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The (Inventory) End Is Near

One of the industry's two largest electronics distributors, {complink 577|Avnet Inc.}, is seeing signs that component inventory in the global supply chain is beginning to balance with demand.

Although executives stopped short of declaring the downturn has reached its bottom, the supply chain's efforts to not build inventory over the past two quarters is beginning to pay off. Additionally, during its second-quarter 2012 analyst conference call, Avnet reported that an uptick in demand at the end of December is holding strong so far through January.

Avnet’s revenue for the quarter was $6.69 billion, which was in line with the company’s expectations and a decrease of 1.1 percent year-over-year. Adjusted diluted earnings per share (EPS) accelerated beyond expectations, at $1.15, which is an increase of 28 percent sequentially and 7.5 percent year-over-year. EPS set a new second-quarter record for Avnet.

Avnet's components business saw its book-to-bill ratio — a measure of positive or negative demand with 1 as its base line — reach parity in all regions except Europe. In addition to the uptick in December, Avnet's efforts to drive down inventory contributed to the improved metrics.

“We want to be very cautious and very aware of what the positive book-to-bill is telling us,” said Harley Feldberg, Avnet EM President, Global, during the earnings call. “We don't want to drive our inventory levels down based on velocity alone — we want to be sensitive that if we see continued strength we would adapt to that as well.”

Analysts noted that Avnet's expectation of a return to normal seasonality in the next few quarters differed from some of its suppliers' forecasts.

“There's no upside to critiquing my suppliers' projections, and I'm not brave enough to call a bottom,” said Feldberg, “but in general, I'd say our broad customer base has reached some type of bottom relative to the inventory excess. If you track our suppliers, you'll see the projections are quite diverse even within the same commodity. I would expect some of that is driven by some of the industry's largest customers [which have significant direct relationships with suppliers.]”

10 comments on “The (Inventory) End Is Near

  1. FLYINGSCOT
    January 27, 2012

    Was Avnet's book to bill much above 1?  I see a few companies out there with fairly low book to bills.

  2. Barbara Jorgensen
    January 27, 2012

    Hi FlyingScot–in all regions except Europe, Avnet's btb is at one or approaching 1.00:1.00. Some additional details: although Avnet counts China and Taiwan in its “Asia” region, which revenue-wise was down for the quarter, executives said Taiwan was extremely active in the December quarter. It outperformed China.

  3. Nemos
    January 27, 2012

    “in all regions except Europe” and how about Europe?  The situation is going better or worse there? 

  4. ahdand
    January 27, 2012

    Nemos: I think Europe is getting better right now. They were struggling from the recession very badly and still not stable but recovering at a good rate.

  5. Taimoor Zubar
    January 28, 2012

    “Avnet reported that an uptick in demand at the end of December is holding strong so far through January.”

    @Barbara: What do you think was causing this up-tick in demand in December? Was it the impact of the holiday season indirectly which may have pushed the demand for electronics up? Or was it some other factor?

  6. tioluwa
    January 30, 2012

    Well i wouldn't say the holiday season caused the up-tick since it started towards the end of the holiday season. But if it turns out that the holiday season contributed to it, then discussion on this forum last year about the possible drop in demand during the holiday season turned out a bit wrong.

    People predicted that demand will be low last holiday season due to the recession, but this up-tick could just the saying the direct opposite.

  7. Barbara Jorgensen
    January 30, 2012

    @Nemos: Although execs stopped short of saying that, my impression was Europe has made little headway and is expected to lag for the next few quarters

  8. Barbara Jorgensen
    January 30, 2012

    @Taimoor: The uptick at the end of the year was more attributable to the inventory correction of the last few quarters. Even though it appears there is still ample inventory in the channel, the mix of products–semicndcutors, capcitors, connectors, etc.–is constantly being updated and changed. So it is likely we are seeing a replenishment. It's also possible the Chinese New Year had some impact: we usually see an uptick from the Christmas holiday in Q3; so an uptick in Q4 is unusual.

  9. Barbara Jorgensen
    January 30, 2012

    @Tuilowa: Nothing about 2011 was usual, so the uptick in December was unexpected. So far, the term “normal” seasonality hasn't applied–although the uptick was certianly welcome!

  10. tioluwa
    January 30, 2012

    @Barbara, well I guess we are in very interesting and slightly unpredictable times. Let's just hope then that the uptick remains

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