Welcome back, everyone. This is Melissa Dailey Fairbanks, IT supply chain and analog semiconductor analyst here at Raymond James. Right now, we've got Avnet joining us. The team from Avnet, we've got Phil CEO Phil, CFO Ken, and then also Joe Burke is joining us in the back of the room. So I think we'll just get it kicked off, and welcome. Thanks for participating again. We always enjoy having you here. I think unless you wanted to say some opening remarks.
No, thanks for having us. We really appreciate the invite, appreciate being here, appreciate everyone's interest-
Maybe-
-in Avnet.
Yep, maybe just a quick review of the September quarter results, December quarter outlook.
Sure. Well, we run fiscal year July to June, I think that's important to note. And have to throw in that, you know, we had a record-breaking June fiscal 2023 on many fronts, including going north of $8 EPS, you know, from a few dollars only a couple of years ago. So building off that momentum, you know, we're really thrilled. We closed out September quarter around $6.3 billion, which was ahead of guidance, okay? And that down roughly 6.1% year-over-year. EMEA, just give you a regional breakout. Europe was up 8.3% year-over-year.
The Americas was up 6.5% year-on-year, and Asia was down about 16% year-on-year, which is typical for what we've seen in Asia, and still we're able to grow some share. Earnings per share adjusted were $1.61, well exceeding guidance and consensus. So overall, you know, September, you know, hit our expectations. I'll let Ken comment here in a second. As far as December outlook, we kind of gave that outlook in our last earnings call. Not much to update at this point in time. Ken, anything-
I had to try, you know.
Yeah, yeah, I know you did. Yeah, yeah. So we're gonna... We're sticking to it.
All right.
At this point.
Sounds good.
I mean, I would just say that, you know, gross margins are holding up pretty well. We have our operating expenses well under control, you know, but the area that we have, you know, still some work to do is on the working capital side, the inventories side in particular, you know, higher than we'd like it to be. You know, we think it's stable in terms of, you know, flattish, or we think we have it under control, but it's gonna take a few quarters to kind of get through the inventory and to, you know, lead that to cash flow generation, which we're disappointed in.
But I think that's the priority by Phil and the team of getting through the inventory and making sure we generate the cash we should with those sales declines.
Okay, we'll definitely get into the cash return and capital allocation later, but I just wanna dig in on some of the geographic trends. Your year-over-year trends in EMEA have been relatively strong-
Mm-hmm.
-for a while. But you've had several straight quarters of year-on-year declines in Asia.
Mm-hmm.
In EMEA, it almost seems as though you're outperforming some of your suppliers.
Is that just reflective of the easing supply, you're able to actually ship more through, or is there something else going on?
Yeah, Europe has been amazing for us. Well, I think a lot of it comes down to we have a great team in Europe, okay? A very experienced team, and it does matter. Leadership matters, and we've been very consistent in Europe. It's been our top-performing region now for many years. No different than this past year. And it's interesting, Melissa, when you go back a year or so ago, and God bless all that's going on in Europe between the wars and the energy crisis, and we're all aware of that, we frankly expected Europe to kind of soften up a little bit, and it didn't. We ended up June a year ago with a record number, then September, Decem...
It just followed with three quarters in a row of record top line and bottom line performance in Europe. And we said, "What's happening?" It's just, it's a very resilient market. We have gained share, so yes, to part of your question. Europe is just a very... It, the industrial tail of customers in Europe is just really, really large, even larger than the Americas, and of course, you got the automotive-
Mm-hmm.
As well. But yeah, it's just been very good for us. You mentioned Asia Pac. That's Asia Pac. And, you know, we're not over, I mean, everybody, you know, we're not overweighted to China with Asia.
Mm-hmm.
I think that's important for the investors to know. I mean, China in total for Avnet, Inc. is, is less than 10% of our business.
Okay.
Right? So, it affects us in Asia.
Mm-hmm.
