Avnet CEO Phil Gallagher: Supply Chain Challenges To Persist Through This Year

‘Lingering COVID-19 impacts from inflation and impacts from the conflict in Ukraine continue to have some ripple effects on supply chains. While supplies of some of the parts have modestly improved, we expect supply chain challenges to persist throughout the remainder of this calendar year,” says Avnet CEO Phil Gallagher.

Electronics distributor Avnet saw increased strength in its business in the fourth fiscal quarter of 2022 and said that backlogs are increasing even as inventories are growing.

Avnet CEO Phil Gallagher, speaking Wednesday to analysts during Avnet’s fiscal year 2022 financial analyst call, said the Phoenix-based distributor saw sales rise nearly 25 percent year over year, supported by a strong year for electronics components and record revenue year for Farnell, the U.K.-based service-focused electronics distributor it acquired in 2016.

“We’re continuing to make investments in inventory, including SKU additions at Farnell, added field application engineers and online design tools that have delivered meaningful value and growth. … We have a strong foundation to build upon in the coming fiscal year and are well positioned to deliver value and adapt even if market conditions change in the future,” Gallagher said during his prepared remarks.

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Even so, Gallagher said, supply chain issues continue.

“Lingering COVID-19 impacts from inflation and impacts from the conflict in Ukraine continue to have some ripple effects on supply chains,” he said. “While supplies of some of the parts have modestly improved, we expect supply chain challenges to persist throughout the remainder of this calendar year.”

These types of environments prove how important the role of distribution is, Gallagher said.

“As we’ve proven over the years, the value of Avnet in a complex operating environment is our ability to serve as a control tower for our customers, helping them proactively manage their supply chains,” he said. “We expect customers and suppliers to leverage these solutions more fully in the coming years.”

Avnet’s electronic components business had a strong year, reaching nearly $23 billion in sales, with robust sales in its fourth fiscal quarter following a very strong third quarter, Gallagher said.

“Our book-to-build ratios at the end of the quarter have remained above parity,” he said. “Lead times are mixed. Some remain extended, particularly for controllers, while some lead times of other products have been moderating.”

Avnet continues to effectively manage its backlog, with inventory levels increasing in the fourth quarter to support the ramp-up of sales in Asia into the seasonally strong first fiscal quarter, Gallagher said.

“As a distributor, we pride ourselves on our ability to meet and support strong customer demand,” he said. “And I’m proud of the success we’ve had in managing key relationships with customers and supplier partners to get the right parts in the right place at the right time.”

Farnell had a record revenue year, with full year revenue up 20.2 percent over fiscal 2021, Gallagher said. Avnet continues to make investments in Farnell, including adding over 18,000 new inventory SKUs in the fourth fiscal quarter, he said.

“As we head into fiscal year 2023, we see opportunity for Avnet to leverage and build upon the value of its demand creation capabilities, supply chain services, embedded products and Farnell offerings,” he said. “We’re a different and much more resilient company today due to the durable changes we’ve made to our business. There has never been a greater need for global distributors, and we remain confident in our ability to meet those opportunities.”

During the question-and-answer portion of the conference call, when asked about the loosening of some component shortages, Gallagher said he is very confident and comfortable with the inventory levels and the mix to meet sales for the coming quarter.

“The quality of the inventory is good,” he said. “Very good, as a matter of fact. It’s a mixed bag on the commodities and what’s coming in and what’s going out. [Inventory is] moderating, for sure, but still above levels, you know, pre-COVID, if you will. So we are seeing some moderation. … It’s really complex. It’s really by products, by commodity, but overall, inventory that did come in come in near the end of the quarter. And we’ll be looking to turn that this quarter.”

Gallagher, when asked about demand going forward, said that book-to-builds are moderating.

“They’re not where they were six months or a year ago, but still above one,” he said. “Which I see as a good thing, that book-to-build coming down a bit, to be candid with you.”

Gallagher also said inventory growth is outpacing sales growth in the coming quarter, which is similar to what happened last year.

“As we bring in the inventory, some of it was for, as we said, the Asia growth, other for strategic customer opportunities that we’ve won in the past quarter and had to bring some inventory in,” he said. “[And so] we look at the next three to six months, we feel the inventory is positioned correctly for the growth that we’re seeing in the marketplace through December.”

The quality of that inventory is also extremely good, Gallagher said.

“Our what we call non-moving inventory that we calculate is at an all-time low,” he said. “So the inventory that we have is the right inventory and quality inventory. And most of the inventory we have … is for customer contracts. We have customer contracts. We have firm supply chain engagements.”

Gallagher also took time to describe Avnet’s Control Tower supply chain orchestration program after being asked about it by an analyst.

Control Tower covers about 50 percent of Avnet’s business, or more where the distributor is actually managing a customer‘s material requirements planning, he said.

“We‘re taking in feeds, whether it’s an EDI, an API, a fax, however they want to give it to us we’re managing their pipelines for them,” he said. “And what’s happened in the last couple of years is more and more customers are coming to us, and they need more assistance. And some of these are maybe tier ones or large OEMs that weren’t doing business with us directly and are asking us to help them rebuild their supply chains when it comes to technology and semiconductors.”

Part of this business actually becomes supply chain as a service, Gallagher said.

“It‘s low working capital or no working capital, and really gross profit kind of building,” he said. “And it does integrate us more with those customers. And really, the partnerships just go to a new level where we’re integrated, and it does create more stickiness.

For the fourth fiscal quarter 2022, which ended July 2, Avnet reported revenue of $6.37 billion, up 29.1 percent from the $5.23 billion the company reported for its fourth fiscal quarter 2021.

That included electronics component revenue of $5.93 billion, up 23.9 percent, and Farnell revenue of $442.3 million, up 0.2 percent. Total sales to the Americas region was $1.62 billion, up 35.5 percent over last year.

Avnet reported GAAP net income of $246.8 million, or $2.51 per share, up from last year’s $85.4 million, or 85 cents per share. On a non-GAAP basis, Avnet reported net income of $203.4 million, or $2.07 per share.

For all of fiscal 2022, Avnet reported revenue of $24.3 billion, up 24.6 percent over the $19.53 billion the company reported in fiscal 2021.

Net income on a GAAP basis was $692.4 million, or $6.94 per share, up from last year’s $193.1 million, or $1.93 per share. On a non-GAAP basis, net income was $691.5 million, or $6.93 per share.