Avnet, Inc. (AVT) on Q2 2021 Results - Earnings Call Transcript
Operator: Welcome to the Avnet Second Quarter Fiscal Year 2021 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.
Joe Burke: Thank you, operator. Earlier this afternoon, Avnet released financial results for the second fiscal quarter of 2021. The release is available on the Investor Relations section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet's website.
Phil Gallagher: Thank you, Joe and thank you everyone for joining us for our second quarter of fiscal year 2021 earnings conference call. I hope everyone is safe and healthy and that your 2021 is off to a good start all things considered. 2020 was a challenging year to say the least. And, of course, we continue to manage some lingering COVID related headwinds. But speaking for myself, I can say it's nice to have some momentum moving into the New Year. Despite the challenges, we persevered and produced solid second quarter results. Our success is doing those small part to the hard work and dedication of our incredible employees. Our team's ability to continue to provide uninterrupted service at a global scale and supply chain visibility is remarkable. This demonstrates the invaluable role Avnet continues to play for our customers and our suppliers. As I've highlighted in past calls, our employees' continued hard work has been supported by a renewed commitment to our primary value proposition here at Avnet, bridging the worlds and accelerating the success of our suppliers and customers. Our efforts have been focused on streamlining the business, leveraging the core and Farnell and investing in our value-added businesses, including the likes of IoT and Avnet Integrated. We've continued to add SKUs to the Farnell inventory, add salespeople and FAEs in selected geographies, invest in employee development programs, strengthen our supplier engagement teams and embrace digital capabilities. All of these actions put us on track to grow revenue streams, capture market share, enhance our global digital footprint and extend existing customer and supplier relationships.
Tom Liguori: Thank you Phil. Good afternoon, everyone and thank you for attending today's call. As Phil stated, despite some sustained macro headwinds we produce strong results this quarter and made notable progress sharpening our execution in our primary distribution operations. Revenues of $4.7 billion exceeded our guidance and grew from $4.5 billion in the prior year's quarter. At this point, we fully implemented our $75 million OpEx reduction plan and are nearing completion of our $245 million plan. As our top line has grown, our adjusted operating expenses as a percent of revenue have continued to decline, hitting 9.25% this quarter, down from 9.55% in the previous quarter. And we achieved our goal of reducing working capital days. We started this initiative over two years ago when our days were in the mid-90s. Today, working capital days are at 75. As a refresher, each day is worth approximately $50 million of working capital. And to date, we've reduced working capital by nearly $1 billion. We are very proud of our team's progress and that we've been able to use the cash over the last three years to reduce our share count by almost 20% and paydown debt. Going forward, while we expect to invest cash in inventory as the economy and revenues recover, we remain focused on our net working capital days targets. On slide 11 you can see the early progress we've achieved. As noted, revenues of $4.7 billion and adjusted EPS of $0.48, both came in above our guidance range. Cash flow from operations totaled $85 million, our ninth consecutive quarter of positive cash flow, further demonstrating our team's execution and managing cash and working capital as we continue to navigate in unpredictable market.
Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Thank you. Our first question comes from Adam Tindle with Raymond James. Please proceed with your question.
Adam Tindle: Okay. Thanks. Good afternoon. Phil, I just wanted to start with a strategic question. You've had a little bit of time to analyze the portfolio. I think there's kind of two paths that investors are potentially thinking about. On one path, you conclude you have the right portfolio. You're going to pursue organic margin improvement and cash preservation. Or another path could be pursue M&A in an effort to enhance the portfolio, potentially accelerate growth aid and supplier relationships. Just hoping you could start by maybe opining on those two potential paths in which you're concluding is the right one to take here near term.
