Avnet, Inc. (AVT) on Q1 2023 Results - Earnings Call Transcript
Operator: Please standby. Our presentation will now begin. Welcome to the Avnet First Quarter Fiscal Year 2023 Earnings Conference 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, Paul. Earlier this afternoon, Avnet released financial results for the first quarter fiscal year 2023. The release is available on the Investor Relations section of the companyâs website. A copy of the slide presentation that will accompany todayâs remarks can be found via the link in the earnings release, as well as on the IR section of Avnetâs website. 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 companyâs 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 Avnetâs 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. Todayâs call will be led by Phil Gallagher, Avnetâs CEO; and Ken Jacobson, Avnetâs CFO. With that, let me turn the call over to Phil Gallagher. Phil.?
Phil Gallagher: Thank you, Joe. And thank you everyone for joining us on our first quarter fiscal year 2023 earnings conference call. In the prior fiscal year, we delivered record results and continue to take strategic steps to position Avnet as a more durable company with an increasingly critical role in the global technology supply chain. We are well positioned to continue to deliver value to our customers, suppliers and shareholders, even in the face of a more challenging and uncertain operating environment. I am pleased to share that we kicked off the fiscal year with another quarter of solid financial results, including meaningful sales growth across all regions and improved profitability year-over-year. We achieved these results despite the macro headwinds affecting certain areas of our business, which I will touch on in a minute. In the quarter, we achieved sales of $6.8 billion. This exceeded the higher end of our guidance up 6% sequentially and over 20% year-over-year. On a constant currency basis, sales increased nearly 29% year-over-year. Efficient management of our operations also enabled us to drive solid operating margins of 4.3%, which is the third consecutive quarter of greater than 4% operating margin. Further, the combination of a solid sales and effective management of operations allowed us to increase operating income 3 times greater than revenues on a year-over-year basis. A significant driver of our results in the quarter was, of course, the continued execution by our incredible global team. Our team has effectively managed market complexities and has served as great partners to our customers and suppliers as they face fast changing supply chain conditions and uncertainties. We are more deeply engaged with our customers and suppliers than ever before, which enables us to maintain the necessary expertise and capabilities to help them navigate todayâs supply chain complexity. And with the structural and organizational changes we made to our business over the last two years, we are well positioned to continue serving as control tower for our customers and suppliers. In the quarter, demand remains strong globally in key vertical segments like transportation, industrial, and aerospace and defense. And we have continued to invest in inventory to meet this demand. You will see that inventory levels were higher at the end of the first quarter as compared to the prior quarter, which Ken will speak to you further in his commentary. This reflects our need to support sustained sales levels in Asia and quarterly increases for specific supply chain engagements. Overall, we continue to be very comfortable with our days of inventory heading into our second quarter. With that, let me turn to the highlights for our business. At the topline, our Electronic Components business saw sequential and year-over-year growth across all three regions. In constant currency, Electronic Components sales were up nearly 9% sequentially and up over 31% year-over-year, reaching $6.3 billion in the quarter. These results were primarily driven by another record quarter of sales in Asia and consistent strong sales growth in both the Americas and EMEA regions. Increased sales in Asia were driven primarily by growth in the transportation and industrial markets. The team in Asia has also successfully gaining share in the region, leading to record quarter billings. The Americas and EMEA regions both benefited from strength in key verticals, notably industrial, transportation, and aerospace and defense. We are very pleased with the growth in these markets as highlighted at our Investor Day in June. This is proof that we are well diversified across the end markets we serve and reinforces our expectation that these end markets will continue to have positive long-term growth prospects. Further, our enhanced focus on growing key supplier relationships and addressing their supply chain needs continues to bring benefits across all of our regions. We continue to coordinate closely with customers and suppliers to effectively manage our backlog. As a result of those actions, our overall book-to-bill ratio continues to moderate as it was near parity leading into our second quarter. We continue to benefit from our unique engineering capabilities with our field application engineers and digital design tools, resulting in another record revenue quarter for demand creation. We believe this continued strength is indicative of the increasing value of the capabilities we provide to customers and suppliers, and itâs important to supporting our margins in a more uncertain operating environment. Turning to our Farnell business. Farnell sales and profitability were impacted by currency fluctuations, particularly weakness in the British pound, an ongoing component shortages that are affecting Farnellâs ability to fully meet demand for single-board computers. Even with that, the backlog for a single-board computers remains robust and we expect to realize such sales when product becomes available. Additionally, Farnell recently became the exclusive licensed distributor of the Raspberry Pi single-board computer and we are really excited about this development, which will increase our market share and favorably impact Farnellâs revenue in the mid-term. Operating margins for Farnell were above 12% during the quarter, impacted by weakening of the British pound. We expect currency fluctuation to have continued impact on Farnell into the second quarter. We remain excited about Farnell and continue to see opportunity to leverage Farnellâs and Electronic Components unique and synergistic collaboration to better serve our Avnet customers. To conclude, I want to reiterate that we are stronger and much more durable company today through the changes we have made to our business and I believe our recent trends and results reflect that. While we cannot control the overall market, I am confident in our teams ability to execute in a challenging and uncertain environment and continue to deliver value to our supplier and customer partners. Thereâs never been a greater need for the capabilities of Avnet has and we look forward to continuing to play a critical role at the center of the technology supply chain. With that, I will turn it over to Ken to dive deeper into our first quarter results.
