder, 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. 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. Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP and GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, 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 on our second quarter fiscal year 2025 earnings call. Our first earnings call in the new calendar year. Before we begin, I want to take a moment to acknowledge the unimaginable devastation in Los Angeles County and ongoing challenges in North Carolina. Our hearts go out to all those affected by these catastrophes, including our employees, customers and suppliers, and we are committed to providing support to the communities affected through our Avnet Cares program. As of now, all of our employees in these locations are safe. And to date, there has been no impact to our operations from these tragedies. With that said, let me turn to the second quarter results. In the quarter, we achieved sales of $5.7 billion and adjusted EPS of $0.87, both above the midpoint of our guidance. Similar to last quarter, our results were primarily driven by stronger-than-expected performance in Asia, offset by weakness in the West, with Europe presenting the most challenging market conditions. Our team continues to compete well and manage the factors within our control. We are making good progress on optimizing inventory and managing costs while at the same time making investments in our business and operational capabilities. These efforts by our team helped us to generate over $300 million of cash flow from operations in the quarter. I want to thank our team for their perseverance during the prolonged and challenging cycle. Their efforts position us well for when the market recovers. Taking a look at the market today, and with the exception of a slight uptick in the memory space, semiconductor lead times continue to be stable across technologies. Pricing is mixed with some decreases in commoditized products and increases from certain suppliers providing more complex technologies who are looking to pass along higher input costs. On the IP&E side, lead times and pricing continue to be stable. Our global book-to-bill ratio remains below parity with our Asia region showing the strongest and Europe having the weakest book-to-bill ratio. Our backlog continues to be under pressure due to a combination of shorter lead times, the current demand environment and customers still being in that destocking mode. However, cancellations have remained at normal levels. From a demand perspective, sales increased sequentially in the Aerospace and Defense vertical led by the Americas and comms and transportation verticals led by Asia. Industrial, compute and consumer verticals were lower on a sequential and year-over-year basis. Even with the muted demand, as customers continue to work through their elevated inventory levels, I am pleased we made the expected progress on reducing inventory. Our team will continue their efforts to optimize the composition and quality of our inventory over the coming quarters. We expect to continue to reduce core inventory levels where needed in the coming quarters, but will balance the reductions with inventory investment opportunities we are seeing in the market. Now turning our attention to Electronic Components results. At the top line, our Electronic Components sales increased slightly on a sequential basis and declined on a year-on-year basis. Asia continues to be the bright spot for our EC business with sales increasing both sequentially and year-on-year. We saw sequential and year-on-year growth in the industrial, communications and transportation end markets. We saw a slight benefit in Asia from customers ordering due to the uncertainty of potential regulatory changes in the United States. In EMEA, we continue to experience weak demand across the region due to the economic backdrop and certain geopolitical factors, which are all having a dampening effect on the business and consumer confidence. In the region, the Aerospace and Defense end market showed moderate growth on a sequential and year-on-year basis. In the Americas, we saw sequential growth in the aerospace and defense end markets and in select industrial end market applications. We did not see any meaningful increases in orders this quarter in advance of the recent tariff increases. Demand creation revenues increased sequentially by 5% as our field application engineers continue to drive the funnel for converting design wins into revenues. Our design registrations and wins also increased sequentially which is a positive indicator for future demand creation revenues. Now turning to Farnell. Sales were flat sequentially and down year-on-year. Farnell sales continue to be challenged given the weak macro environment in Europe where they have the highest percentage of sales. Farnell is also facing some competitive pricing pressures for on-the-board components. I am confident that we will see slow and steady improvements at Farnell as we execute against our cost reduction initiatives and focus on those growth opportunities we have control over. Including leveraging existing Avnet customer relationships. To conclude, the current market correction has been one of the most prolonged and uncertain in recent memory. And I want to thank our team for their dedication and competitive spirit. While it is difficult to gauge how long the market correction will continue, there are many reasons why I'm optimistic about the future of Avnet. We have a great supplier line card and a diverse customer base. We have a seasoned and stable leadership team, and we have a solid balance sheet, giving us the capacity to weather these challenging market conditions and emerge even stronger. We also see opportunities with supplier partners to grow our share by continuing to demonstrate the value of distribution, including tapping into our supply chain services and digital capabilities. Additionally, our continued focus on higher-margin offerings such as embedded solutions, demand creation and IP&E products will yield future growth and gross margin benefit. With that, I'll turn it over to Ken to dive deeper into our second quarter results.