It's 25% of Asia, roughly, give or take. But we're not overweighted. We think, and we gained share in Asia on it, and that's, you know, again, public information. And, yeah, president in Asia Pac, actually, who's our leader, again, another experienced leader, really feels we're bumping along the bottom in Asia, and you're gonna start seeing, Asia start to come back a bit. Not, you know, not overly bullish. I'm not bullish or bearish on anything right now... but, you know, some good optimism that Asia Pac might be through the, through the worst of it.
Okay.
We've had good success in Japan as well.
Great, great. I think this will kind of lead into a discussion on pricing. It's been a little bit surprising, even as the shortages have kind of eased. Pricing seems to be holding in fairly well. How much of that do you believe is structural? You know, we've heard kind of from the supplier side of things that they expect this to be relatively permanent, but are you seeing any signs of customer interest in maybe returning to normalized pricing, where we get a few percentage points of decline each year?
Well, the customers are always interested.
Of course. I guess that was not a great question.
Um-
We love our customers, you know? So, we saw the pricing inflation the last several years, and, you're right. Most typically, and I've been with Avnet for going on, well, it's 42 years now. And typically, if there's slightly start to see average selling prices, you know, that you see the deflationary effect.
Mm-hmm.
Now, in standard products, multi-source products, you're gonna see that, you know. That's pork bellies goes up and down. But in the products you're referring to, the higher end, typically the higher end, we're not seeing much deflation-
Okay
... if at all. You know, the input costs just aren't coming down. Labor, inflation, you know, zinc, silver, gold, I mean, all the ingredients, if you will, that go in, they're not coming down. So if they're not coming down, I don't believe we're gonna see the pricing deflation that we typically have seen in the past.
It seems like we've certainly gotten beyond any risk of a major price correction because we're now, you know, a few quarters into moderating demand, a little bit of a downturn, and still haven't seen that collapse.
That's my sense. Again, look, I could be wrong. We'll find out soon enough, but I...
I'm gonna hold you to it.
We're just not getting that type of pressure.
Okay.
You know, actually, there's a few suppliers that are still talking about, you know, raising prices.
Yeah.
Okay, yeah. Not like it was a couple of years ago, every day there was 25 or 30 more suppliers, you know, raising prices. So think of...I think it's, for the most part, is stabilized.
Okay. In Asia, there have been some reports that, you know, maybe a little bit more aggressive pricing in China in particular. Does your mix kind of help insulate you from that, or are you seeing, are you seeing that?
I don't think we're seeing anything out of China that's unusual.
Okay.
I mean, I think you've, you know, it's the indigenous Chinese are building up their capacity-
Yep
... and their capabilities.
Mm-hmm.
So there's no question the Western suppliers, probably even more so the U.S.-based suppliers, are feeling some of that-
Okay
... and concern, but I wouldn't say it's, you know, it's anything too out of the ordinary at this point in time.
Okay.
We'll see, though, 'cause that's gonna be very dynamic as things move on with China.
Sure. So maybe moving on to inventories, I don't know if, Ken, you want to address that? So we did see the inventories - well, this, this might be a good one for Phil, too.
Yeah.
We saw your inventories rise at the end of last quarter. That was an opportunistic investment. You had signaled it well ahead of, you know, with the 3Q guide, that this is what you had planned. Maybe discuss your expectations for your own inventory levels going forward. If the industry correction is expected to last through mid-year 2024, and don't worry, I'm not gonna ask you, when you think it lasts through, how does this impact your balance sheet management?
Yeah, I mean, I'll start by saying, you know, what we try to do is isolate, you know, the broad businesses inventory, right? The EC businesses inventory, whichever one is, you know, concerned about or reading into it, and the word we'd like to describe it as is stable or stabilizing. You know, what that means to us is flattish. That means that we've got control over the inputs and the outputs, but the reality is, it's, let's say, higher than we'd like it to be, or where it maybe should be relative to the inventory is turning slower. It's still some challenges to get customers to take inventory reorder on their behalf because of their current inventory levels, right?
