Good day, ladies and gentlemen, and welcome to the Arrow Electronics, Inc. Fourth Quarter Earnings Conference Call. My name is Shakwana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Ms. Greer Aviv. Please proceed, ma'am.

Thank you, Shakwana. Good afternoon, everyone, and welcome to the Arrow Electronics Fourth Quarter Conference Call. I'm Greer Aviv, Senior Manager of Arrow's Investor Relations program, and I will be serving as moderator on today's call. If you would like to access today's call by webcast, please visit our Investor Relations website at www.arrow.com/investor and click on the webcast icon. With us on the call today are Mike Long, Chairman, President, and Chief Executive Officer; Paul Reilly, Executive Vice President Finance and Operations and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components. By now, you all should have received a copy of our earnings release. If not, you can access the release on the Investor Relations section of our website, along with the fourth quarter CFO commentary as a complement to the earnings press release. You can access a copy of our earnings reconciliation for the fourth quarter in our press release or in the Investor Relations section of our website. Before we get started, I would like to review our Safe Harbor statement. Some of the comments to be made on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings, including our 10-K that was issued this morning. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. As a reminder to members of press, you are in a listen-only mode on this call, but please feel free to contact us after today's call with any questions you may have. At this time, I would like to [indiscernible] our Chairman, President and CEO, Mike Long.

Thank you, Greer, and thanks to all of you for taking the time to join us today. We delivered strong results in the fourth quarter in a market that continues to be hindered by the macroeconomic uncertainty. Sales of $5.4 billion and non-GAAP earnings per share of $1.22 were well ahead of our expectations. We also delivered very strong full year performance, with revenue and non-GAAP EPS of $20 billion and $4.40 per share, respectively. During the year, both businesses executed on their key strategic priorities and experienced a number of important wins. The dedication and the full focus of the Arrow teams around the globe allowed us to continue to generate industry-leading margins and profits in an environment laded [ph] with economic and political headwinds. Cash flow is, again, a great story as we generated $675 million in cash from operations for the year, once again exceeding our target for cash conversion. Our balance sheet remains exceptionally strong, allowing us to selectively reinvest in the business for future growth and operational efficiency, as well as fund strategic acquisitions that increase the size of our addressable markets, expand our geographic footprint and enhance our portfolio of value-added services and solutions for our customers and suppliers. We just completed our most successful ERP implementation in Southern Europe and now have the entire European region united on a single system. In global components, fourth quarter sales of $3.2 billion were at the high end of our expectations. Sales in the core business in the Americas were in line with normal seasonality, with a particularly strong growth in vertical markets. In Asia, sales in the core business were near the high end of normal seasonality, with excellent growth in China and the ASEAN regions. Sales in our core European business were below normal…

Thanks, Mike. Fourth quarter sales of $5.4 billion were in line with our expectations. Pro forma for acquisitions excluding the impact of currency changes, sales declined 3% year-over-year. In global components, sales declined 7% year-over-year as growth in Asia was offset by revenue declines in Europe and the Americas. Pro forma for acquisitions, excluding the impact of foreign currencies, sales in global components were down 9% year-over-year. Sales in global ECS increased 11% year-over-year with solid performance in both regions. Pro forma for acquisitions, excluding the impact of foreign currencies, sales increased 6% year-over-year in global ECS. Our consolidated gross profit margin was 13.1%, a decrease of 60 basis points year-over-year due to ongoing year-over-year pricing pressure in both business segments, a change in the mix of geographies and products. Pro forma for acquisitions and excluding the impact of foreign currency, gross profit margins decreased by approximately 70 basis points year-over-year. Operating expenses are up 2% year-over-year on an absolute dollar basis and increased 20 basis points as a percentage of sales. Pro forma for acquisitions and excluding the impact of foreign currency, operating expense dollars declined 1% year-over-year. And to assist you with your analysis, acquisitions added $20 million to operating expenses this quarter. Operating income was $196.3 million. Operating income as a percentage of sales was down at 90 basis points year-over-year, both on a reported and pro forma basis. Pro forma for acquisitions, global ECS operating margin as a percentage of sales was flat year-over-year, as expansion in EMEA was offset by a modest decline in the Americas. In global components pro forma for acquisitions, the operating margin declined 130 basis points year-over-year, due in part to the geographic mix as Asia Pacific exhibited strong growth in the fourth quarter. Our effective tax rate for the quarter…

Thank you, Paul. Shakwana, please open up the call for questions at this time.

