Avnet (NASDAQ:AVT) Q1 2020 Earnings Call

0:00 Please stand by. Our presentation will now begin. I would like to turn the floor over to Joe Burke, Senior VP, Treasury and Investor Relations.

0:10 Thank you, Operator. Earlier this afternoon, Avnet released financial results for the first fiscal quarter of 2020. 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 ABNDET's website. Lastly, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risk, 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 ABNET'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.

1:19 Today's call will be led by Bill Emilio, Avnet's CEO, and Tom Liguori, Avnet's CFO. Also, Phil Gallagher, Global President of Electronic Components, joins us to participate in the Q&A session. With that, let me turn the call over to Bill Emilio. Bill?

1:38 Thank you, Joe, and thanks to everyone for joining us for our first quarter fiscal year 2020 earnings call. This quarter, we delivered sales of $4.6 billion. and adjusted EPS of $0.60, which were in line with our guidance. Both macroeconomic headwinds and continuing uncertainty around tariffs impacted sediments and buying patterns across key geographies and verticals. As a result, we saw market trends decline in the first quarter of fiscal 20, which was a continuation of some of the patterns that began about nine months ago. No one knows exactly when the market will return to more favorable dynamics. What we do know is that macro data, including the United States Purchasing Manager Index, or PMI, hit a 10-year low in September.

2:29 As you know, a PMI of greater than 50 indicates industrial expansion, and changes in PMI are often indicative of year-over-year organic sales growth trends for distributors, in turn, the sales of semiconductor companies. With PMI data across the United States, Europe, and China all currently below 50, we are continuing to monitor conditions closely. We think that Brexit and tariff concerns play a key role in the low PMI data across Europe and China. Tong will run through the specifics of our performance by geography during his remarks. But in general, the macroeconomic data are consistent with what we saw in the first quarter and what we're seeing in our geographies as we look into our December quarter. The Americas is the latest to see slowing.

3:15 Conversely, the leveling out of sales in Asia that we saw makes us optimistic that we may have turned the corner in that geography. Meanwhile, EMEA remains under pressure. For the first quarter, by vertical, we saw mid- to long-term opportunities in retail and healthcare with positive trends in defense and aerospace. We still see some softness in industrial and automotive markets. These last two verticals were further impacted by the more recent slowing in EMEA. As for how the macroeconomics will play out, we now believe that the current correction will continue into 2020. The market environment is challenging, but we are well-positioned to take on these challenges.

4:01 Our teams are well-prepared and ready to capitalize on opportunities and use our competitive advantage across geographies and verticals so we remain bullish on Avnet's long-term growth prospects. Before we get into more specifics on the quarter, I want to address the changes to our relationship with Texas Instruments. In 2016, TI began a strategic shift to sell more directly to customers, phasing out demand creation. Earlier this month, we announced our distribution agreement with them would be ending. We are working collaboratively with TI to arrive at mutually agreeable terms related to this transition. Their decision was not a result of any performance issues. In fact, They have been an Avnet supplier for more than 40 years, and we are proud of the strong results we've delivered for them.

4:50 This transition with TI is an example of our ever-changing industry and competitive landscape. As a 98-year-old company, Avnet's supplier line card is continually evolving. Our line card today looks much different than it did 10, 20, or 30 years ago. We've been through some major changes like this in the past, and we have always recovered from them. and this is no different. As we transform into a technology solutions company, we are expanding into new areas that are less vulnerable to these types of changes. For example, through our strategic efforts in the Internet of Things, Avnet Integrated and Farnell, we are diversifying our business to maximize higher margin opportunities. Our work to replace the TI revenue is already underway as we emphasize driving increased sales from existing suppliers to our highly differentiated value proposition.

5:45 We will also seek out new suppliers who will find our comprehensive ecosystem very compelling. Now moving into the five areas of focus on our core strategy. First, we remain focused on amplifying our electronics components distribution business worldwide. Second, we are creating the ability to scale higher margin segments. Third, we are aggressively expanding our digital capabilities. And fourth, we are continually finding new ways to leverage our ecosystem for growth. And finally, fifth, we are driving continuous improvement throughout the business, which is fundamental to our success. Let me give you an update on the specific achievements in each of these five areas during the September quarter. Turning to the electronic component business.