It's all kind of a work in process in order to get the inventory levels corrected, and that's why, you know, we kinda signaled that, you know, stabilized inventory for the next few quarters to that mid-2024 before we can start to work it down. Part of that is our customers working it down so we can replenish. Part of it is suppliers, you know, giving more flexibility, which they are doing in terms of the inputs of inventory coming in. So, you know, it's definitely higher than we'd like it to be. There's definitely cash kind of trapped on the balance sheet because of that, but we do feel good about, you know, we've got the right controls in place, and we've got the team working on it.
It's our number one priority is you know, getting the inventory levels corrected, generating that cash that we should. At this point in the cycle, when the sales are down, typically, we'd have more free cash flow generation, but you know, we think we have line of sight to it, just a matter of continuing to kind of stay the course and work through it. And we wanna make sure we work through in a manner that we're ready to capitalize when the market returns to growth, by being flexible, but also firm with customers in terms of what we need to do.
Yeah, I'll just add to that, Melissa, I think, and we're fine with the... We said that publicly, too. We believe we're gonna bump along the bottom, somewhere around mid-2024, you know, start to see more relief and some further growth. This is really a complex one, 'cause it's part of the role we play in the supply chain, right?
Mm-hmm.
And, and we deal with 1 million customers, you know, and you got to all the household names that everyone in here would know, then you got this long tail of customers that a lot of people would not know. And we've got to work with them. I mean, we can jam them-
Mm-hmm
... on the inventory, and then they're just not gonna pay us, or they're gonna go out of business or what have you. So part of our job is to work with these customers, and, you know, and that's, that's just what we do, and it's not - there's no EDI button or e-commerce button to say, "Just go take care of it." It's, it's kind of hand-to-hand combat. Everybody, boots on the ground. You gotta go call the customer, you gotta negotiate, and right now, they're looking for more cash-
Mm-hmm
... on the balance sheets, and they, and it's actually a good margin play for us.
Yeah.
But, it's an ongoing battle.
Last week, you, I thought you had an interesting comment at a different presentation, that you said distributors act as a shock absorber.
Yeah, yeah
... for the industry.
Mm-hmm.
I think that was just a really good characterization of, you know, in the past, that's definitely been the case, but this cycle has certainly been a little bit more unusual.
Yeah, it has been, and I, I have used that word a lot 'cause that, that is what we are.
Mm-hmm.
For our suppliers upstream and our customers downstream, we're that guy in the middle. You know, in normal times, our backlog adjusts 25% a day. In normal times, our inventory goes. It would just, we're booking, canceling, pushing out, pulling in, roughly 25% of all. That's a lot of backlog to be managing, but that's what we do. And we act as a shock absorber and part bank. And we just need to get paid, you know, for the interest, and we need to get a fair interest for that return. But yeah, I remind our suppliers that, and for many of you out there, that's why we are so valuable to suppliers. Well, we handle...
You know, I said millions of customers, some are strong balance sheets, and some aren't. But we're the bank, our suppliers are getting paid in 30-40 days, okay? Then we go and extend the credit beyond that, you know.
Yeah.
So, the value proposition is alive and well, but that's what we've been since for 102 years.
I think,
I would just say one area we did talk about, you know, in our earnings call was, you know, we do see growth coming in Supply Chain as a Service-
Mm.
-which is where we kinda step in and help provide supply chain, you know, logistics and storage and all kinds of forecasting for big OEMs that have a direct relationship, typically, with the suppliers, and we're stepping in to help them get product where they need to be as kind of a service. But sometimes that comes with some working capital. A lot of times that working capital is kind of cash flow neutral. It doesn't necessarily drag on cash flow, but it might optically show an increase in inventory. So we're gonna continue to kind of try to give some transparency on that particular opportunity, which we view as distinct and separate from, let's say, the rest of the business, the rest of the inventory, less risk on the inventory and some of those things.