Ken Jacobson: Thank you, Phil. Good afternoon, everyone, and thank you for participating on todayâs call. As Phil mentioned, we are very pleased with our first quarter performance. Our teams continued execution resulted in significant sales and operating income growth with excellent returns and we are encouraged by the great start to fiscal year 2023. In the first quarter, our sales were $6.8 billion, up 21% year-over-year, well exceeding the top end of our guidance range. Sales growth in constant currency was 29% year-over-year with each region contributing to the growth. We also grew sales 6% quarter-over-quarter or over 8% in constant currency, which is well above our typical seasonal trend. We had strong sales in the first quarter across all of our regions, led by our Asia team, which delivered a record $2.9 billion of sales. On a year-over-year basis, sales grew 33% in the Americas, 42% in European constant currency and 18% in Asian constant currency. From an operating group perspective, Electronic Components sales grew 23% year-over-year or 31% in constant currency. Electronic Components sales grew 7% quarter-over-quarter or 9% in constant currency. Farnell sales declined 6% year-over-year, but grew 2% in constant currency. Farnell sales continue to be negatively impacted by the continued shortage of certain components needed to complete single-board computers. Excluding sales of certain single-board computers, Farnell sales grew 7% year-over-year. For the first quarter, gross margin of 11.4% was down 85 basis points quarter-over-quarter. This decline was primarily driven by higher Asia regional sales mix and from declines in gross margin due to product and customer mix. We continue to maintain discipline around expenses in the quarter as adjusted operating expenses were $475 million for the quarter, down 4% sequentially and down 1% year-over-year. Adjusted operating expense as a percentage of gross profit dollars was less than 62% in the first quarter, which is the lowest it has been over the past several years. Adjusted operating income of $293 million increased 64% year-over-year and grew 3 times greater than sales, demonstrating our ability to continue to drive operating leverage as we grow our business. Our adjusted operating income margin was 4.4% in the first quarter, which is the third consecutive quarter with greater than 4% operating income margin. Electronic Components operating income was $267 million, up 65% year-over-year. Electronic Components operating income margin was 4.2%, up over 100 basis points year-over-year. Most notably, our Americas business continued to make progress towards our operating margin improvement goals. This is the eighth consecutive quarter of Americasâ year-over-year operating margin improvements and we are encouraged by the momentum our Americas team has coming into the December quarter. Farnell operating income was $52 million, up 4% year-over-year, despite the 6% decline in sales. Farnell operating income margin was 12.1% in the quarter, up over 120 basis points year-over-year. The quarter-over-quarter decline in Farnell operating income margin was primarily driven by a combination of lower sales and a lower gross margin because of the foreign currency impact on Farnellâs pricing and related gross margin. Turning to expenses below operating income, interest expense of $45 million in the first quarter increased by $50 million quarter-over-quarter, primarily due to higher debt balances to support working capital investments and from rising interest rates. This increase in interest expense negatively impacted adjusted diluted earnings per share by $0.12 quarter-over-quarter. Our effective income tax rate was 23% in the quarter as expected. Adjusted diluted earnings per share was $2 for the quarter, which increased 64% year-over-year. Turning to the balance sheet and liquidity. During the quarter, we invested in working capital support our sales growth resulting in approximately $700 million increase quarter-over-quarter. Avnetâs working capital increased approximately $300 million came from additional receivables and approximately $400 million came from additional inventories. With respect to our inventory, we are comfortable with the quality and age of our inventory. The increase in inventory was driven by several factors including support for sustained sales levels in Asia and an approximately $120 million increase specific to a single supply chain engagements that came in at the end of the quarter. We expect the inventory related to this specific engagement to ship