Phil Gallagher: Yeah. Thanks Adam. Appreciate that. Well, it might be an ad versus an order. Adam, short term, clearly we're going to be driving the organic strategies. As we've talked before, the biggest needle mover forces is right here at home in the U.S., getting the Americas continued to stay on track to the their plan, which we felt good about this past quarter and making progress and continuing to invest organically. Europe is, frankly, steady as she goes and going to continue to double down in Europe. And, of course, Asia, we're really pleased with the progress we're making in Asia, with effectively record quarters, that's in the core. And then you got -- I call that there's really two though. Then you've got Farnell. So, they're the two major paths. And Farnell, we've made some progress this past quarter. We're expanding SKUs and mild progress in the Leeds facility. As far as M&A -- and then, of course, we have Avnet Integrated, which is our embedded business, right? And we've -- we're restructuring that a bit and putting that closer to the core, particularly where there's boards and software and displays that goes into many of our core customers. And then, we'll continue to invest in IoT. But as we've talked, we just kind of took the pedal off the metal there a little bit, okay, to be sure we're getting a fair ROI based on the investments. And Tom could jump on M&A if he wants. But on M&A right now, we've been pretty convicted to continue to strengthen the balance sheet and protect that as much as possible while also protecting the dividend, right? Now that doesn't mean we're not going to date and look at opportunities from the future for M&A. And I'm sure that will begin again at some point in time. We're just not ready to talk about it yet. So, I think it's more of an end then or and maniacally focused on execution.
Tom Liguori: And Phil, let me add. Just to set expectations, any M&A would be a smaller tuck-in with a distributor that had a complimentary, either supplier or customer. So, keep that in mind, Adam.
Adam Tindle: Okay. That's helpful. And maybe just as a follow-up. I know margin improvement is a key part of the story. I guess, if we were to double click on margin improvement, Farnell is one of the big potential drivers here. I wanted to ask on that path too. I think you said 10% over a six-quarter timeframe. I think you mentioned in the quarter that gross margin was now over 30%, so that seems like it's quite healthy at present. And you're still kind of in the mid single digits on an operating margin basis. So, maybe help me bridge the next six quarters, kind of doubling operating margin while the gross margin correction seems already done. Is there OpEx to come out? Is there volume on the revenue side? What are the drivers to get to that number? Thank you.
Tom Liguori: Phil, should I take that?
Phil Gallagher: Sure. Why don’t you start Tom? Go ahead.
Tom Liguori: Adam, I think the main thing is getting the Leeds distribution center out. $19 million is I think close to maybe 150 basis points improvement. And the Farnell team has done a really good job on OpEx management and moving things for lower cost geographies. So, there's some of that. We're going to continue to add SKUs which we expect will help bring people into our site -- into our website and grow revenues, as well as enhance our e-commerce tools into marketing investments. But we want -- the expectations should stay the same, about 100 basis point improvement per quarter. And we feel good about where we're at with that.
Phil Gallagher: Yeah. Tom, last comment I'll make -- yeah, Adam is that, we were there, okay? So six, seven quarters ago, we were at that 10% operating margin, and we're effectively reverse engineering the business back to get to that 10%. The maths working now, the execution has to follow, and that's what Chris and the team are working on.
Adam Tindle: Good point. Phil, I appreciate the details and congrats on the quarter.
Phil Gallagher: Thanks Adam.
Tom Liguori: Thanks Adam.
Operator: Thank you. Our next call comes from Tim Yang with Citibank. Please proceed with your question.
Tim Yang: Hi. Thanks for taking my questions. On incremental margins, if I use midpoint of guidance, I think you're guiding $88 million to $90 million operating profit, which means that you are guiding profit of roughly $80 million higher with sales up $200 million on year-over-year basis. So that's roughly 9% of incremental margins. Looking forward, how should we think about the flow -- I mean, flows through margins or incremental margins given you have Farnell recovery and cost saving.
Tom Liguori: Well, the good thing about our financial model is that we feel very good about the cost structure. We feel very good that all of our organizations are staffed properly, that we have the proper staffing out in the field. So, we use the term drive-through. This is one of Phil's favorite terms, right, Phil.