6:32 Electronic components delivered sales of $4.3 billion. which was down approximately 1% quarter over quarter and operating margins for the business came in at 2.6% compared to 3.4% a year ago. We were encouraged by our performance this quarter in Asia where sales were up sequentially by more than 9% to $1.9 billion. This is now more in line with what we see in terms of seasonality. Also bookings are showing signs of stabilizing in Asia during this December quarter.

7:04 In addition,

7:05 The Americas region noteworthy wins included a leading America-based wearables manufacturer component business and a mobile solution and services provider 5G business. We also had a number of wins in IP&E, which is a higher margin segment. Now I'd like to talk about our scaling higher margin segments, digital transformation and operational excellence, specifically for Farnell. As we entered our first quarter, Farnell experienced continued pricing, sales, and margin pressure as lead time shortened and average selling prices declined historically consistent with this phase of the cycle. For the first fiscal quarter, Farnell reported revenues of $336 million and operating margins of 6.5%.

7:51 And as the quarter progressed, pricing started to stabilize. We remain very bullish and confident in Farnell's model, and we are doubling down on our investment there. We now have better headlights on the business, and since our last earning call, we've made progress on our five-prong plan to ensure Farnell's long-term success. The five areas of focus that will improve Farnell's competitiveness in the high service model are SKU count and new product introductions, pricing and quoting, and many more. This approach is enabling us to complete all integration actions that have been in a long-term plan. It will also help us capture additional market share as the market trends turn positive again.

8:47 Drilling down into the details for several of these areas, we already are making progress on improving our pricing and quoting capabilities. Teams are ramping up efforts to administer uniform discounting controls, ensure competitive pricing, and increase the breadth of our inventory with a focus on top suppliers. And in keeping with our overall ad net strategy of driving operational excellence through the organization, we're further integrating back office functions across the electronic components and foreign health business units. And we're working closely together on lead sharing. During the quarter, we added 26,000 SKUs to Farnell's website. We also added two new supply lines. E-commerce global order penetration continues this upward trend as well.

9:35 Farnell's new distribution center will come online in December. The benefits include reduced cost, the ability to more dramatically increase our SKU count, and improve our customer service. And this will position us well when the market turns up again. Overall, we are confident that the dedicated focus on each of these areas will ensure Farnell captures the benefit of fully leveraging Edna's vast resources and will lead to sales growth with best-in-class profitability. Turning to digital transformation. Expanding and deploying our digital capabilities goes beyond Farnell and is key to achieving better penetration in the demand creation categories versus fulfillment category.

10:20 Our work of implementing multiple robotic process automation projects continue during the quarter and will be an ongoing effort through the full fiscal 2020. This rollout across the ADMIT ecosystem of our artificial intelligence pricing tool is complete and the implementation across Farnell is on track to be completed in June. Our marketing automation tool is the cornerstone of our lead sharing integration between Farnell and electronic component business. In the first quarter, Salesforce software was implemented in parts of Europe after we completed its implementation in the United States and Asia. As I previously discussed about Farnell, implementation of our competitive pricing tool is critical to driving growth, customer satisfaction, and efficiency.

11:10 Now we'll turn to how we are leveraging our ecosystem to expand customer opportunities. You can see a depiction of our ecosystem on slide 10. This quarter, we strengthen our ecosystem with a pending acquisition of Waticchio. Waticchio is a global company with expertise in software, embedded systems that help developers overcome the technical challenges and complexity of developing IoT solutions. The Waticchio team has experience in embedded software, edge computing, and security, specifically from hardware to the cloud. Waticchio has business transformation consultants, user experience designers, and system and software experts who have worked with many Fortune 500 companies.