[Operator Instructions] Your first question comes from the line of Jim Suva [ph] representing BAPI [ph].

A quick comment is it's kind of noticeable, it looks like you guys haven't been very active in the M&A world currently. Or is that just more of a timing feature? Just wanted to check in what's your priority uses of cash is. In the past you've been acquiring companies every handful of months or so.

Right. Well, we still continue to believe, Jim, that the markets are attractive in the area we want to expand in. And we're going to continue to invest in M&A right along with our other strategic initiatives. And we're continuing to operate with a disciplined approach to how we evaluate our acquisitions, as you know. And a perfect example is if you think about our European enterprise business, we began investing in that several years ago. And that generated nearly $60 million in operating income for us, and the invested capital is well ahead of WACC. So we're still looking. We're still doing acquisitions. There's nothing to slow us down, but the pace of acquisitions has to match where we're going with the company. And so I would say that there has been a little lull, but I wouldn't read anything into that.

Great. As a quick follow-up, that doesn't then imply that you're looking at a bigger, much larger size of one, it just comes to the timing? And then the follow-up would be, when we start thinking about Europe, has it kind of stabilized? Is it still getting softer still? What's your overall feel and outlook for Europe?

All right. Thanks. Well, we're actually seeing 2 very different looks in Europe. Our enterprise computing business was up about 11%. But the overall market in Europe, as you know, was not up anywhere near that in IT spending. And I would say the overall IT market has been relatively flat to down a little bit over the last couple of years. And then on the opposite side of that is the components business. The entire market in Europe had a small contraction over the last few years. But then in the last 2 years, we've seen a much, much more dramatic contraction of that market. And I wouldn't expect that market to come back in any big way in the short term. But our results are somewhat offset by what's been happening on the computer side of our business. But we still remain, what I would say, very conservative on our approach to Europe. And just like you, we would welcome a turnaround. But I just don't see the economies there coming back in the first half of this year, for sure.

Your next question comes from the line of Shawn Harrison representing Longbow Research.

I guess the first question, Mike, is some opposing statements with the less-than-seasonal guide in global components, yet your book-to-bill was the best that you've seen in the fourth quarter in 3 years, and I think also the design activity, you said, was up 17%, which is usually a good precursor of growth. So I guess, if you could just kind of explain those positive dynamics versus the cautious guidance.

Yes, the truth is we saw book-to-bills are very encouraging for what may happen. The second piece of that is the design wins are up. But the design wins production comes on slowly and then starts to ramp up as those new products start to come to market. And we really do not see a big uptick in that in the first quarter. I would also say that we've been conservative in our outlook for growth in the short term. A lot of our suppliers, as you know, have come out with a relatively negative Q1, and most are talking about an uptick in late Q2 or in the second half of the year. And I might remind you that we see that usually just behind them. The good news though is the backlogs at this point are not declining anymore and they're starting to firm, and that's really a good sign. But I wouldn't say that the firming is all going to happen in the first quarter.

Okay. And then as a follow-up, Paul, the $40 million in cost synergies, I guess, is that all SG&A related? And when will we see the full run rate of that?

Sure, Shawn. So I would say the vast majority will be in SG&A. It's an efficiency program. When we look back on it, we've had really terrific performance in 2012. So it's not a slash-and-burn approach to try to catch up to anybody or anything, and we were selectively investing throughout the year. So this is something we do just about every year. So when I look at it, it's not going to be immediately felt in a meaningful way in Q1. You'll start to see it in Q2, and it will accelerate through the second half of the year.