Phil Gallagher: Yeah.
Tom Liguori: And what it means is as we get gross profit dollars, Tim, we're not going to be adding a lot of costs, totally go straight down and help with the operating income and the operating margin percent as well. Does that help answer your question?
Tim Yang: Sure. So, firstly, so incremental dollar amount that you are generating the revenue. How much of that would have flow through to your operating profit line on a year-over-year basis? I think that's my question.
Tom Liguori: I think we've said in the past 70% to 80%. It kind of depends, but that's what we target internally, so it should be quite healthy.
Tim Yang: Gotcha. And then on the COVID related costs, can you maybe just remind us, like how much of that in the past quarter? And then how should we think about that going forward in the next two quarters?
Tom Liguori: We've given out a number, I think, $8 million to $10 million, that's probably about steady. Keep in mind, we're also saving money, right, like no travel, building expense. So, I think the net impact, Tim, is probably not that material.
Tim Yang: Gotcha. Thank you.
Phil Gallagher: Thanks Tim.
Tom Liguori: Thanks Tim.
Operator: Thank you. Our next question comes from Matt Sheerin with Stifel. Please proceed with your question.
Matt Sheerin: Yes. Hi. Good afternoon, everyone. Just a question team about just the current demand environment. If you could drill a little bit more Phil, in terms of the book-to-bills that you're seeing per region. And then also just commentary, you did talk about the supply constraints out there. Are you starting to see customers looking to build inventory? Do you think what you're selling is actually selling through versus some inventory build. And then with that, basically two to three years ago, we had a very strong cycle and you saw some benefits on the pricing side, and obviously on the margin side. Did you envision that kind of scenario, given the data points out there? And would that margin environment be beneficial to you in terms of pricing?
Phil Gallagher: Sure. Matt, I'll take that. Was that one question?
Matt Sheerin: That was multiple parts. Thank you.
Phil Gallagher: You got, Matt. I'm teasing you. So in the book -- I jotted them down here. I think I got them. Hey, look on the book-to-bill yeah, we did note in the script, well above a parody at this point in time in all regions. I think we noticed in the last earnings. We started to see it come out of positive book-to-bill in Europe in the September month of that quarter. And that continued strong in Europe, even through December, as it did in the Americas and Asia-Pac. So, yes. We're very positive book-to-bill. And I think it leads to the kind of the next question, because that'll kind of combine. Part of it is lead times going out, Matt, right? And I'll comment on that as well. And as lead times go out, customers do tend to book more out as well, right? So just for the lead time. So that's what we track really closely. The total book-to-bill bookings inside of 30, inside of 90. And then anytime you get outside of 90, 120, obviously the -- statistically, the accuracy comes down a little bit, but we're tracking that. We got the mechanisms to do that. We're taking them roughly thousand plus customers MRPs every day, week and month. So, we've got the analytics around that. So, feel good there. As far as selling through, I just know that I'm on a lot of expedite calls where customers have real demand. There's only three today as a matter of fact. So, -- and with the suppliers. It's hard for us to judge if they're building inventories internally. I don't sense that talk to the customers at this point in time, and I'm assuming you're talking raw inventory buildup, as opposed to finished goods or maybe a little bit of both. It's tough for us to track that. We try to manage it with our customers, but there's no magic wand on that one. We do watch the MRPs for inflated demand, right? We get a customer that comes in and is using match yearnings, using a hundred pieces a week. And all of a sudden, they want 300 or 400 a week. We try to catch that and go back and reverify, that is true demand. So, I'm not feeling that at this point in time. Our cancellation rates push outs, all that we look at are pretty consistent right now in that 25%, 30% range, which is for those that don't -- aren't aware that that's normal. It's the buffering, the shock absorber we take care of for our customers and our suppliers as we -- we always sit in at center of technology, right? So, we're seeing it on both ends. As far as the pricing, yeah. So that's been pretty, pretty public out there for many suppliers. We won't comment on any one supplier. But yeah, definitely seeing some pricing increases in -- whether it be shipping debit or just commodity costs. And we do have processes in place to go and work to pass that onto our customers. Sometimes that's difficult based on the contract we have, and we need to do some further negotiation. But certainly the plan is particularly -- as these are sort of supply, we certainly can't be the shock absorber to pick up the pricing increases. So, our -- and what our majors price increases, Matt, as far as going with us and we work with the customer together then to explain that. So, it's not a black and white answer. It's a challenge, but we do have the mechanisms in steady analytics to go back and track that to be sure that we're drive -- increasing fairly, by the way. I mean, we might have customers on is called fairly, the public price increases that are being passed on to us.