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our second quarter earnings call. Our sales for the second quarter were approximately $5.7 billion, near the high end of our guidance range and down 9% year-over-year. On a sequential basis, sales were higher by 1%. Regionally, on a year-over-year basis, sales increased 8% in Asia but declined 25% in EMEA and 14% in the Americas. From an operating group perspective, Electronic Component sales declined 9% year-over-year but increased 1% sequentially. Farnell sales declined 12% year-over-year and less than 1% sequentially. For the second quarter, gross margin of 10.5% was 86 basis points lower year-over-year and 32 basis points lower sequentially. A significant portion of the year-over-year and sequential declines were the result of a sales mix shift to Asia. The same mix shift to Asia also impacted EC gross margin, which was down both year-over-year and sequentially. Gross margins for each EC region remained relatively consistent on a sequential basis. Farnell gross margin was also down sequentially and year-over-year largely due to an unfavorable product mix and from competitive pricing pressures for on-the-board components. Turning to operating expenses. SG&A expenses were $437 million in the quarter, down $28 million or 6% year-over-year and down $2 million sequentially. As a percentage of gross profit dollars, SG&A expenses were slightly higher sequentially at 73%. Foreign currency positively impacted operating expenses by approximately $4 million sequentially and had relatively no impact year-over-year. For the second quarter, we reported adjusted operating income of $159 million and our adjusted operating margin was 2.8%. By operating group, Electronic Components operating income was $182 million, and EC operating margin was 3.4%. The sequential and year-over-year decline in EC operating margin was primarily due to the sales mix shift to Asia. Farnell operating margin was 1% up 47 basis points quarter-over-quarter, reflecting improved expense control. Farnell operating expenses were down $10 million year-over-year and down $4 million sequentially. Farnell operating expense reductions continue to progress as planned, and we remain focused on all the areas we can control. Turning to expenses and low operating income. Second quarter interest expense of $62 million decreased by $12 million year-over-year and decreased $2 million sequentially due to lower average borrowings. This lower interest expense positively impacted adjusted diluted earnings per share by $0.11 year-over-year and $0.02 sequentially. Our adjusted effective income tax rate was 23% in the quarter as expected. Adjusted diluted earnings per share of $0.87 exceeded the midpoint of our guidance for the quarter. Turning to the balance sheet and liquidity. During the quarter, working capital decreased by $554 million sequentially including a decrease in reported inventories of $362 million, $154 million decrease in receivables and a $38 million increase in payables. Sequential changes in foreign currency exchange rates contributed to $211 million of the working capital reduction and $160 million of the inventory reduction. As a result of this working capital decrease, working capital days decreased five days quarter-over-quarter to 102 days. Our return on working capital decreased from last quarter due to lower operating income, partially offset by the reduction in average working capital. Although there is more work we have ahead of us to optimize inventories, the reduction this quarter demonstrates additional progress to our near-term reduction goals. Our inventory days improved three days sequentially to 98 days. As Phil outlined, our priority remains ensuring we have the right inventory to support our customer needs and to position Avnet for growth opportunities. We continue to work down areas of aged or excess inventories while we invest in the inventories we need to achieve our growth objectives. We generated $338 million of cash from operations in the quarter. The cash flow generated from our working capital management allowed us to decrease debt by $385 million this quarter. We ended the quarter with a gross leverage of 2.9 times, and we had approximately $1.1 billion of available committed borrowing capacity. Over the past several weeks, we extended the maturities of our two primary credit facilities, which provide for $2 billion of borrowing capacity over the coming years to support and future liquidity needs. Cash used for capital expenditures was $29 million, within our expected quarterly levels of approximately $25 million to $35 million per quarter. We remain committed to our road map of delivering a reliable and increasing dividend and making share repurchases to increase shareholder value as we believe our shares continue to be undervalued by the market and are still trading below book value. In the second quarter, we paid our quarterly dividend of $0.33 per share or $29 million. We also repurchased approximately $51 million for the shares and have $515 million left on our current share repurchase authorization. We are on track for our goal to reduce outstanding shares by at least 5% this fiscal year. Book value per share decreased to approximately $55 a share or a sequential decrease of $1 per share due to changes in foreign currency exchange rates. Turning to guidance. For the third quarter of fiscal 2025, we are guiding sales in the range of $5.05 billion to $5.35 billion and diluted earnings per share in the range of $0.65 to $0.75. Our third quarter guidance assumes current market conditions persist and implies a sequential sales decline of approximately 6% to 11%. The sales guidance implies expectations of a seasonal sales decline in Asia due to Lunar New Year and a modest decline for sales in the Western regions compared to typical seasonal sales growth. This guidance also assumes similar interest expense compared to the second quarter on effective tax rate of between 22% and 26% and 88 million shares outstanding on a diluted basis. In conclusion, our team is consistently performing well in the areas within our control, driving working capital reductions and cash flows and being disciplined with our operating expenses. We continue to look for areas where we can reduce expense while still investing in our business and capabilities. By providing value at the Center of the Technology Supply Chain to our customer and supplier partners, Avnet will be well positioned to return to growth when market conditions improve. With that, I will turn it back to Phil for one last word before questions.