Your next question comes from the line of Brian Alexander representing Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Just a follow-up on the previous question and more of a clarification that you guys haven't seen any deterioration in book-to-bill in the month of January, that's causing what looks to be pretty conservative outlook when I compare it to how your main competitor guided seasonally for the components business for the March quarter, and I think a number of your suppliers, particularly on the analog side, are guiding more seasonal. So did things deteriorate in January? Or is there anything company-specific that's causing what looks to be a conservative outlook?

Brian, we've seen about the same bookings that we saw during the fourth quarter. And we're seeing the backlogs, as I said earlier, firming for us. At this point in time, I don't see a lot of that taking traction until more of the tail end of the quarter and if that would take -- so we've taken a relatively conservative approach based upon what we see and how far out we see. The good news though is that the inventory levels are positioned just fine to go into the year, and they're ready for whatever mix change may happen. So we're not in any position that if the market did turn around faster than what we believe it will, we're okay to take advantage of that. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay, great. And then just one follow-up on the computing business. Obviously, IBM made an announcement a couple weeks ago to authorize a couple of broadline distributors in Redemtech Data to distribute enterprise product. So I guess the questions would be, one, why do you think they made that decision? Two, how are you thinking about revenue and margin implications for ECS in the U.S. over the next few years as a result of this? And then finally, do you anticipate any of your other major vendor partners making a similar move, or do you think this is really more of an isolated event?

First off, I don't see much change at this point from any other vendors. We have a good relationship with IBM. And in fact, what I can tell you is we are not expecting much of a change of anything. In fact, this is how IBM has been running in Europe for quite some time. And as you know, we had outstanding growth across Europe over the last couple of years with IBM in particular, and that model does exist there. In fact, the model is even a little more stingy here in the U.S. than it is in Europe, and we're really not expecting much. The customers that we deal with require a little bit different type of service than we've seen for the broadliners. Having said that, IBM is looking to see if there is a market at some different levels for their products, and I think time will tell. And truthfully, if it does work, it's going to create a bigger market for all of us. And if it doesn't work, then I would say things will stay about the same that they are now.

Your next question comes from the line of Amit Passi representing UBS.

Just a couple of quick ones for me. Mike, I haven't heard you talk about ITAD in a while. Just wondering what the development there is and whether that continues to remain a key focus area. And then Paul, just curious how you are looking at managing inventories as we move into the March quarter.

Yes, the ITAD is still a focus market for us. We've completed, as you are well aware of, several acquisitions over the course of the year. We expanded ITAD in EMEA with our Flexion acquisition. We did Redemtech. We did asset recovery, and we still see that business performing as we expected. The business is accelerating at this point in time. It should be meaningful to us this year. And we still want to continue to build, but we are up to 15 locations right now. And the locations are getting spread out to a place that we can actually get the product into and then turn around and refurb it, resell it or dispose of it properly. And it's been an exciting area for us. It performed well this year. And we still have high hopes for it going forward.

Yes. And on the inventory question, we feel good about where we are right now. We're under no pressure to increase the level of it or decrease it. We track it, and we keep it as a critical part of our quarterly business reviews, and we continue to improve the quality of the inventory. So when we say quality, we're getting some of the slower-moving inventory out the door, and we're replacing with faster-moving inventory. So we feel good where we are right now, and we think we had good performance around that specific point in the fourth quarter with our global components team.

Your next question comes from the line of Steven Fox representing Cross Research.

Just 2 questions for me, please. First of all looking at the storage growth in the quarter, year-over-year was pretty healthy. I was wondering if you could dissect that a little bit within the enterprise business, in terms of how much you would attribute to the markets versus maybe your own performance relative to your competition during the quarter? And then secondly, Paul, I don't know if you can provide a more specific comment around inventories in the components segment. Just curious numerically if how much it was down or whether the turns improved, et cetera, in the quarter just completed.