11:55 Their experience spans vertical markets including medical and healthcare, automotive and navigation, handheld and mobility, industrial and energy, and smart connected objects. The Waticchio acquisition complements our overall solutions offering and several of our strategies including scaling into our higher margin businesses. and extending our digital capabilities and leveraging our ecosystem. It's part of our larger strategy of building vertical and scalable platforms that can speed time to market and reduce financial investment while still offering high level of customization to all players who want to tackle IoT opportunities. The addition of Atticcio also complements our acquisition of SoftWeb Solutions, which was announced approximately 10 months ago.

12:45 Waticchio develops software for every layer from device to the cloud, while SoftWeb develops cloud-based software to connect, manage, and analyze data. Waticchio's user-centric technology includes connected hardware, device architectures, and applications. An important part of leveraging our ecosystem is the creation of opportunities with existing and new types of customers, which we call non-traditional customers. These customers aren't technology companies. They're coffee retailers, fitness equipment manufacturers, beauty companies that are seizing the opportunity to use IoT to transform their business models. The work we're doing with these non-traditional customers is illustrated by Water Management Company, World Water, and Soar Technology.

13:31 It also includes some of Waticchio's customers, including L'Oreal and coffee technology innovator, Evoca Group. All these highlight how we position Avnet to add value as an end-to-end solutions provider. We've included the case study of World Water and Solar Technologies in today's presentation. Turning to our goal of driving performance and operational excellence, we have been relentless in our commitment to decreasing operating expenses and gaining efficiencies. We are on track to pull forward $50 million of operating expense reductions that are part of our existing three-year, $245 million cost reduction plan. During the first quarter, we continue to make progress on our strategy to move certain back office functions to lower cost jurisdictions, including growing our offices in Serbia, Guadalajara, and Bangalore. We are well positioned to weather the current market downturn and are remaining very aggressive in our approach to executing on the plans that will keep us agile and improve our execution.

14:34 We are committed to our strategy to deliver a great customer experience and long-term growth. With that, I'll let Tom report on the financials for the quarter in more detail.

14:43 Tom?

14:45 Thank you, Bill.

14:46 Good afternoon, everyone. Let me start with the highlights and our key metrics on slide 15. First quarter's revenue, operating margins, and earnings were affected by product and customer demand trends that were to a large degree driven by an industry-wide slowdown. We delivered revenue of $4.6 billion, slightly above our guidance midpoint and down 1% sequentially and down 9% from the year-ago period. Gross margin declined 76 basis points year-over-year to 11.8%. This was mainly due to lower sales and margins at Parnell, with global pricing pressures and a higher mix of Asia revenue also contributing.

15:31 We continue to focus on managing costs, and saw our SG&A expenses decline $19 million year-over-year. Progress is on track with our additional cost reductions of $50 million that we called out last quarter. These reductions will be fully implemented by the end of the March quarter. Working capital days improved from 88 days to 84, contributing to the $196 million of cash flow generated in the quarter. We continued to repurchase shares, ending the first quarter with diluted shares of $104 million, down from $116 million a year ago. Adjusted earnings per share totaled $0.60, the low end of our guidance range, with lower spending helping to partially offset the gross profit declines.

16:20 Turning to business performance on slide 16. Electronic components results reflect the shifting demand environment. Electronic components revenue was down sequentially at 4.3 billion, and operating margins came in at 2.6%, compared with 3.3% in the prior quarter. Sales for Avnet by region were as follows. Americas, with revenue of 1.2 billion, was down approximately 4% both year-over-year and sequentially. Similar to others in the industry, our Americas business slowed during the quarter, a trend which is expected to continue into the second quarter. EMEA revenue of $1.5 billion was down 14% year-over-year and 10% sequentially.

17:11 Constant currency performance was a bit better, down 11% and 8% respectively. As discussed last quarter, EMEA revenue trends are similar to the market trends in the region. Asia, which saw the macro slowdown early in the March quarter, showed signs of stabilizing, as revenues rose sequentially by 9% to $1.9 billion, though still 7.6% lower than the prior year period. Turning to our catalog distributor, Farnell, Revenue of $336 million was a decline of 11% year-over-year. For now, pricing and demand slowed further in July, though both appeared to be stabilizing in August and September.