But it's definitely where we see opportunity for growth in terms of some of these long-term OEMs are really trying to redesign their supply chains, make a more resilient supply chain. What we like to use as an example is you have a $2 microcontroller holding up a $100,000 luxury vehicle. You know, the automakers aren't gonna let that happen again, and so therefore, they need to redesign their supply chains to make sure they have stock in the right place to be able to weather, you know, hurricanes, typhoons, or those kind of things. And so we see some strategic builds there, in terms of these supply chain services starting to grow a little bit of ramp, even though we've been working on them for the past, you know, year and a half.
They're starting to finally get some fruition there. You know, although there's still a long tail for those to really grow, to be meaningful, but, you start to see some of that come in this quarter or next.
I assume a lot of that is margin accretive because you're creating more valuable or value for your suppliers and your customers. Maybe now we can start talking about some other margin accretive opportunities.
Sure.
I had the benefit of being able to tour one of your facilities in Arizona, and I got to see the programming business.
Yeah.
I think this is something that you don't, you know, on earnings calls, certainly, you don't get a chance to talk about it very often. But it does kind of seem like an exciting opportunity, a little bit differentiated from-
Yeah
... your traditional, fulfillment business.
Yeah. So, thanks for bringing that up. By the way, we welcome anybody to come to Chandler, Arizona, to see our facilities. I mean, I think a lot of the times there's a misperception, we just buy a bunch of big boxes, put them into smaller boxes, and out they go. And, you know, over 70% of every line item we ship around the world, we're doing something to it, value-added services of some sort. A big one is pro-programming, to your point, Melissa. So, for those who don't know, you know, we sell chips, as everyone knows, right? And many of those chips, like controllers, have memory on them and for software. Okay, so the chip doesn't do, doesn't do a thing without the software, right?
So we've been doing programming services for years now, where we actually load the software on a chip and then ship it. Oftentimes, we'll relabel that chip as well. Whatever the customer wants is what we do. That's fine. So we have programming centers, multiple in the U.S., in Guadalajara, Singapore, Hong Kong, and you can prototype, you know, a customer can prototype then test their software in Boston, okay, and have it shipped in production in Singapore or Taiwan, okay? So that's the kind of capabilities we have, and we're programming tens of millions of units a year, let alone... I mean, it's hundreds of millions a year. And for some household names that you all know and are using now or on your wrist or what have you, you know...
We're programming for many, many large OEMs, and it's a great business. It's sticky.
Mm-hmm.
Okay, it's value-added services, so you get additional margin. But it's a great business. Thanks for bringing that up.
Sure. Maybe some other opportunities. You know, we hear a lot about demand creation-
Mm-hmm
... design services-
Yep
... maybe some upfront engineering opportunities.
Yeah, so, really good point. So let's start with, you know, demand creation. And demand creation for those who don't know, you know, we have roughly 2,000 double E field application engineers around the world, and we influence design. So we'll influence microcontroller designs, FPGA designs, power designs, and more and more customer solutions as well.
Mm-hmm.
We do that on behalf of our suppliers or with our suppliers. And again, stickiness, because once you have that design win, okay, no matter where that ships around the world, as things are moving around the world, we're protected on that. And on average, we get 400 basis points more margin, okay, when we have the design on the chip. So when we get that from the supplier, and in total, it's between 30% and 33% of our total revenue is tied to a registration and demand creation. So that's really key and critical, which is why we pretty much report on that almost every earnings call.
Yeah.
If not, we certainly get a question. Tied to that is design services. So now you got more and more customers now actually outsourcing their total design or pieces of their design. You know, they got the core engineers working on this, and there's other projects. There just aren't enough engineers out there. They'll outsource to an Avnet, and we have our, which we, we get you to Europe, but, you know, the, our Avnet Embedded business, okay, where we actually do full turnkey designs, including, you know, monitors for medical applications, the monitors you see going through airport security when you see the security, the TSA, looking at them. We actually, many of those customers, we manufacture those with that screen, okay, and ship it as a turnkey product. So it's a turnkey design services. And then we also do reference designs.