All right. I'll take a stab at the overall storage business and then I'll let Andy add some color. And then we'll have Paul follow up with your inventory question. Storage has been and continues to be a good story for us. Worldwide, year-over-year, that business is up around 25%, and we saw pretty much year-over-year equal change both in the Americas and in Europe. Part of that change of accelerating the market, I believe, was due to the software increases that we had too, that went around storage. And whether it was security, virtualization, networking or even infrastructure software, they all had a high growth for us. And if you take a look today versus 5 years ago in Andy's business, those categories have really changed the complexion of what we've looked -- at what we look like today and how our profit's generated, and I think it's one of the reasons you see the strong profits out of this business that you do. Andy, would you like to add to that?

Sure, Mike. I think you've covered it very well. Steve, I would just add that we have a few more players in the portfolio. I think you know the suppliers that we carry in the storage area. But we continue to recruit new lines in storage, which is helping our growth. And I think the other factor is the quality of our resellers. We have some very good resellers, focused on storage business, which is obviously doing well because of Big Data and the information side of the business. So it is robust, as Mike said, and did grow 25%.

And Steve, from my side we had about a $25 million reduction in inventory on a sequential basis in global components, not meaningful. You may recall as we came out of the third quarter, we thought we were in good position and we're not under any pressure to adjust up or down. What we saw was an improvement, sequentially, in both NAC and in Asia turns, and Europe performed more seasonally, which is actually a little bit of a trend down, and that's consistent with the last several years for the fourth quarter.

That's very helpful. As just a quick follow-up on the storage, if I look ahead to 2013, there's been some concern about just general market trends. Do you have an opinion on how you can grow? It sounds to me, from what I just heard, that maybe the growth is 70% Arrow related, 30% end market, given all you guys have been doing, is that a fair assessment? Or any kind of color there will be helpful.

Yes. I'll -- what I would say is that it might even be a little bit higher on some of the things that Andy and his team was doing. I'll let him elaborate a little more on that.

Yes. Well, I think, obviously, the compares continue to get tougher and tougher because the growth has been so good. But when you look ahead, most of the guidance from people like IDC and Gartner still have data center systems growing in the mid-single digits. And we've been growing storage at 3x and 4x that rate. We definitely believe we will continue to outgrow the market. A little too early to maybe predict what the growth will be for the year though.

Yes. If you're looking at the overall IT spending that we're estimating for the year based upon Gartner and some others right now, they've got it, I think, around 4%, 4.3%. So our full expectation would be to grow faster than that, if those numbers hold true.

Your next question comes from the line of Ananda Baruah representing Brean Capital.

I guess just sort of like a related follow-up to that. Can you talk about -- you mentioned virtualization as an ongoing source of strength. Just wondering if you could talk through the dynamic you're seeing with sort of the VMware guidance a couple weeks ago. I guess can you decouple that from some of the stuff that you guys are doing to grow faster than market, and help us kind of understand what's going on just at the market level from your perspective with virtualization.

I think you're probably talking about the 24%, 25% growth that the team had this year in that business. Part of it for us was some good market expansion in EMEA. They really knocked the ball out of the court. Laurent has had a sort of this matrix strategy that we've put in place, which is more lines in more countries, and he's been executing very well on that strategy. Andy, would you like to talk about some of the activities that you guys have going?

Yes. So virtualization was very strong, as Mike commented, 24% growth. Going forward, a lot of our resellers are reloading their pipelines and this is the first quarter, and we'll see -- we'll see what the demand is for virtualization. I do not expect it to drop off dramatically. I think it will continue to be a growth sector for us. The other 2 I would highlight is security, and we've positioned ourselves very well in the security space. That grew 31% for us. And we continue to expand our networking portfolio. It grew 38%. I'll wrap it up by just saying we've, over the years, 3 years, we've moved ECS to almost 50% software and services. So it's been a pretty dramatic transformation. And these are just some of the areas that we picked them right, and we will continue to look for the high-growth segments.

Do you feel like the things that you're doing in virtualization, you feel like you can maintain the virtualization growth rates that you guys have seen, if indeed the market is -- market growth is going to be softer than it has been?

Well, there's another emerging customer in the market. Managed service providers are becoming tomorrow's VARs, right? That's our new VAR base. And I expect that, that will continue to drive virtualization. A lot of end users have enterprise license agreements, as you know. But I think the mix of customers is still out there to keep the growth coming.