Thanks, Ken. Appreciate that. Yes, before we go to questions, there's going to be one analyst that's noticeably missing on the questions this quarter. And I just thought it appropriate. I want to take a moment to congratulate Matt Sheerin of Stifel on his recently announced retirement. I'm not sure he's listening today, knowing him he probably is. Well, we wish him well and thank him for his dedicated and decades of coverage of Avnet and the Technology Supply Chain. He's been a longtime friend personally and the industry, and he will be missed. So best of luck, Matt, in your next chapter. With that, I'll turn it over to the operator, and we'll open it up for questions.

We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Toshiya Hari with Goldman Sachs. Please proceed with your question.

Hi, guys. Good morning. Thank you so much for taking the question. Maybe a market flush kind of cycle question for Phil. I know this is a tough one, but curious how you're thinking about the overall industry beyond the March quarter. I think last quarter, you sort of hinted that internally your expectation was for the environment to improve in sort of late Q1, Q2 and definitely into the second half. Has anything changed over the past 90 days? And if so, if you can sort of expand on what has changed, that would be really helpful. And then I have a quick follow-up. Thank you.

Yes, thanks for the question. Obviously, this question has gotten a little bit more complex over the last several quarters to a year as we're kind of, I think collective as an industry missing the mark here a bit and there's just a little bit more inventory out there than maybe we had anticipated. My overall view of the market and the semiconductor cycle, I mean I'm still very bullish on our industry. I mean there's no question we're dealing with some challenges here and some excess inventories out there that we're burning off as an industry, it is improving on the burn off, okay? We're just not seeing it yet in our POS. So I still think it's end of June into the summer quarter, we'll start to see some recovery but we're kind of beyond calling that at this point in time. We just need to manage what we do know and what we're seeing for the current bookings, which are still below parity how we're seeing our backlog, which is still getting eaten into a bit. And I think the real indicators is the second year in a row, and I've been at this a long time that we did not see the West come back greater than the East in the March quarter. okay? That's so atypical. And that will shift, but we're just having some extra issues happening in our industry, whether it be geopolitical and other things that we all know about is just having a -- is taking its toll and it's given a lot more of a gray outlook. But I want to be -- I want to maintain a super positive on what's happening out there. The applications of what's happening for technology for semiconductors. Again, I'm bullish on the long haul. We just need to do what we're doing, and I think we're doing it well is managing through this cycle, okay, it's a little bit longer, a little choppier than we wanted, but we're healthy, and we'll be ready when it bounces back.