17:57 First quarter revenue in constant currency was flat sequentially. The lower volumes in pricing drove operating margins to 6.5%, though both pricing and operating margins appear to be stabilizing. We ended the quarter with a book to bill of 0.89. By region, America's was at 0.95, EMEA was 0.89, and Asia finished the quarter at 0.85. Turning to the balance sheet and cash flow statement on slide 17. Our solid capital structure positions us well to continue our capital allocation strategy of buybacks, dividends, M&A, and other strategic investments.

18:43 During the quarter, we returned $133 million to stockholders in the form of $112 million in stock buybacks and $21 million in dividends. This followed a Board-approved $500 million increase in AVNES share repurchase authorization and an increase of 5% in our quarterly cash dividend to $0.21 per share. At the end of the first quarter, We had $593 million remaining in the share repurchase authorization. We ended the quarter with $1.2 billion of net debt and a net debt leverage ratio of 1.6. Next, cash flows. We continued our focus on working capital and cash flow, generating $196 million of cash flow from operations in the first quarter.

19:35 We continued our buyback program, and our diluted share count is now 104 million shares. We have a path to get below 100 million shares in the coming quarters. Let me now take a few minutes to discuss our management focus for the next 12 months in light of the macro slowdown. We continue to believe that our focus on growing higher margin businesses like Farnell and IOT, managing costs and generating cash for buybacks will reap significant benefits once the macro environment recovers. However, as we work through the macro slowdown, the Fresnel improvements, and the TI transition, we want to reset expectations for the next nine to 12 months.

20:22 First, Fresnel. Operating margins sequentially declined this quarter, and we anticipate they will remain below 10% until the catalog industry turns more favorable. Bill already outlined the five areas to improve Farnell results. On slide 19, you can see the timing of the operating margin benefits from these initiatives. We expect that by the summer of 2020, the initiatives for cost, marketing, and SKU expansion will grow Farnell's operating margins to the 8% range, assuming no change in macro demand and pricing. Historically, For now, let's experience a 6% or higher improvement in demand, three-quarters post a cyclical downturn. Assuming a similar recovery timeframe, we anticipate operating margins crossing the 10% threshold by next summer.

21:21 Completing Fresnel's SKU expansion and e-commerce upgrade will take more time. The benefits of the new distribution center are expected to be realized in the second half of calendar 2020. We estimate that we will see operating margins in the 15% range by the end of fiscal year 2022. For the TI transition, our sales in the first quarter were slightly under $500 million. While we do not disclose the gross margin by supplier, the TI sales were generally lower fulfillment type gross margins. As of today, we do not have an agreed upon transition plan with TI. We anticipate completing the transition by December 31, 2020.

22:09 Our goal is to replace the gross profit dollars by driving higher revenues from existing as well as new suppliers, understanding that there will be a time lag between winning new business and the revenue reaching our P&L. Cost reductions will also be implemented. As we look at our business based on these new factors, by the summer of 2020, We expect EC operating margins of approximately 2.2%, which assumes the following. A substantial portion of the revenues will have been transitioned to TI by this time. We will have made some level of progress in replacing this revenue with new revenues, and variable cost reductions of $35 million annually will have been implemented.

22:57 If we further assume modest improvement in the macro environment for both EMEA and Americas, Following the same 9-12 month stabilization timeframe that we are seeing in Asia, we anticipate EC operating margins of 2.5% by the summer of 2020. We think it is realistic to replace the TI revenues with higher margin revenue by the end of our fiscal year 2022. By this time, we also expect to see the benefits of America's margin expansion initiatives, as well as IoT growth, We should bring EC operating margins to the 4 to 4.5% range. Based on what we've outlined here, we anticipate that by the summer of 2020, ABNAT's total operating margins will be in the range of 2.1% to 2.6%, depending on the timing of the macro recovery.