So we've been doing that for years. Many of the reference designs you see sold out there, one might be for a large FPGA company out of Santa Clara or now Austin. You know, we're, we're doing a lot of those, okay? We're not only designing them, but we're manufacturing them and then selling them-
Wow!
online. And another big area that we've focused on is in IP&E, interconnect passive electromechanical. It's between a $3 and $4-billion business. Yes, we're known as semiconductors. We love semiconductors... But 85% of the board, 85% is IP&E, interconnect, passive, electromechanical products, into—they're 15% of the value of the board. But they're, they again, on average, are 400 basis points higher margin in IP&E. So we've got to make sure our teams, when we're going in and selling the FPGA with the controller, and the power, and the analog, you can't—you can't—your phone won't work without capacitors. You can't—If you can't connect it, it's not gonna charge. I mean, so every one of those applications has an opportunity for IP&E. So they're just a couple off the top of where we're continuing to diversify our portfolio.
So you've kind of laid out at your last analyst meeting, how all of these things kind of combine toward driving toward your margin target. So maybe this is now a good time to talk about-
Mm-hmm
... margin targets, how far you're there. You've had a really good improvement in the-
Yes
- Americas business.
Mm-hmm.
In addition to growth in some of these other, you know, margin-accretive areas, how much going forward is going to be driven by growth in some of these newer-
Mm
... but, you know, a value-added services versus just traditional cycle, traditional mix, dynamics?
Yeah, I think it's you know always tough to tell a couple years out. But what I would say is, I think there's enough higher margin opportunities to offset where we have pressures on you know when we're talking about the gross margin level. You know, because, hey, there's gonna be competitive pressures. You know, we talked about just overall ASPs. Hey, we believe they're gonna be pretty stable, but, hey, there's tough competition. We've got several competitors out there, you know, that want to win business from us. You know, so there's always gonna be some level of competition. And we've seen that over time, but we also have higher margin opportunities to kind of help offset that and kind of keep it stable.
So clearly, we're trying to drive to an improved gross margin with some of these mixed opportunities, but even if we kind of keep it stable, you know, which is part of it, we can still with modest growth, you know, expand operating margin. You saw that over the past several years with decent, you know, high single digits on average growth, and really able to expand the operating margin, expand the EPS. Phil talked about, you know, the model for us as a value-add distributor is scale.
So the more scale we can get, you know, the more business we can win, we can leverage that with our overall infrastructure, and, and we're continuing to invest in digital tools and capabilities that make us more efficient and, and make it so for every dollar of new sales growth we get, we don't have to invest necessarily, you know, $0.20 of OpEx. We can, we can get that more optimized. And we're making some long-term investments as well. One of our, you know, drags on cash has been, you know, our CapEx has been higher than normal. We're building a new warehouse in Europe that's gonna set us up for the next 20 years and allow us to continue to grow there.
But, you know, we're getting out in front of that, so it's ready to go by the time the growth comes. So we're excited about some of those long-term investments, because we do believe the future is bright, and, with that modest, you know, single-digit type of sales growth, you know, we can definitely create more leverage and, you know, get to $28 billion, then $30 billion, and so on. And we think we've got the right line card and, you know, the right partners to do it with.
Yeah, we were just at that facility in Bernburg, right?
Yep.
It's the single largest investment Avnet, Inc. has ever made in the company.
I understand-
To me
... it's got the most automation as well.
It's, it's phenomenal. It's absolutely phenomenal. It's exciting. Hey, I'm probably not gonna be here in 25 years, but that warehouse will be, you know? So it gives us that growth for the future in Europe and beyond Europe, because they ship out of, you know, globally out of there as well.
Sure. Is that facility addressing specific end market verticals, or is it just all broad-based?
It's broad-based.
All the-
It's broad-based.
Okay.
It's... You know, we have Tongeren still and Poing-
Mm-hmm
... outside of Munich, and this is just adding capacity.
Okay.
Yeah. It'll have programming centers.
Excellent!
A lot of them.
Excellent. I hope to visit that one, too.
Yeah. Yeah. It'll be on our list.