Great. Thanks for that, Phil. And then maybe my follow-up for Ken, on gross margins. You mentioned mix was the primary driver in the December quarter and your implied guidance for March as well. How should we think about gross margins again beyond the March quarter? I know you guys talked about your focus on demand creation and how the leading indicators look good. And I know you've got things going on in Farnell that over the medium to long term should improve profitability there. So both the near term and the long term, how should we be thinking about the puts and takes around gross margins? Thank you.

Yes. A couple of comments. I think the first would be, if you think about kind of the gross margin for the quarter, we attribute about 75% of the decline coming from that Asia mix, right? And then there's puts and takes on the rest of it. We're trying to focus on margin at each business unit. So think about each of the regions as well as Farnell and how they're doing. And I think, generally speaking, they're holding up pretty well. There's obviously some competitive pressures. And in general, as the demand environment gets soft, there's pressure on gross margin. We feel pretty good about margins in each region are holding up pretty well. So that's a good sign. I think as we look forward, right, we would expect the mix shift to kind of normalize. Even in the guidance this quarter, although the West isn't normal seasonality, we're still getting a little bit of a normal seasonal mix shift because Asia is down more than the West, right? So you'll see a little bit of gross margin accretion. But we think that mix normalizes over the next several quarters and then continue to drive those higher margin opportunities that you talked about. And again, I think our base cases, thinking about being able to hold the margin in each region, hopefully increase it some, but we think we've got enough positive gross margin, product lines and opportunities to kind of keep margins flattish over the midterm here.

Let me just -- if I can just jump back on the review of the market. I would just highlight, there's a lot of good stuff going on, too. I mean if you look at Asia Pac, which we've highlighted, second quarter in a row that we've seen year-on-year growth in Asia Pacific. So it's not all doom gloom out there by any stretch of imagination. I just want to highlight that as well. And that's typically a good sign for what's to come in the balance of the regions.

Understood. Thank you.

Thank you.

Thank you. Our next question is from William Stein with Truist Securities.

Great. Thanks for taking my questions, guys. A couple of quick ones. I suspect that there was a benefit in the quarter from foreign exchange. Can you maybe tell me if I'm right, and please quantify it if that's the case.

Yes. I would say we didn't really get much benefit from currency. If anything, it was a little bit different. So I guess, how I'm looking at here is, it was, call it, $40 million on the sales line. So that's kind of the gist there. Currency did move a lot during the quarter. We mentioned it did help on the working capital side at the end of the quarter versus the beginning of the quarter, which is how the balance sheet gets translated.

Okay. Thanks. And maybe a different way to go at the inventory question. You made some good progress this quarter, but it's still about 20 days above typical. And I wonder if you see sort of a normal path to reduction there. Maybe when I say normal, I mean, sort of straight line, just a matter of time, it will burn off? Or maybe is there something else to talk about in inventory? Like I've heard some industry folks talk about what they call sludge, when there's things in the inventory that aren't really moving or stuff that you don't have price protection or rotation rights on. Maybe you can characterize it that way for us so we can maybe get a better idea as to when we might see things clear up and normalize on a days basis. Thank you.