Just one last one, if I could. I guess can you talk about component pricing. It was mentioned in the kind of -- in the CFO commentary that you did see some component pricing that was a cause of some of the margin degradation. But just interested, is that incremental pricing pressure or is that kind of just what ongoing pricing dynamics have been?

Great, thanks. I'll take that one. When we're talking about the pricing pressure, it's really year-over-year. What we've seen now for probably at least 2 quarters a leveling out of that. So not another step down as an example. So we didn't seeing anything really dramatic in the fourth quarter compared to the third quarter. So year-over-year, it's still meaningful. And as you may remember, we've been talking about this for probably 4 or 5 quarters anyway as we've seen this, not surprising in light of the world's economic backdrop. But the decline has really leveled off on a sequential basis.

Your next question comes from the line of Brendan Furlong representing Miller Tabak. Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division: Question on the margins. Unfortunately, I have to go there. But the gross margin on ECS down sequentially. And normally, based on the surge in sales in the fourth quarter, gross margin normally increase in ECS sequentially. So curious as to why that is. And then second question then, is the operating profit on global components, very weak, considering the upside you had in terms of revenue, I'm just curious if you could walk me through that one as well.

Sure. So Brendan, I'll try to start off with the ECS question and then the operating income question. It's pretty interesting when you look at ECS North America, right? They're generating a substantial amount of operating income, not being negatively impacted by the world's economies and outperforming just about by any measure. So when we look at it, the trimming, if you will, of the margin at the gross level in Europe, sequentially, we're talking about 10s or 20s of basis points. So really, the strategy that Mike was just talking about is paying off for us, right? New products in new countries that Andy's been driving and Laurent's been driving has really paid off for us. What we did see in North America was a little bit more downward pressure on gross profit sequentially. We saw a downward trend last year also. We saw a downward trend in 2009, downward trend in 2008, with really the only place where we saw an upward trend was 2010. So if you look at it, the trend we saw in the fourth quarter this year is not that different than what we've seen in 3 of the other last 4 years, so kind of consistent with what you're you talking about. So it's really, that comes down to mix of product sets, right? We've talked about it for an extended period of time, less reliance upon service. Proprietary service had a higher margin. So we're getting less reward on the GP line. But with that said, operating income dollars are very strong and returns still exceptional, above 100% in the business. So net-net, we look at it as just more so around the change in the mix, less proprietary service as a mix issue, and real good improvement in the product expansion…

I think to add to that, as you know, we've been doing the ERP system in Europe for quite some time. So that did hinder our ability to aggressively take the costs and get the benefits out from that because we were operating 3 systems before. Now we've totally converged that to 1 system, and some of the cost initiatives that we talked about before will now be able to drive through the business. And that's part of what you heard from us earlier on the cost side when it comes to Europe. Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division: Got you. The follow-up I have is if you look at -- taking your comments to heart there on the mix issues in ECS and the mix issue of the Asia and global components, should we view the gross margin percentage as being somewhat subdued in the March quarter and through the balance of the year, and you're going to be relying more on some leverage on the operating margin line rather than the gross margin line?

Yes, I think 2 things. One is that we do expect a soft economic backdrop for the first half of the year. The other point is we don't see a substantial step-down in the first half of the year. And if you go back to my other comments that we saw that this gross profit pressure has, at least, abated now for a couple of quarters, so that we wouldn't expect meaningful change there outside of mix.

Your next question comes from the line of Sherri Scribner representing Deutsche Bank.

Just to clarify. I think you gave detail on the book-to-bill being above parity in the Americas and Europe. But you didn't give commentary on Asia, unless I missed it. Can you tell us what the total book-to-bill was for the company last quarter?

Sure. So Sherri, what we did say was that Asia Pac had the highest fourth quarter book-to-bill in the last 2 years. So that was our comment there. There's a seasonal trend that you're seeing in Asia that sometimes doesn't push it up to parity in the fourth quarter. So our book-to-bill was, at global components, was at the 1-ish type range, maybe a little bit above 1.