Matt Sheerin: Okay.
Phil Gallagher: That -- I think I hit them all.
Matt Sheerin: No, I appreciate it. Just one quick follow-up just in terms of the gross margin. Tom, sort of backing into the number, it looks like it's going to be what, 30, 40 basis points sequentially. I know that mix is part of that, TI going away as part of that. But as we look forward, when Asia comes back, is it kind of sort of be in that range for a while until you start to see more demand creation and premier Farnell contribute? Or is it different?
Tom Liguori: No, I think you're absolutely right. It will be in a range. One of those two factors …
Matt Sheerin: Okay.
Tom Liguori: Thank you, Matt.
Matt Sheerin: Thanks a lot.
Phil Gallagher: Thanks Matt.
Operator: Our next question comes from Steven Fox with Fox Advisors. Please proceed with your question.
Steven Fox: Yeah. Thanks. Good afternoon, everyone. Just following up on the last question about where the supply chain is at. Phil, can you sort of -- if we roll this situation forward say three to six months, what's the buffer that sort of keeps things from getting sort of out of hand where you do get into a situation where customers are double ordering. Is it that -- do you see the demand on the other side of some of the inventory build that some of your suppliers are talking about, or is there another catch-up here that I'm missing? But I'm just trying to understand why this doesn't become a problem say in 90 days, and then I have follow up.
Phil Gallagher: Yeah. Hi, Steve. Thanks. Again, I think it's based on what we're seeing today in the forecast management systems we have today. And when I say that mean back upstream with our suppliers and downstream for our customers. So, we're seeing by directionally. And right now, just based on the activity we see, the backlog, I mean, automotive -- the diversification, Steve, as well. Automotive, industrial, consumer, the application technology. I'm not a prognosticator to go out three, six, nine and 12 months. We typically don't do that, but just right now, the demand looks pretty darn good. And I was with three major semi guys today and protecting certain commodities, right? But it does feel -- it feels pretty good. So, again, we've been around the industry a long time, so we see the cycles. And I think this is just a different type of cycle, which is maybe make it a little bit more difficult to, because you do have the COVID issue, how much of it's new demand versus replenishment of inventory. Because they -- in the automotive, for example, because they didn't have inventory. So, that's what we're just going to continue to track and put our own analysis around it and the analytics around it. And I think the other word I use with customers and suppliers is, hey, we all need to be more responsible. What is it we really need? What is it that the customers really need, okay, without inflating it, right? And we need to hold them -- hold ourselves a little bit more responsible in the supply chain.
Steven Fox: Okay. I appreciate that perspective. And then just on the Leeds, the ramp of that distribution facility. Tom, you mentioned $19 million of eventual cost savings. Do we think about that as sort of a fairly straight line, or is there a certain humps you still have to get over before you start realizing the bulk of the $19 million? How does that play out between …?
Tom Liguori: It'll be -- sorry -- I didn't mean to interrupt, Steve.
Steven Fox: I was just saying between now and say -- you're talking six quarters from now.
Tom Liguori: Yes. Yeah. And it's going to take another quarter to two before you start to see the savings. But it's designed to have higher capacity at lower total costs. And what we see is, it's on track as far as ability to achieve the savings.