early in the quarter. Additionally, we continue to work with our customers and suppliers to come to mutually beneficial solutions as certain customers have high levels of inventory as a way for the golden screw components. As a result of this working capital increase, working capital days was 73 days for the quarter, which is within our acceptable range of working capital days. Our returns on working capital continue to be significantly higher than our cost of capital. The increases in working capital led to an increase in debt of approximately $700 million and a corresponding $650 million use of cash from operations. The increase in debt led to a gross leverage of 1.9 times at the end of the quarter, still well within our required leverage ratios. At the end of the quarter, we had approximately $600 million of available borrowing capacity and we expect to generate positive operating cash flows in our second quarter, because of seasonal declines in sales from our western regions. In our first quarter, we purchased approximately $150 million of the shares, which represented nearly 4% of outstanding shares. Over the last two quarters, we have retired approximately 6% of outstanding shares. There is $383 million left on our current share repurchase authorization entering the second quarter. We expect to continue to buy back shares at similar levels during the second quarter as our shares continued to trade at meaningful discount to book value and a lower multiple than our shares have historically traded out. During the quarter, we also increased our quarterly dividend to $0.29 per share and over 11% increase from the prior quarterly dividend. During fiscal 2023, we expect our capital expenditures to increase primarily to support a new warehouse in Europe. Turning to guidance, for the second quarter of fiscal 2023, we are guiding sales in the range of $6.35 billion to $6.65 billion and adjusted diluted EPS in the range of $1.80 to $1.90. Our second quarter guidance today is based on current market conditions, including a $60 million negative impact on our sales guidance at the midpoint from the recent strengthening of the U.S. dollar as compared to the first quarter. This guidance implies a sequential sales decline of down 1% to down 5% in constant currency and assumes a typical seasonal decline in sales in our western regions as those regions have fewer shipping days compared to last quarter because of the holidays. This guidance assumes similar interest expense to the first quarter, an effective tax rate of between 21% and 25% and 94 million outstanding shares on a diluted basis. In closing, I want to thank our team for delivering another quarter of sales and earnings growth. We believe that we are well positioned to continue to gain market share in the future. Avnetâs diversification of suppliers, products and end markets we serve are key differentiators that will enable us to continue to deliver positive financial results despite uncertain and changing market conditions. With that, I will turn it back over to Operator to open it up for Q&A. Operator?
Operator: Thank you. Thank you. Our first question comes from Melissa Fairbanks with Raymond James. Please proceed with your question.
Melissa Fairbanks: Hi, guys. Congratulations on a great quarter and guide, really refreshing to see amid all this uncertainty. I was just wondering from modeling purposes, OpEx was at kind of a record low as a percentage of sales. Just wondering going forward, how sustainable that is, if OpEx needs to kind of trend higher as we go forward or can we expect to see this kind of operating leverage in the model?
Ken Jacobson: Hey, Melissa. This is Ken. I would say, in general the absolute level of OpEx, it did â it would sustain around the same levels. Sales continue to decline, we have some levers on the overall OpEx side. But we feel pretty good about the absolute number of OpEx now depending on the level of sales. The percentage of GP might change a little bit. But we feel pretty good of the OpEx we had this last quarter and that can be sustainable into the fiscal year.
Melissa Fairbanks: Okay. Great. Great. And maybe just one quick follow-up, I imagine you are probably going to get a lot of questions on the inventory balance. I am just wondering is there any risk to the inventory due to price inflation. Meaning as you have been able to accumulate the inventory, some of these supply constraints ease, is there any risk going forward as we get into maybe some normalization of pricing next year that the value of inventory is overstated?