23:55 Longer term, operating margins of 4.5% to 5% are achievable. Turning to our second quarter, we are guiding revenue in the range of $4.2 billion to $4.6 billion, and adjusted EPS in the range of $0.35 to $0.45. These estimates reflect our expectation of continued industry headwinds, including continued slowness in EMEA and the potential for further softness in the Americas, as well as the gradual reduction in TI revenue. And it assumes an orderly Brexit process. Today, we've laid out our path for Finnell's recovery to double-digit operating margins, as well as our strategy for driving other higher margin sales.

24:41 We continue to manage the factors that are within our control, cost, working capital, cash flow, and buybacks. We believe the actions we are taking today will make us financially stronger when the demand environment improves. With that, let's open the line for Q&A. Operator? Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for your question.

25:26 Also, please limit your questions to one question and one follow-up. Our first question comes from the line of Rupalu Bhattacharya with Bank of America. Please proceed with your question.

25:37 Hi. Thank you for taking my questions. I just wanted to talk about the TI transition. Can you help us understand the cadence of how that revenue will go out? Is it we should remodel that $500 million a quarter going out? Or, Tom, I think you said something about by the summer of 2020 most of that would be out. So just trying to understand the pace of how that $2 billion in revenue exits. and is it more on the EC side? And how much of that is EC versus Farnel, if you can give any guidance? Thank you.

26:12 As you can imagine, this is pretty fresh. So what we said was by the December of next year, it will be all out. And I would at this juncture just model it more linear over the course of the year, but most likely nothing is going to happen for the first quarter.

26:29 Okay, okay, and just as a follow-up, I mean, I'm looking at the two charts, the margin bridges that you gave. It looks like from the charts that the TI impact to Farnell is in the second half of next year, whereas the 75 bits come out of the EC up front from the first quarter, more in the first half of the year. Am I reading that correct?

26:59 Hi, this is Tom. So, you know, as Bill said, we're not agreed to or sure of the exact timing. So what we're trying to do with these charts is, you know, there's a number of things up in the mix, right, the macro slowdown, the Fresnel, and the TI transition. So we're trying to give you some feeling of where we expect to be in the The exact timing and the sequence of these events are subject to change, but that was the spirit of these charts. Okay. Thank you for taking my questions. Appreciate it. Thank you. Our next question comes from the line of Adam Tindall with Raymond James.

27:44 Please proceed with your question.

27:47 Okay. Thanks. Good afternoon. I just want to also start on TI, Bill. Understand they've had a strategy to continue to move more direct, but what explanation did you get for why this strategy is now being accelerated? It didn't sound like there was anything operationally Avnet did to lose this business. And then also, it looks like your major competitor hasn't filed a similar notification and may even be a beneficiary of some of this. So why is Avnet seemingly on the wrong end of this one?

28:13 Well, as I said in my remarks, it has nothing to do with relationships, with performance. That's been really good. So no issue associated with that. And, you know, on this one, you really have to talk to the AI why they accelerated the reason why they decided to make a shift. And as you know, it wasn't just Avnet. They essentially accelerated. DeFranchise, all the Asia distributors as well. So there's a massive move, and according to TI, they will be taking a lot of that direct. So while there will be one distributor that will benefit, the fact is everyone will be losing probably about 30% to 40% of what was out there previously, and that's supposed to go direct.

28:54 Okay. Maybe just one on the operating margins then. Last quarter, the explanation was that Farnell was impacted from demand moving back to broad line and the core EC margin was actually stable at 3.3% as a result. This quarter, Farnell margins were still light and a little softer than expected, but EC margins also fell significantly. Maybe just help us understand the explanation because it looks like revenue was actually a little better than you were expecting, so the volume was there. I know there's a geographic mix component, but I have a hard time getting the math to blame all of it on that. So maybe just some help with the dynamic on operating margin in the core EC business.