Steven Fox: Okay.
Phil Gallagher: And Tom, I could add to that Steve, because it's a great question. And we're all over that is, it's also going to add more capabilities for us, okay? There's certain value added. The new logistics center will offer our customers that in the current facility today in the U.K., we can't do. So, it's not only a cost. I mean, a hard black and white cost savings to Tom's point, but it should enable us to sell more and offer more services as well.
Steven Fox: Okay. That makes sense. Thanks for that color.
Phil Gallagher: Thanks Steve.
Operator: Thank you. Our next question comes from Nick Todorov with Longbow Research. Please proceed with your question.
Nick Todorov: Hi, guys. Good afternoon and thanks. I wanted to double click on the comment of replacing TI's revenue in Asia. Just to confirm this as sales, does that mean that you guys have replaced essentially more from a gross margin perspective what you were getting from TI in Asia? And maybe if you can give us a split, how much of that is new province wins. And lastly, on that point, maybe how is progressed on and doing the same thing in EMEA and North America?
Phil Gallagher: Yeah. Thanks Nick. I appreciate that. The answer is really yes and yes. So, we -- on the revenue side, just looking at the last three years while we're talking, it was -- as we said the highest number we had and that would have had the guys from Texas in the numbers. So, it's now -- it was effectively out all together and a similar on the profit side, which to the earlier question drove nice drop through for us in Asia-Pac. So, effectively, yes. So, we got revenue and GP. What was the follow-up question on that one?
Nick Todorov: Just any update on the province wins.
Phil Gallagher: Americas and Asia? Yeah. So, in Asia, obviously, we've got some -- yeah, thank you. So, obviously, in Asia, we've got a little bit of a lift from the market as well, right? Because Asia market's really hot. So that's certainly helped us as well as organically working with other suppliers to help drive more shifts and design. There's three areas we're focused on. And we've mentioned this before. One is the pin for pin replacement. So, that's in a range of 10%, 12% of the business. And that's a global statement, by the way. And the second one is the design win. And the -- that bucket is going to be the longer pole at tent that will affect more of the west, okay, and be slow to fulfill in both Europe and Americas and even some of that might be fulfilled in Asia-Pac will track that. But that number is growing nicely. And that's when you're catching the next generation of design that a customer -- they're not going to typically design something out to midstream, but we've got our design registration, design win tracking, and we've actually got some design wins already going into production and replacing some of that business. And then the third bucket is what we call shifts. And that's where there's -- I think that's where -- we all should remember that the customers care what happens with their supply chain and their suppliers. And there's -- they like to at times share that business, okay? And there might be reasons they have to share. So there's some shifts inside the customer where we lost a line like this one that we can go make it up in DTAM or TAM to DTAM shift inside the customer and that we're tracking as well. So third -- a three-pronged approach that we're getting after on TI. And we're ahead and to your point -- good observation, we're ahead in Asia-Pac versus the balance of the west.
Nick Todorov: Okay. Great. Thanks for the color. If I can follow-up with one more. Maybe Phil, can you -- I understand that there's pockets of where lead times are strict and maybe out of pockets, there are not. And maybe if you can compare and contrast the lead times relative to the prior cycle, maybe to the peak of the prior cycle. And if lead times are stretching, what do you think is customer's ability to build inventory? Because it seems like we're hearing more of the fact that they cannot get product rather than build inventory on their shelves.