So is it, Ken, maybe for you, is it safe to say... Well, actually, both of you, is it safe to say that the industry is just generally more rational in terms of behavior? You know, historically, we've always thought about it as just being extremely price competitive, extremely price aggressive, but you are seeing this kind of differentiation where different distributors are investing in different types of value-added services. Is that a way of maybe kind of insulating against, you know, just returning to this cutthroat pricing environment?
I think it's fair. I think, you know, our supplier partners are very aware of, you know, what excess inventory potentially does to pricing.
Mm-hmm.
I think they're been very good at working with us to try to help, you know, curb the inflow coming in. At the same time, if they build something that we ordered right, they expect us to take it. So, you know, I think there's lots of dynamics between the supplier and the customer that we're working through, but I think we're working through it better than we did last time around.
Mm.
More enlightened, more understanding, you know, the long-term implications. And I do think, you know, the silver lining for us is, we've always been a leader in supply chain and supply chain capabilities, and what we're seeing now is, you know, not only customers wanting to engage us for that, but suppliers understanding that this is not what we do, right? We design technology, we build it. We don't want thousands of customers and have to ship at all these locations. Let's let Avnet do what they do best. So we're seeing a lot of opportunities coming out of this, and suppliers are helping us with those opportunities because they know that's not their expertise.
They're bringing-
People are focusing on their core capabilities, and then which we continue to do, and we think there's a lot of growth and opportunities for more, you know, operating income dollars, you know, in the space we're in, and I think we're well positioned to capitalize on that.
Yeah, Melissa, I think it's a great question. I haven't been asked that. I think it has, and generally got a little bit more rational. I think, there's always... Look, it's a competitive market.
Of course.
There's always gonna be competition-
Of course
... and there's always gonna be some disagreements, but I think there's much more alignment and understanding it, particularly through this last crunch.
Yeah.
This was a tough one, right? It was different than anything I've been through before because it was so broad-based-
Mm-hmm
... and so fast. I thought the customers, for the most part, were pretty rational as well. And you understand when they're not. They got lines down, they can't ship. You know, you're—it's, you know, I was a chief expendite officer for a while, right? I mean, that's what we do, you know? But we love our supplier. Our supplier partners are, have been terrific. We don't have anyone, it's important for investors to know, not one supplier or customer or greater than 10, 11% of our business, so we're not overweighted. Same thing on the vertical side.
Mm-hmm.
But the suppliers, I would say, and there's always a few that are, you know, here and there, but for the most part, have been much more rational. They're not just shipping stuff into the channel, you know?
Yeah.
I mean, it's not happening, or you're right, many, many moons ago, that was happening, and I feel there's much more alignment.
Yeah. I think there-
That's a good point.
You know, over the summertime, fall, you know, I was getting a lot of investor questions about that.
Mm.
What's the risk? We know that there's inventories-
Mm-hmm
... building out there, and are you just gonna, you know, they're just going to push it onto you? And I think it's been encouraging to see, not only has that not happened, but also, we're seeing your margin levels, your peers' margin levels, stay at least, even though we've seen some compression, it, it's at least above-
Mm
... where it was during a prior downside.
Even suppliers, some of them talk about it on their earnings calls.
Exactly.
They don't want to-
Yep
... they're holding it. So it's actually, it's been encouraging.
Yeah. Okay. Question?
Your conviction level in bringing inventories down over the next couple quarters, given the like the demand uncertainty, is it you're just, you're just stopping acquiring products, so if your inventories will naturally come down? Like, what gives you that confidence that it's two quarters or so?
Turn it off. I think, yeah, we have slowed pipelines for sure. You know, as suppliers bring in, and a lot of them, the part of the issue is a lot of them did wait too long to bring in their lead times, their public lead times. So it's that. They didn't want to do that because their books are gonna fall off, right? Well, that's what we needed to happen, right? Because you got to get this stuff out of the system. I mean, two to one book to bill for almost two years, we know is not real, and 0.31 book to bill. And that's not real either. I'm just saying in general. Yeah. So it's normalizing.