Yes. Thanks, Will. I'll give you some comments here and then Phil can jump in. I think there's no silver bullet. The answer is complicated. Do we still have pockets of inventory that's becoming aged that customers have committed to, but they need to take, and we're working through with them on how to get them to absorb that inventory. We've got pockets of inventory that are really just -- we kind of bought the wrong stuff, we need to work through those. And then just in general, demand is down. So it's taking more time to get through some of those broader inventory challenges. It's not elevated everywhere, it's not aged everywhere, right? We kind of know the targets, and they've been lit up. It's just a matter of working through them. And we think we made good progress this time. So I think it's going to take a few more quarters to continue the progress there. And clearly, if demand picks up, right, that will help as well. So I think we're doing what we can. And we don't view this as a high risk of meaningful write-offs and huge charges related to inventory. It's still good inventory, it's still underlying. There's demand. It's just lower than expected as well as customers having more. So we'll just continue to work through it, but it's more of the same. I wouldn't say that anything has fundamentally changed. If anything, we're actually seeing more opportunities to use our stock rotations and work with our suppliers to get rid of some of those stuff that have been problems that maybe we couldn't have done a year ago. So we're seeing more flexibility in the overall system to help everyone get through this.

Yes. Will, this is Phil. It's a great question. It's one of the questions, right? And we're looking at this obviously very closely internally. So the short answer is, yes, we're going to continue to work inventory down. The acceleration of that is going to determine somewhat on the previous question we had based on the market growth, right? But we're definitely going to want to continue or will continue to move the inventory down just at what pace. The other side of that coin, yes, we're all tracking sludge, slab, whatever you want to call it, but we're tracking call it NMI. So we're tracking our non-moving inventory. And right now, we're in pretty good shape. There's some that's aging, obviously. And then we're working that with the sales teams and the customers to try to get that moved or with suppliers on rotation. The key point I want to make in addition is it's not all the inventory. I think it's when we put that deliberately in the script, it's a handful let's just call suppliers that's driving it up a bit. We're working with them. And I mentioned that because we're still making investments in inventory. I mean we still need to run the business, in our returns business and supply chain business, and we have a lot of suppliers that joined the call and customers and I get feedback after the call. We don't want them to think we're taking all our inventory down to zero. That's not the game we're in, right? So we need to have inventory and we need to have the right inventory while we work off some of the stuff that's aging a bit. So I do want to make that clear as well.

Great. Thank you.

Thank you, Will.

Our next question is from Joe Quatrochi with Wells Fargo. Please proceed with your question.

Hey, guys. Thanks for taking the questions. Maybe just a follow-up to that. I mean, I guess, how do we think about just the mix of your investment in strategic inventory of key verticals relative to the optimization? I mean do you think that inventory at the overall level here been continued or down? Or I guess it depends on how fast the cycle kind of turns to see that dynamic?

It's a good question, Joe. We have to do some work on that to get you down to the tail there to buy -- we don't inventory to buy vertical that's why because I'm looking at the verticals now. Because a lot of -- what's used in industrial is also used in com, might be used in transportation, et cetera. So it's not necessarily inventoried by vertical. We do look at it by supply chain and things along those lines. But there's not any one vertical that we're overly concerned about with having excess inventory. It's just with the -- as you know, probably your next question, we're very heavy in industrial. And even in Europe or even heavier than we are in the balance of the world in industrial, and that segment as a vertical has slowed. Now we mentioned in the transcript that there are some select customers have picked up, but it's not like it's across the board, and that's call it at between 30% and 40% of our business. And then the other big one that obviously slows is transportation, okay? And I will tell you in transportation because there are some unique technologies and quality issues in transportation inventory. That inventory is not -- that inventory is not overly concerning at all, okay, in transportation, where we have select products. So it's really and aerospace defense there is no issue really there in inventory that business, as we called out, is continuing to grow nicely, unfortunately, I guess, for many, right? But that's increasing and particularly on the defense side, and we start to see a bounce back on the aerospace side.

And Joe, I'd just add that I think our overall expectation is inventory should continue to go down, but we have capacity to invest. So we'll bring it down but still make investments and so it may not come down as meaningful as some would like because of those investments. But I think it's -- there's opportunity to get the pockets of inventory. And we're really focused on getting the right inventory down. We could just go ahead and stop the spigot and stop inventory coming in, but that's not good for our business. That's not good for our customers, right, we want to make sure we're attacking where we have challenges in inventory and not just getting the total inventory line item down. It's attacking those areas that are in excess or slow moving. And so we'll continue to do that. And there may be -- from a quarter-to-quarter, there may be timing differences between those two items of the investments and bringing the inventory down, but still plenty of capacity and opportunity to bring inventory down while still making the investments in the right kind of inventory to position us well for recovery.