Phil Gallagher: Yeah. That's right. And that goes to, I think, Steve's question and part of Matt's question earlier on the building of inventory. Again, tough for us to track that, although we try to with the MRP sharing. So the lead times, yeah, it's a really good question versus 17, 18 . It feels a little different than 17, 18. I mean -- and I think we all do need to remember this can change within days and weeks, okay? And then in 17, 18, it was more in a passive area, the capacitor area, not exclusive, but just if you would make a statement, it was more than that capacitor area where today it seems to be more in the actives in the semi electro side. That's not to say it can't spread into the passage as well, but it's really a moving target. In the last call we had with everybody back in October, it was predominantly 32 bit, the high end microcontrollers, which is predominately driven by automotive. That's still maintained to be a challenge. And so huge range because we say 32 bit what a tons of different packages and whatnot, but it's 16 to 52 weeks lead times. We see it spreading in the -- into some of the FPGAs, power. So some parts of the analog or find other parts, seeing that it hits in the power devices in certain op amps and some of -- or automotive ICs. 16 bits starting to leak out a little bit, it's out about four to six weeks from where it was several weeks ago. And some of the 8 bit are starting getting out to the extend lead times as well. So, it's a bit of a moving target, but it definitely seems to become a bit broader, okay, then we saw even in the October timeframe.
Nick Todorov: Got it. Very helpful. Thanks. Good luck.
Phil Gallagher: Thank you.
Tom Liguori: Thanks Nick.
Operator: Thank you. Our next question comes from Ruplu Bhattacharya with Bank of America. Please proceed with your question.
Ruplu Bhattacharya: Hi, thanks for taking my questions. Tom, I think you said that there was $40 million left in the $245 million cost reduction program. How should we think about that flowing in? And also how should we think about SG&A trending over the next couple of quarters? Are you done with all the hiring that you needed to -- for Salesforce and engineers? And do you have enough staff to capture the end market demand or how should we think about SG&A over the next few quarters?
Tom Liguori: Ruplu, thanks for asking that. I think that's really important. I would expect our OpEx dollars to remain relatively flat with some adjustment for volume. We have $40 million left to go. Remember that half of the $75 million were temporary measures things such as furloughs. And then as Phil mentioned earlier, we are making a number investments. But the good thing that we're really pleased with the OpEx is that, as the market recovers, as revenues grow, we're not going to be adding dollars and other than sales commissions and some distribution related costs. And therefore, we'll get some pretty good drops through down to the operating income dollars and the operating margins. Does that help?
Ruplu Bhattacharya: Yeah. It does. I mean, that's very helpful. Maybe just as a follow-up to a prior question on the TI revenues. In the past you've said that you don't have to make up the entire TI revenue that's going away because you're targeting revenues that are at a higher margin. So in that vein, is there a way to quantify how much of the revenue that you need to make up you've already made up? So like, have you made up half of that revenue that you need to make up, or one-fourth or three-fourth, is there a way to quantify how much more revenue that you need to make up to get to the same gross profit dollars?
Phil Gallagher: Yeah. We're probably in a range of between 30%, 35%, right? Because again, the biggest bucket is that design win registration bucket. And that's the one that's going to be further out because of just the share cycle time of design to fruition -- or registration to fruition in the 30%, 35% range. And we've said -- we would just remind it, we've always said it’s a roughly a two-year period that's going to take. So we feel we're tracking.
Ruplu Bhattacharya: Right. No, that makes sense. Just the last question, I don't know if you've mentioned this. But the end markets that were strong, if you can just kind of quantify, I'm pretty sure like a demand from automotive was strong. But as you go forward, I mean, which -- the demand that you're seeing from different end markets, if you can quantify like which one is stronger, which one is weaker? And in that vein, are you seeing any unusual demand from markets like automotive? So, I mean, getting back to the question of double ordering, you think anybody like the tier ones versus OEMs they could be, both ordering at the same time. So, are you concerned about any double ordering in the -- in your backlog? Thanks.