29:30 Okay, a couple of points. As we noted, Asia stabilized this quarter or stabilizing this quarter. And we saw a pretty big uptick quarter over quarter at 9%. So you got a shift towards Asia, which is lower margin. And then we started to see more of the slowdown in AMEA. And now we started to see early days in the Americas, both of which demonstrated more pricing pressure this quarter than last quarter.

30:02 Okay, thanks. Thank you. Our next question comes from the line of Matt Sheeran with Stiefel. Please proceed with your question.

30:11 Yes, thanks. I just want to get back to the plan to fill the void left by TI in terms of the gross profit dollars. Even if it's sort of a higher, more demand creation value-add business, you're still probably looking at a billion dollars or more of revenue that you're going to have to Makeup. Is that a share issue, or do you see the potential for some direct business to move through distribution? Exactly what is the plan to increase that? Because that's a decent amount of market share, it would seem.

30:51 Let me give you a couple of data points, Matt, because I think that's a helpful question. First of all, as you recall, a few years ago, we lost a billion dollars to suppliers with four different suppliers, and they were much higher margin, so the hole was much bigger, and we were able to fill that gap up in months, not years. Additionally, more recently, EBV, we had a shift all of our TI business away from EBV, and they rapidly were able to fill that hole back up. And the way we've been able to do that is kind of threefold. One is Of course, we will, on new designs, design in other suppliers. But that, as you know, is a six-month to a couple-year journey. Additionally, there are roughly 30% of the components that are commodity components that we can easily switch out faster. And then finally, customers tend to have dual source with the distributors, and they want to keep that balance.

31:46 So you will see a share shift of other suppliers' components back to Avnet. and by those three things, you'll see us start to fill this gap up over the course of the next year to 18 months. Hey, Phil, can I add? Hey, Matt, Phil, how you doing?

32:01 Hey, Phil. And as we fill that gap, yes, and as we fill that gap, okay, which we obviously plan to do that with the balance of the line card, that gap will be filled with, frankly, higher margin suppliers. And you kind of nailed it. The billion is just roughly the number you're writing with the delta in the margin from the different suppliers, so. That's how we think we'll feel the gap, and we'll feel the gap.

32:26 Okay. And then that number, that operating margin target you gave for next summer, Tom, is that contingent primarily on lower OPEX versus SG&A, I'm sorry, versus gross margin continuing to be depressed here because of mix and pricing issues? Are you expecting your gross margin to shift as well?

32:52 So, Matt, in both of the Farnell and TI charts, there's a bar that says modest market recovery. So any change in pricing would be reflected in that, and most of that is volume. Anything to the left of that is predominantly correct. I'll bet.

33:10 Got it. Okay. Thank you.

33:13 You bet. Thank you. Our next question comes from the line of Joe Quattrosi with Wells Fargo. Please proceed with your question.

33:22 Yeah, thanks for taking the question. A couple if I could. The $35 million of incremental cost reduction-related TI, is that on top of the $245 million that you have already outlined?

33:34 Yes, Joe, that would be on top, and that's the variable cost associated with the revenues.

33:40 Okay, perfect. And then, sorry if I missed it, but I was curious, any update on what your three-year forward pipeline for IoT was this quarter?

33:53 We did not give the revenue for that, but remember, IOT is 15% plus op margin, so it's very consistent with what we've been saying.

34:04 It's continuing to grow, and the game plan now is to convert that to revenue, so we can start talking about both pipeline and revenue in future quarters.

34:15 Okay, so it's up from the, I think, 630 last quarter? Yep. Thanks. Thanks, Joe. Thank you. Our next question comes from the line of Sean Harrison with Longbow Research. Please proceed with your question.

34:30 Hi, afternoon, everyone. Tom, I was wondering maybe you could talk about the working capital associated with the approximately $2 billion of revenues at TI. What kind of cash flow will you see in terms of a benefit as this business exits?

34:46 No, I appreciate that question. You know, $2 billion is, right, $500 million of roughly a quarter. Most of the inventory is consigned. So you're looking at about 60 days' worth of receivables, $300 million-plus or so, million of cash flow associated with it.