Okay. Great. That's helpful. And then just following up on the commentary about proprietary servers and the ECS business. I think in the prepared remarks you had mentioned some mix issues in ECS. I guess other than proprietary servers, I would assume that software and storage and services would be beneficial to the mix. Can you maybe give us some detail on which of the products are the most beneficial versus which are less beneficial?

Well, for sure, if you go back to a few years ago, proprietary servers was the vast majority of our profits. And today with most of the services that we are offering the software, we're able to provide a bigger solution to what the customer requirements are. And I would say that storage has largely replaced and exceeded what proprietary servers did before. And Andy, you want to comment on the software piece and the services piece?

Sherri, it's Andy. So in software, we get margin 2 different ways. If we bring a customer with new license through our supplier partner, we get rewarded very nicely for margin on new licenses. And then on repeat renewals and enterprise license agreements, sometimes those are more high transactional, lower margin. But the software business really is a business of returns. Keeping in mind that there's really no inventory, we collect fairly quickly. So software has been beneficial overall. As Mike stated, storage is strong. And really, we're getting great margin in our networking portfolio, which we're building.

Okay, that's helpful. And then a question for you, Paul. Looking at the interest expense, it's been trending down a little bit over the past couple of quarters, but I don't see that your debt is going down substantially. Can you give us some guidance on how to think about interest expense as we go forward?

Sure. Thanks, Sherri. We've been talking about our goal of driving an average cash flow to be better throughout the quarter. And we've had some really good success over the last couple of quarters. I would tell you that seasonally, we're probably not going to have the same success in Q1 as we have payments to make on the very strong growth in the ECS business in January. So we have a difference in the collection of DSOs and probably won't collect until sometime in the March month. So with all that said, I would expect interest expense to trend up at least in Q1, and we then we'll continue to get improvement in the average cash flow. So kind of looking at it, thank you, yes, we've had some good success for the last 2 quarters. So that means the initiative we kicked off is working. But seasonally, it'll slow down a bit for us in Q1 and probably a little bit in Q2, we'll probably see a trend-up in interest expense.

Is that like back to 28 million or 27 million type of numbers? Or is it less than that?

Yes. I think we'll be trending up to about the levels you're talking about as we think about the quarter. And we'll drive it down after that.

Your next question comes from the line of Param Singh representing Stifel, Nicolaus. Paramveer Singh - Stifel, Nicolaus & Co., Inc., Research Division: This is Param Singh on for Matt Sheerin. So most of my questions have been answered, but I did have one on the ERP implementation. Now just curious, what's left globally on the ERP side, and you expect any disruptions there?

Well, of course, we don't expect any disruptions by the way we're going forward. And in fact, now after doing Australia, New Zealand going completely through Europe, the biggest disruptions you have are on sort of training around the system. We have gotten better with each implementation, less time to get the business back on track, meaning salespeople getting familiar with it and understanding how it works. That has all been good for us. The reason that we're doing what we're doing right now is that we have just finished Europe. So now, we have the opportunity to go back and capture some of the benefits we told you about that, that system will bring us. And we're going to work on that this quarter and then next quarter come out and tell you more about what's next with that. But I think the good news, so far, is we've been on this for a few years. The conversion is complete in Europe. And now our goals are to go forward, but we believe we can do it with even more minimal risk than you would have with those initial launches. Paramveer Singh - Stifel, Nicolaus & Co., Inc., Research Division: And what geographies are left?

I'm sorry? Paramveer Singh - Stifel, Nicolaus & Co., Inc., Research Division: Anything else? So other than Europe, everything is left?

Yes. We have -- Asia and North America run on the same computer system. And so the truth is we have one computer system left to convert. And we're assessing what the best way to do that is. And we'll get back to you next quarter with basically the finishing schedule of this. Nobody will be happier to get out of this than I will be. But the truth is, it has gone smoothly so far and we've taken a lot of steps to make sure it will continue to go smooth.

At this time, there are no further audio questions.

Thank you. If you have any questions about the information presented today, please feel free to contact Paul or myself. Thank you for participating. Have a nice day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.