Ken Jacobson: Yeah. I would say we donât see a huge risk there. We do have some price protections on lowering prices, if that happens to come from the suppliers. But at the same time, we have commitments from our customers and we work through the inventory levels, but we donât see a huge risk in terms of taking inventory losses and things like that because of pricing.
Phil Gallagher: Yeah. Melissa just toâ¦
Melissa Fairbanks: Okay. Good.
Phil Gallagher: Just to add on this â thanks. I apologize for my voice and the cough. I have got quite some allergies here. But yeah, it was well within our range for inventory and the returns we model around the inventory, and as important, so I will get ahead of the next question. The quality of the inventory is extremely good, our reserves are well in line and the aging inventory is not increasing. So itâs relatively current.
Melissa Fairbanks: Okay. Excellent. Great. Thatâs all for me. Thank you.
Ken Jacobson: Thanks.
Phil Gallagher: Thank you.
Operator: Thank you. Our next question is from Matt Sheerin with Stifel. Please proceed with your question.
Matt Sheerin: Yes. Thanks for taking my questions. Phil, just trying to get your perspective on the outlook, it looks like you are down a little bit seasonally, your book-to-bill finally at parity after how many quarters of very positive. Some of the suppliers, the semiconductor suppliers and other component suppliers are modeling or at least looking more cautiously to Q4. Texas Instruments last night guided down double digits, other component suppliers are starting to see some inventory correction going on at customers. It doesnât sound like you are seeing that in a big way yet, is it that you are lagging the cycle or are there still those hard to get parts or customers are still dealing with that imbalance and they are not going to start cutting their inventory until that straightens out?
Phil Gallagher: Yeah. Itâs correct, but 64 tells our question, Matt. Thanks. But look, we have giving the outlook as we see it today with our backlog today in the next three-month to six-month backlog and it is a straight roll up from the regions, we are not precedent, we are not pushing them, itâs a number we feel that we can hit at this point in time. And if you look and we call it out intentionally, the industrial, defense/aero, transportation, as we see it today, those still grow pretty solid. We are not as exposed in the consumer, we are -- and some of the compute even, Iâd say, that others are. So, and the other think, Matt, that really this is -- we are watching the backlog, I am pleased that book-to-bills are coming down, but we are helping to drive some of that, because you and I both know thatâs not realistic, whatâs kind of been going on here last 12 months to 24 months. We are not seeing as we get to the cancellations as much. We have seen some push outs. we are Managing our customers backlog with them if they can get the golden screw and all that kind of stuff. But we are not seeing that wanted to remove it off the books. So we are driving, frankly, to some of that, because I just want to make sure itâs real. The next three months or so this is the outlook that we see based on the roll-up from the teams.
Matt Sheerin: Okay. Thanks for that. And then on the gross margin, I understand why that was down sequentially because of the mix. Looking forward, as you said, North America and Europe has fewer selling days. So would you expect gross margin to remain at these levels and be down, I guess, meaningfully year-over-year or is there some pricing power or other reasons why gross margin could be higher?
Ken Jacobson: Yeah. Matt, I would say flattish, but we are still going to have a higher mix of Asia in our second quarter due to the holidays, but that gets offset by a better product and customer mix than we had this quarter to kind of offset some of that impact. So flattish is probably the right way to think about it. And then when you get into the third and fourth quarters, you would have a higher mix of west, you get some of that margin back on a gross margin perspective.
Matt Sheerin: Okay. And just lastly on the SG&A, it was noted that it was down year-on-year, how much of that is related to FX and that the natural hedge that you have in regions like the U.K. and Europe, where the currency is in fav -- basically a favorable swing for you on the OpEx side?
Ken Jacobson: Yeah. From a currency perspective, somewhere between $35 million and $40 million, Matt, was the benefit, I guess, we got with overall OpEx from a reported perspective.
Matt Sheerin: But on a year-over-year basis?
Ken Jacobson: Year-over-year basis, yeah.
Matt Sheerin: Okay. Terrific. Thanks very much.
Ken Jacobson: Thanks, Matt.