35:03 And you would see that, if it winds down by, let's say, middle of next summer, you would see that type of cash flow come out over the next nine months, give or take?

35:13 Correct.

35:14 Right. I mean, those receivables are good. They're current customers, and... You know, that'll come in as the sales wind down.

35:21 Gotcha. And then as a follow-up, the December quarter guidance, does it assume any further margin erosion at Farnell, or is it more just the regional mix dynamics associated with the Broadline business?

35:37 You know, Farnell, which we said in the script, Sean, seems to have stabilized, so we're not assuming further margin or pricing erosion. Most of the decline you see from September to December is associated with what Bill was talking about, right? That we just started seeing the Americas slow down. We continue to see some in EMEA, and we are assuming some level of pricing pressure during that time. Okay.

36:08 Thank you.

36:09 And Asia continuing. Asia is looking very stable, very solid, which is good. Thank you. Our next question comes from the line of Tim Yang with Citi. Please proceed with your question.

36:22 Hi. Thanks for taking the question. In your slide, slide 20, you have one bar chart showing 60 basis points positive margin contribution from recovering lost sales. Can you elaborate on why the timeline is after summer 2020, not sooner? And I have a follow-up.

36:43 Sure, because there's a lag time between when you win the business and when it actually transitions and you start showing revenue in the P&L. So we've tried to be conservative here, and assuming we gain some business in the first half of the year, we'll probably see it in the P&L toward the second half of the year.

37:05 Got it. And then I think you mentioned the market improvement could help margins by 30 basis points. Can you elaborate that the market improvement that you were referring to, does that mean the semi-sells return to growth or just flattish is kind of like stabilizing compared to the current development? Thank you.

37:27 So market improvement, you know, varies by slide, but it's basically reflecting that, you know, Some upturn in revenue, which would be accompanied by, you know, very small, perhaps, improvement in pricing. That's what market improvement is. So, for instance, what we're trying to say in Farnell is, you know, we know historically that, you know, three-quarters after a downturn, they typically get a 6% or higher revenue growth. So market improvement in that is typically we're showing a 6% revenue increase from today through that period. We were modeling based on what we're seeing in Asia, which is now two or three quarters later, and now they have a 9% sequential growth. So I think if we do the math on those, it will come out pretty close to these numbers.

38:15 Got it. Thank you. Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question.

38:43 Hi, this is from Mark. Thanks for taking the question. Our question was what are some key metrics Avnet is watching for when the current downturn could bottom?

38:56 There are several factors that we're looking at. For example, we measure stated lead times from suppliers versus actual. We watched that delta. And as that starts to shrink, we know that things are starting to tighten up back up. We will also look at gross profit percentages through time. And we also look at ASPs through time. And we look at cancellation rates and extra die rates. All those together give us a basket of what we think is a predictor of where we think the economies are going.

39:28 OK, thanks. And then just as a follow up, anticipating any impact and margins from the TI business, Due to a reverse leverage effect, given that there's potentially more potential for more fixed costs of evidence to be spread over less revenue?

39:47 Yeah, we're going to be taking out the variable cost, and the game plan over time, of course, is to replace that revenue as we have in previous situations like this. So we may have a temporary couple quarter issue, but we will work our way through that.

40:05 Let me add to, since there's been a couple of questions on market recovery, we're not trying to predict a market recovery here. What we're trying to give all of you is our margins without a market recovery, and if one were to occur based on historical, what our margin would be, and we'll leave it up to you to predict the timing of the market recovery.

40:29 Thanks. Thank you. There are no further questions at this time. Mr. Emilio, would you like to make any of your closing remarks?

40:38 Sure. Thank you, Alberta. I appreciate that. Today we reiterated a clear plan that allows us to improve upon the aspects of our business that are, of course, within our control. As a result of these plans, ADMET will be in an even better position to accelerate its growth when the demand environment improves. As always, we thank you for your interest in ADMET. We look forward to reporting to you our progress in the coming weeks and months. Thank you, and have a great day. Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.