So as that normalize, they get the lead times right, customers load in their MRPs. Again, we take thousands of MRPs in or APIs or faxes. We'll take anything they send us. For forecast, as those forecasts start to come down, you start to burn off the inventory, and then, and then you're not buying quite as much either. So just kind of naturally. But it, it, and Joe always says this, and, you know, our treasurer, IR. Yeah, it takes several quarters, you know, to burn that off, okay? Or to get to have that. See that thing start to come down. And as Ken explained, some of the timing issues, the core, we've, we've, you know, it's definitely going to stabilize and come down a little bit.
But we've got some of these other big deals that are happening, coming in on top, that just aren't generating the returns yet. So that's why we will continue to work on better describing, you know, the inventory scenario. Hope that helps.
And I just add that we, you know, our premise based on that data was a consistent or similar demand environment we have today. Demand is softer than it was a year ago, for sure, but it's not falling off the charts or anything. I mean, we're still at $6 billion plus revenue a quarter. So I mean, we're still turning a lot of product. It's just a matter of, you know, some of that impact on sales isn't necessarily broader market demand, it's the fact that customers have enough of that product, so they don't need it, you know, for this three months, but three months from now, yeah, they do need it.
And so, you know, customers' demand, especially in the industrial space and the transportation, seems to be holding up pretty well, which is a little unique this time around than others, which was really focused on, you know, broad-based demand falling off. Pockets, you know, Bill mentioned China. You know, we've seen consumer, some of those things are, are falling off, but some of the, the key markets that we serve that have the most potential for us in the future, are still holding up pretty well in terms of demand. You know, although customers are challenged with higher inventory-
Yeah
... than they want, right? So that's-
Yeah, it's gonna be a bumpy road-
A broader challenge.
... for a few quarters. I mean, no question, you know, it's gonna be a bumpy road for a bit.
Just a couple minutes left. Any other questions before I-? I, I have to ask about capital allocation or free cash flow. You know, we've obviously, to your point, bumpy few quarters.
Mm-hmm.
Free cash flow is probably gonna be a little bit challenged. It has been recently, but, you know, when we do finally get to this more normalized kind of cyclical behavior, we get some of the working capital release, maybe discuss, you know, balance between CapEx investment, buybacks, you know, bringing down some of the revolving debt and reducing some of that interest expense.
Yeah, I think the priority will continue to be investing in the business and investing for future growth, but we think that, you know, once this warehouse is done, gets back to a more normalized level, let's call it between $100 million-$120 million a year. And then the cash flow we generate or the free cash flow we generate, you know, think about it as, you know, some of the debt buy down. We wanna keep our leverage in order. We wanna get that interest expense down. It's definitely through the roof right now, but also we see our shares as a really great opportunity, trading at 10%+ below book value. So we wanna continue to buy back.
We were in the market here this past quarter, and when we get back to free cash flow generation, we'll be buying back shares, and we'll continue to give the dividend, and we've had a steadily growing dividend, and we think that's, you know, meaningful, so we'll continue to prioritize that. But that'll be the stacking, ranking order, and we think there'll be cash flow to invest in all those priorities.
Okay. Just about a minute left. Any closing remarks?
Yeah, well, thanks for the time. I appreciate the time. I appreciate all the investors and analysts here today. Look, I mean, as I said, it's gonna be bumpy road for the next several quarters, two, three, whatever that number is. But boy, is the future bright, no pun intended, with LEDs and everything. Just walk around the city here, right? But it really is. The applications for technology, I mean, it's just everywhere, right? And that wasn't the case in 2001, when we had a tough adjustment in the market for those that might have been around or the financial crisis in 2008, 2009. This just feels totally different. And that's what I think everybody's struggling.
It's the mixed signals are so different this time, with so many different markets and applications. I think it's what is getting the tougher for people to call it, right?
Yeah.
So, but no, we're positioned well. We're very excited about the future. We got a great team, and we're just gonna continue to focus on our execution.
All right. Great. Thanks very much, guys.
Thank you.
I really appreciate it.
Thanks much. Thank you.