Operator: Thank you. Our next question comes from Jim Suva with Citigroup. Please proceed with your question.
Jim Suva: Thank you so much. A quick question on your operating margin, given the state, I think, Phil mentioned, thereâs a few push outs but nothing material to keep an eye on it as far as cancellations and such. What about operating margins? Do you think they are kind of sustainable at these levels, because you know the investor concern out there, of course, is that, if ASPâs come down and order push outs and cancellations, ratchet up that ASR that margin -- operating margins could be under pressure, could you just kind of help address that elephant in the room, that would be great?
Ken Jacobson: Yeah. I guess, I would say, we feel pretty good about the second quarter operating margin still being above 4% itâs implied in the guidance. As you look out clearly there would be an impact on our operating margins that we have a deterioration in sales, a meaningful deterioration. So thatâs a given. I think when we think about it, we feel really good in the mid- to long-term that we can sustain that level of margins and so there might be some temporary declines as those market factors come through the model. But in general, we feel good about our OpEx levels, feel good about some opportunities like demand creation, supply chain services, IP that can help still give us some positives on the gross margin, but clearly, we would lose some, say, if the sales go down meaningfully.
Jim Suva: Great. And a quick follow-up, interest expense outlook, a little bit more on that and does it include a plan November increase by the Fed, just so we can kind of think about that?
Ken Jacobson: Yeah. I would say it contemplates potential increase there and we are looking at kind of flattish from the first quarter.
Jim Suva: Thank you. Congratulations.
Phil Gallagher: Thanks, Jim.
Ken Jacobson: Thank you.
Operator: Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.
William Stein: Great. Thanks for taking my questions. First, I am hoping you can elaborate on the control tower topic. You mentioned this at the Analyst Day. I am not sure how deep we dug into this topic, but I understand it provides your customers with a way to envision their inventory across various channels. Can you maybe spend a minute or two talking about how your customers are using you for this and what the financial implications are on your business? Thank you.
Phil Gallagher: Sure, Will. This is Phil. Yeah. We started coining that term as we went through the pandemic and resolve supply chains breakdown, we are right at the center of that, technology supply chain and thatâs the value we bring to the market is managing supply chains, of course, demand creation as well. So we have had many customers and suppliers from all verticals, frankly, started to come to help them rebuild their supply chain. Thereâs just a lot of, I will use the word transparency loss from the end OEMs where the manufacturing was, multiple manufacturing sites, hundreds suppliers, tens of thousands of SKUs. And things started to break down and it lost lot of that visibility and the one you are right, we had at Investor Day was Milwaukee, right, and they spoke very clearly about that, how we were able to build them, we call it, control tower. They can help aggregate there many different SKUs, many different suppliers and then filter that or drive that to the right. In this case EMS provider thatâs driving the manufacturing for them. So itâs really a visibility on the transparency and then thereâs analytics in there to help them with their forecasting and demand on the front-end, as well as whatâs coming in from the suppliers as we manage lead times coming in to the MRPs. So hopefully that helps explain what we are talking about there.
William Stein: A follow-up if I can. Can you talk about the distribution of parts that are still in a shortage situation? I think certainly the microcontroller companies, for example, those buying from foundry on very trailing edge. They talk about how this is still in a so protracted shortage situation and then there are other components like memory, broadly speaking, thatâs in severe oversupply. Can you talk about the mix between those two dynamics unusual to have sort of disparate things happening at the same time? We know they are happening to have it for a while, but can you talk about how thatâs trending the mixes between those two dynamics?