Thanks for that. And as a follow-up, can you talk about just the level of inter-quarter turns or just-in-time demand that you saw in the December quarter? And just how should we think about that level of type of demand that's embedded in the March quarter guidance?

Yes. We touched on that last quarter that we started to see slight. And again, I think we're careful in the words we use here, Joe. I said last quarter, September quarter, a slight increase in turns. We saw that continue in December, but nothing overly exciting. So we're not building in a lot of turns outside the norm for the March quarter. Now that could change. I mean there are some things happening out there that we're still in January. I mean March is a big month and typically has been a big month. Right now, as we're looking at it, we're looking at our backlog, we're looking at what we have in supply chain backlog and say, hey, that's kind of what we're forecasting. We did not put a lot of turns in there. If that changes that would be good news. But right now, we're being conservative on the turns number.

Okay. Thank you very much. Appreciate it.

Thank you, Joe.

Our next question is from Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Hi. Thank you for taking my questions. Phil, and Ken, I want to ask you a question on operating margins. And just to my question what is under your control that you can do to help margins. So what are you -- some of the things on the Farnell side, that you're doing to improve margins and 1% operating margin how do you see that trending over the next couple of quarters? And the same question on the core business. I know mix is a big driver for margins, but are there things under your control? And what I'm thinking is you recently hired a Chief Digital Officer, I know most of the sales are not through the website, I think, on the core side. But is that something that I can say that can grow and can help you on the cost side? So just give us your thoughts on what's under your control and what's not? And how you see margins improving on the EC side as well?

Yes. Thanks, Ruplu. Yes, it's hard to control a regional mix. And I think our goal is to not necessarily focus on regional mix. And if Asia is growing, we want to take advantage of all that growth. We do focus on the gross margin in each region. So I'll maybe start with Farnell in addition to the expense actions, which will help operating margin, we've got a few different things going on in terms of the overall sales organization where things we think we can control. A part of that is how do we leverage the broader Avnet and our customer base to kind of facilitate market share growth in Farnell with those customers. You mentioned Dave Youngblood, our Chief Digital Officer, and he's really connected with Farnell. And I think there's more we can do in terms of just the conversion and the approach we take with the Farnell e-commerce proposition. So we do think that's within our control, and we can move that up independent of where overall demand is. And Dave was on the call, he would tell you that we get a lot of traffic to the Farnell and related websites as well as Avnet. And so we just got to unlock that, make those visits turn into sales, and there's some things we're driving to help do that. So there are a few examples. On the core side or EC side, listen, our demand creation mix was better this quarter. IP&E was actually a higher mix than semis this quarter. So those things we've talked about, including supply chain services, the Embedded business, our Tria brand, those are all things that do have a higher margin that we believe are going to have higher growth than, let's say, the broader market. So those will help. And again, more scale helps as well if our get back on the growth pattern and some more market share opportunities, some perhaps shift the business from our suppliers from their direct channel to the distribution channel, all those things can help get additional scale to kind of help return the operating leverage into the model. So there is things we continue to work on. And again, our focus and our investments are focused on medium to long term, not just the short term. It is a little tougher than we thought. So we're probably going to sharpen the pencils on our overall operating expenses, considering the market hasn't recovered as quickly as we thought it might. But there are things we continue to control. They may not yield benefits today, but six to 12 months from now, we do think those things will yield benefits on margin.