Phil Gallagher: Well, again, we always track the double ordering, as I said earlier. And we work with our suppliers in that. because they could see it too, by the way. They see X, Y, Z customer place in the same part with three people, then -- they catch out as well and then they're working on that. So, I don't think it's as prevailing as maybe it used to be shorter some out there. But the auto, I don't think there's any -- you mentioned auto. I don't know. They're taking anything they can get right now. So I don't believe there's any buildup of or exaggeration there and what they need at, and that's pretty public information. The industrial is come back strong and that's still about 30%, 35% of our business, which is really -- nice thing about industrial is really a diverse customer set. And we need to make sure that we do everything we can to protect that customer base. It tends to be a much longer tail, a higher mix, a little bit lower margin -- or a lower volume, but a good -- we bring a good value prop to them. So the margins tend to be good. The consumer has been strong. Defense, aero, they were running against their own compares there. But aerospace not as much, we kind of combine them. But on the defense side, definitely still strong in the defense side as well.
Ruplu Bhattacharya: Got it.
Phil Gallagher: We're not dependent -- overly dependent on any one vertical really, which is -- which helps our diversification model.
Ruplu Bhattacharya: Got it. Thanks for all the details. Appreciate it.
Tom Liguori: Thank you Ruplu.
Operator: Thank you. Our next question comes from David Williams with Loop Capital. Please proceed with your question.
David Williams: Hey, thanks for letting me ask a question here and congrats on the progress. Just want to see maybe if you could talk a little bit about the execution hurdles that are in front of you. And what are the main sticking points or the areas that we should be concerned with or potentially could hang up some of the progress that you're making and your progress you're walking toward.
Phil Gallagher: Well, I'll go first, Tom if you want. So, thanks David. I appreciate the question. It's a good question because we're focused on execution. So, I always say we can't control the market and the size of the market or the growth of the market, but we can focus and control what we control, which is execution. So, good question. The two we talk about most frankly, as the Americas and I'm sure Tony, our President, is on the call somewhere, or we'll listen to transcripts. It's our biggest needle mover. From several years ago we took a couple hits here and we're pleased. I want to make that really clear. We've been picking up share in the Americas and we're pleased with the progress being made there. And that's probably number one. And then number two, we've talked about quite a bit in the script and in Tom section, Farnell, we got the Farnell and again, when I say Farnell that includes Newark here in the U.S., with Uma and team leading that effort. We just added National Instruments by the way, which is exciting. So we'll be executing on that. That should be a growth line for us as well. So those two are the most critical to get us back to where we need to get to. And we have line of sight in both of those businesses to get there. And then we need -- Asia, Preston and his team has continued focus on execution. Tom talked about. They've had a nice run and he's done a nice job. And, of course, Europe are most profitable region and we need to Mary and Paul to keep the pedal of metal in Europe and steady state and continue to drive execution there. So, demand creation is key. That's 30%, 35% of our business today. Suppliers value what we bring in demand creation. It's a topic of every conversation we have with our top suppliers and we need to continue to grow that. And then, IP&E interconnect pass electromechanical, right? So, that's a higher margin business for us. And we got focused on that as well. So, there's not anyone, but, there four or five, as we build out the new business models, that'll have a bigger impact of margin as we go forward in IoT and the Avnet Integrated business. Hope that helps. Tom?
Tom Liguori: No, I think you covered it, Phil. Thank you.
David Williams: And one more, if I could. Just maybe any color around the registrations and maybe where the activity has been the strongest specifically within the industrial segment. I know it's been strong, but are there pockets or areas that you're saying maybe greater degree of demand than others, or is it really, truly just very broad based?
Phil Gallagher: Yeah. It's a good question. We report the last quarter of the registration -- the registered -- income and registration, which was the highest we've had on record. And we're pleased this quarter that actually our design win revenue, so that's when you actually shipped the product against that registration. It was the highest in six quarters. And so, we're pleased with the progress even with some of the line losses we've had to be able to close that gap. So, a positive on that front. And then, on the segments, you asked that industrial, industrial is really diversified. But clearly test and measurement strong. A lot of our medical falls into industrial as well as a subset effectively, but it's pretty diverse. There's not really anyone. If you can just -- just thinking about all the industrial applications out there and how diverse that is.
David Williams: Thanks so much and best of luck on the quarter.