Phil Gallagher: Yeah. I will do the best I can. I mean, thereâs tens to hundred different commodity breakouts. So I will just give a high level, Will, which is what by the way, with some of the lead times coming in, thatâs why we are getting some more inventory, which is, again, not a bad thing. We really start with the interconnect and we are -- interconnect for most part has come down a bit, but they are still in a wide range of, I donât know, eight weeks to 30 weeks or so, Will, with -- itâs improved two-day weeks at the beginning of 2022. We donât see that happening in the defense side and aerospace side, we think thatâs going to continue to be extended lead times in particularly in that low aero connector space. Then you go jump over to the capacitors MLCC the general purpose those lead times have come back to more most notably in the mobiles that are back to normal levels of in the 12 weeks to 18 weeks. But even in capacitors, if you look at the high capital, large-sized caps that go into automotive and high voltage large case size, they still have 30 plus weeks. So just in a passive connector, thereâs a huge range of disparities, Will, in lead times, which is why itâs so tough to just summarize. If you jump over to the semi side, you get -- again, products primarily supporting consumer and compute, we are experiencing lead time reductions in that area. You mentioned one like, i.e., memory has come way down of recent. But demand is still outpacing the MCUs and power discretes, for example, lead times remain in the 40 weeks to 52 weeks, things like op amps are still 40 weeks to 52 weeks, voltage regulators 48 weeks to 52 weeks, programmable logic, even some programmable logic, although, some of thatâs improved, you still have anywhere from 20 weeks to 26 weeks. So itâs -- and then the controller space as you pointed out, not much change there 8-bit, 16-bit, 32-bit, pretty much across the Board. Low end might be 20 weeks. Higher end 52 weeks to 60 weeks. So I would say, and how you go through every commodities, we have the time to do that, but we do this for our customers though by the way, we are -- that are using the control towers and our supply chain services. So we do continue to update on what we see in the market across the Board. We are glad to do that in a separate session for anybody on this call as well by the way, as to what we are seeing overall. So hope that answers at least at a high level. Itâs certainly a mixed bag out there, which I think whatâs driving the complexity and the disparities and confusion as to whatâs the market outlook is.
William Stein: Thank you.
Phil Gallagher: Thank you, Will.
Operator: Thank you. Our next question is from Ruplu Bhattacharya with Bank of America. Please proceed with your question.
Ruplu Bhattacharya: Hi. Thanks for taking my question. My first question is on Farnell. I was wondering how did that e-commerce sales impact revenues this quarter. And then if you can touch on the margin performance, I mean, you had pretty strong margins even this quarter, 12% plus, but last quarter it was very strong at 14%. So just a sequential margin decline, how much would you say was the FX, how much was volume, just any color on that sequential trend and how should we think about Farnell margins for the third quarter?
Phil Gallagher: Yeah. So I will go first and turn it over to Ken. Thanks, Ruplu. E-commerce sales are still really, really strong. We call that for most of that is on the board computing. So components that are on the board semis IP&E that represented roughly 73% of the activity, so the line items coming through Farnell and still in 52% to 54% range of the revenue. So we are really, really pleased overall with that -- those stats and overall pleased with Farnell still. They had a couple other things that impacted. Now let Ken touch on the FX with the pound and then a bit with the single-board computing that drove some volume loss.
Ken Jacobson: Yeah. From a operating margin perspective, I would say, itâs about 60%-40%, 60% that was driven by just the sales decline and 40% was driven by the impact on gross margin for the pricing because of FX.
Ruplu Bhattacharya: Okay. Thanks for the details there. For my follow-up, can I ask a question on the core business? It looks like you again had a strong quarter with Asia, how should we think about that trend going forward, do you think that region sustains and the demand there versus Europe and North America, just your thoughts on regional mix going into the next quarter? And then just the same question on margins for sequentially between the June and the September quarters, what were some of the impacts there and how should we think about core margins in the December quarter?
Phil Gallagher: Yeah. So I will hit on the revenue and Ken touch on the margin. So I didnât know what to say, we are really, really pleased with our teamâs execution in Asia-Pac with all the mixed messages that thereâs another record quarter for us in Asia-Pac. And we are also really watching their backlog as well. For the reality in the backlog and integrity in the backlog and our leadership team thereâs very, I would say, very assertive and making sure thatâs as clean as possible as we move forward. And as you look into Q2, it -- we are seeing pretty steady our performance in Asia-Pac from the September to the December quarter, okay, which is we think pretty positive. So as of March quarter, we will look at -- wouldnât go that far out, but we will see how that the traditional Chinese New Year and a holiday in Asia impacts March. We will talk about that next quarter, but right now the December quarter is looking pretty good for us in Asia as we see today. Ken, do you touch on the margin?