Yes, let me jump in. Thanks for the question. Just maybe reemphasize a couple of points that Ken made maybe add a few. Yes, on the digital side, it's a big investment in Dave. He's been on board just 90 days now, barely and yes, we can impact our online sales at Avnet, Inc., let alone just Farnell, online sales tends to run at a higher margin. It's low touch so it's lower cost. So that's a good thing. So he is chartered in working with Rebecca, our President with Farnell, to increase our percentage of sales online so that's something we can absolutely action through improvements on the customer experience on the website. Fundamentally, the biggest thing we could do short term is cost, and we've been doing that. We talked about it in the transcript, some of the benefit, and we're not where we want to be with Farnell. I made that very clear but some of the benefit we've seen even as the markets continue to decline, has been some of the expense actions we've taken over the last year and again, more in the last quarter at Farnell and there is some more that will still be trickling in as they now have rebuilt that staff and rebuilt the strategy to go after driving increased revenues and better mix. And then Ken touched on it. I'm just going to reemphasize it. IP&E runs about 400 bps higher in margin than semis. Demand creation is similar, and we had good demand creation quarter, continue to have a good demand creation story and the suppliers are all bought in on demand creation, which is exciting. And then the embedded business that Ken talks about not only is it sticky once we're in, but we're actually doing turnkey design of boards, right? That are in the industrial -- right in the middle of the customer base, we're focused on. That again, not only is sticky, it runs at roughly 2 times the margins or more than we're running in the core. So anyway, just a few that I wanted to add.

Okay. Thanks for all the details there. For my follow-up, if I can ask. In this environment, how are you thinking about capital returns? Phil, do you see any opportunities for any rollouts or any M&A, I mean, you talked about investments that you are making to better position the company. Is there any chance for inorganic growth? Are you taking any share organically versus competitors in this environment? And Ken, how do you think about free cash flow and buybacks and uses of cash? Thank you.

I'll go first, Ken. Yes, we think we're gaining share, but we don't want to gain share at the -- by sacrificing cost, right? So we're just trying to -- we're just continuing to work and drive value in the marketplace, value our customers and suppliers being that center to technology, supply chain and back to even Will's question, I think one of the questions on inventory. Yes, some areas might have a little bit more inventory than we want. But we're working with those customers. We don't want to force stuff on customers that they can't pay for. We want to build that long-term strategy with the customers and on the upside or upstream, as I'd like to say, with our suppliers. So it's a constant balancing act. But we think we have the right balance there, not to overuse the term of driving responsibility and accountability with having long-term relationships with these customers and extracting more value and more share out of those customers, okay? What was the other part of that question?

I just say that I think we're going to continue to maintain -- we have been doing, obviously, we'll prioritize the business and the investments we need in the business. But beyond that, we're going to continue to support the dividend and just increased this past September as well as buying back shares. And again, we had a good cash flow quarter of $1.2 billion over the past four quarters. We want to keep leverage under control but at the same time, we view the shares as pretty attractive and we're going to continue to buy back and achieve our goal of at least 5% of the share count being reduced this fiscal year. So I would say we're just more of the same and want to just drive some consistency there.

Yes. And Ruplu, the other part of your question was M&A. So Ken touched on the capital allocation with the dividends, share backs, driving down debt their priorities. We're always in the business of M&A, okay? But we're just going to be very selective, okay? Yes, we talk to people. Yes, we have bankers calling us. We think the fastest way to grow profitably is still organic growth, okay, first. But if there's the right type of acquisition that will come along and fit one of these areas that we talked about in the transcripts, we just talked about in Q&A that are strategic in nature, higher margin in nature, differentiate us in the market place, brings us expertise that maybe we don't have, yes, we're open to that dialogue and are having some of those dialogues.

Okay. Thank you for all the details. Appreciate it.

Our next question is from William Stein with Truist Securities.