Phil Gallagher: Thank you.
Tom Liguori: Thank you.
Operator: Thank you. Our next question comes from William Stein with Truist Securities. Please proceed with your question.
William Stein: Great. Thanks for taking my questions. Phil, can you talk a little bit more about the shortages in maybe in this way? What is the biggest product -- sort of problem area for you now? And when you talk to those suppliers, I think we all understand that these are real shortages. I'm guessing there is some double ordering going on, but there's also very low inventories in the supply chain, so it doesn't seem inappropriate. And demand's probably going to continue to get better as we go through 2021. What are those suppliers telling you about their recovery plans for adding capacity for sort of fixing this? Because hopefully it doesn't fix the other way by demand crashing. And then as a follow-up to that -- and as another compound question -- but can you talk about customer behavior in the case of their inability to get a full kit? Are they taking what they can now, and then chasing the other parts for either through you or any channel they can, or are they waiting in a way that they make sure they're always balanced. Thank you.
Phil Gallagher: Yeah. Yeah. Thanks. Well, really, really good questions. Complicated questions. And boy, I'm working on our lead time charts here. And I don't want to have any one supplier, but for sure, the higher end MCUs that consistently, probably the hottest right now in the 32 bit space we talked about in October and that continues. And it's complicated because there's so many different package sizes and I'm just saying and today, I'm expediting a power module for major customer in the industrial segment. So, the subset of the medical, was on the phone literally about two hours ago. So it's kind of -- it's a tough question to answer, but I would say if I were going to pick one, okay, it'd be probably more than likely the higher end, 32 bit. But as I said earlier, probably leaking into the 16 bit, even some of the 8 bit right now. And that's where you're going to get into that broader customer base, particularly 8 bit broader applications in the industrial segment. As far as the -- what they're saying. And a lot of this is, is out there already. That's why this cycle is so much different then than others, because of the COVID and some of the issues that some suppliers had in packaging and whatnot over the past six, nine months and playing catch up. But you look at -- we look at the front end versus the back end and the lead time just to get a fab up and running. I mean, it could take upwards of nine to 20 weeks just to get a fab up or running the back ends and other, 10 weeks or so. So, depending on where to suppliers might be, and some of them outsource that, obviously in that process is the moving target. If we're just starting now, then we're going to have a long road to go. And some are just starting -- some are already underway and whatnot. So, it really just -- that's roughly the lead times that you'll see out there and based on that recovery of capacity and demand, and we'll see how that adjustment plays out.
William Stein: And then the follow-up was about, are they waiting to get fully balanced kits? Are they taking what they can? Or is there a prevalent answer to that question? It's something that comes up all the time when there are shortages and we had the …
Phil Gallagher: Yeah.
William Stein: When the cycle protracted, it happens every couple of years, right? So.
Phil Gallagher: Yeah. No, sorry. Well, it wasn't that one and it wasn't avoiding. Yeah. So, we track that. We're not seeing a lot of that right now. I think what you're saying is that they can't get the -- in 17, we ran into some of that, right. If they can't get the MLCC capacity, they may not want the rest of it. If it's kind of what you're saying. We've not seen that play out yet. It could on a item by item or individual basis, but not a whole lot. And again, we're not -- I'm not seeing the hoarding effect of inventory either on the other side to the earlier question. But again, I look I can't say that there's not some of that happening. But right now, we're not tracking to it. We're not tracking it. We don't see it.
William Stein: Thank you.
Phil Gallagher: You got it.
Operator: There are no further questions at this time. I would like to turn the call back to Phil Gallagher for any closing comments.
Phil Gallagher: Yeah. Thank you very much. I appreciate that. And I want to thank everyone for attending today's earnings call. We hope everyone stays healthy and safe during this time and wishing everybody great 2021. Look forward to speaking to you again in April with our fiscal third quarter earnings report. Take care and thanks again.
Operator: Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.