Ken Jacobson: Yeah. So from an overall Asia mix, you are going to see an increase in Asia sales for this next quarter, because the west has a little bit softer sales, because of the holidays, less shipping days. So and then you get into the third quarter, you would see Asia become less percentage and the west become higher. So thatâs kind of how to think about it from a seasonality not talking about anything in the Q3 sales levels are just more in general the cadence of the business. I would say from a core business operating margin perspective, we will have a higher Asia mix, so that will put pressure on the operating margin, but I think we will have a better product and customer mix offsetting that. So flattish is the right way to think about the core operating margin into this next quarter and we would expected all things being equal and seasonality that goes up as we get into our third and fourth quarters with the higher mix of west business that has a higher gross margin.
Ruplu Bhattacharya: Got it. Thanks for the details. Phil, if I can just have one more quick follow up. Did you, Phil, mentioned what was demand creation as a percent of total revenue and how should we think about that going forward?
Phil Gallagher: Yeah. We did, Ruplu, is roughly 30%, 31% of our total revenue and with the revenue being as high as it was, thereâs another record demand creation dollars. The funnel looks good moving forward, registrations and design wins still a big part of our success story as we move forward. So, pretty bullish on our demand creation.
Ruplu Bhattacharya: Okay. Thanks for all the details. Appreciate it.
Phil Gallagher: Thanks, Ruplu.
Operator: Thank you. Our next question comes from Joseph Cardoso with JPMorgan. Please proceed with your question.
Joseph Cardoso: Hey. Thanks for the question. First one is just a quick one and a follow-up on the Farnell margins this quarter. In prior quarters, you called out pricing benefits that you have seen in the margins themselves. So I was just curious, did you see any pricing benefits on Farnell margins in the September quarter and if so, what was the magnitude of that?
Ken Jacobson: Yeah. I wouldnât say we saw any pricing benefits from the Farnell margin if anything a couple of those commodities where the lead times have come down, we might have got a little pressure on it, but I would say the pressure we saw this quarter is really purely FX and the difference in pricing due to various currencies between U.S. based competitors and Farnell being a primarily U.K. based company, so that was the main pressure. A little bit of noise here and there, but nothing meaningful to point out.
Joseph Cardoso: No. Understood. Thanks for the clarity. And then just my follow up, last quarter, you spoke about seeing ASP inflation for EC. I think it was somewhere in the range of 7% to 8% high single-digits I suppose, are you still seeing that same level or has there been any shift in terms of where you are seeing EC inflation? And then kind of more importantly, how are you thinking about that trend going forward, are you seeing any signs that we are kind of cycling past the peak and could we start to see some moderation? Thanks for the question, guys.
Phil Gallagher: Hey, Joe. Let me take a shot. I think you kind of broke up at least on our end, the future of the pricing inflation we talked about last quarter, right?
Joseph Cardoso: Correct.
Phil Gallagher: Yeah. Okay. Yeah. See, our last quarter we said roughly 20% to 25% of our growth would have been for ASP price increases, it doesnât affect our margin as much. I am not sure thatâs part of your question is more GP dollars than anything, not GP percent and then this quarter we started to see some of that moderate. So some of that would have been from carryover, but a lot of the price increases have seem to work through the system at this point. So, in quarter, we got very little impact on any further price increases, but year-on-year, we would have seen some of that. Ken any comment?
Ken Jacobson: No. I think thatâs about right. And as far as the long-term, I mean, I think, hearing mixed bag, but we donât necessarily hear a lot of commentary at least from our supplier partners about them lowering prices. So, yes, the price increases have moderated, but not a lot on lowering prices and so thatâs kind of how we are viewing it right now, but clearly continue to monitor the tone and conversation around ASP.
Joseph Cardoso: Thanks for the question. Appreciate all the color, guys.
Phil Gallagher: Thank you, Joe.
Operator: Thank you. There are no further questions at this time. Iâd like to turn the call back over to Phil Gallagher for any closing remarks.
Phil Gallagher: Sure. Thank you very much. I just want -- again, I want to thank everyone for attending todayâs earnings call and one more time thank the Avnet team around the world for a terrific performance. And we really look forward to speaking to all of you again at our fiscal second quarter earnings report in January. Okay. Have a good rest of the year. Thank you.
Operator: This concludes todayâs conference. You may disconnect your lines at this time. Thank you for your participation.