Great. Thanks for taking my follow up. I wanted to ask about tariffs and the potential impact and even the impact that we might have seen in the quarter just closed. I think in your prepared remarks, Phil, you talked about in Asia having received some slight benefit from anticipation of tariffs that would be, I guess, a pull-in to try to get ahead of any action. But I think when you were discussing the Americas, you said there's no effect like this going on. And I'm just hoping you can maybe give us some idea as to how you know when a customer orders, whether there's upside or downside, how do you know if it's in anticipation or not in anticipation of this. That would be helpful. Thank you.

Yes. Thanks, Will. So let me start. I'll turn it over to Ken on the revenue impact and I think it was -- I don't know if it was my transcript or his, but yes, we do have a number or an estimate for you, it wasn't that large. And in general, to work backwards, we thought we would see more. And Will, how we would see it is pull-ins from like the March quarter and the December quarter, the backlog that's there to the customer, hey, I don't want to take a chance on waiting. I just want to bring this inventory in now because we don't know the uncertainty around tariffs. And that's how we would measure it, and we didn't see much of it. Surprisingly, we thought we would see more and we offer to customers or went to customers. And part of me is like, glad, we didn't because we got to do well in March. So we're going to need the March backlog there, too, right? No sense driving that unnecessarily to Rob, Peter to pay Paul. So we just didn't see that backlog move a little bit in Asia. I'll let Ken touch on. As far as tariffs in general though, yes, it's an everyday conversation. But -- and I got asked this in New York City with our team, we had tons of analyst meetings in December and actual shareholder meetings, and everyone asked about tariffs. And my high-level response is, hey, we'll deal with it when we know what it is. And we're not losing sleep over it. We've handled it before. My personal belief is it will come down quite a bit from where the rhetoric is today but we have processes in place. We've got free trade zones in place. I think we know a lot more, we talked a lot about this yesterday in the Americas ops review. I'm going by memory, I think there's like 8% of our business in the Americas something along those lines is actually coming out of China. And within some of those suppliers that we have, they can ship the similar product out of a different region, okay, instead of that of China. Now it's complex because the suppliers need to move their supply chains and whatnot. So what these are all the dialogues we're having with our suppliers, our customers and internally, we've got the processes set up. It's really important, and I'll restate this, maybe it's obvious, but we're not paying the tariffs. That I can assure of. Few customers on the line they know that, it will be a pass-through. We don't make money on tariffs, but we will make sure we pass it through. So we can't afford obviously, to absorb that in the products that we're receiving and distributing to the customers. So again, it's an issue. It is not one of the issues keeping me up at night because I think we're well prepared for it. I think our customers are well prepared. It's not their first rodeo either, we'll just have to manage through it, but I think we'll be okay. Ken, do you want to make a comment on the...

In terms of the December quarter, we did see some slight benefit in the top line from Asia customers pulling in, in advance of potential regulatory changes, right? And Phil mentioned that. We also saw a couple of things. There was a price increase that took effect in January on some high-end technology. So we saw a little bit of uptick in demand in December for getting out in front of those price increases, independent of tariffs, we didn't see much benefit in the Americas from tariffs, but we saw some global benefit from customers buying in advance of a price increase that took effect in January as well as there was an end-of-life product on the high-end side as well that we were able to get some benefit from in the quarter. So when we kind of normalize things, our guidance was down 6% to 11%. We think at the midpoint, when you normalize for those things, it goes from 8% midpoint to somewhere in 4% to 5% down midpoint when you kind of normalize for those items. So it was something, it wasn't a huge amount, but all those three things combined added 3% to 4% of the underlying quarter. Some of those were anticipated, some were not. Yes, no problem.

Thanks, guys.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Phil Gallagher for any closing comments.

Okay. Thank you. And hope 2025 is off to a good start for everybody. Hey, thanks for attending today's earnings call, and we look forward to speaking to you again at our third quarter fiscal year 2025 earnings call which will be reported in April. One last comment, I guess, in the event of the Super Bowl week. It's 1.5 week from now, I just want to say go birds, okay? I think most of you know from Philly. So if you are from Kansas City, I apologize. We're going to do the best we can to upset you. All right. Have a great rest of the day. Thanks.