Good day, ladies and gentlemen, and welcome to Arrow Electronics Third Quarter 2017 Earnings Conference Call. My name is Natalie and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded for replay purposes. I will now like turn the conference over to your host for today, Mr. Steve O'Brien. Please proceed.

Thanks, Natalie, and thank you all for joining us today. With us on the call are Mike Long, Chairman, President and Chief Executive Officer; Chris Stansbury, Senior Vice President and Chief Financial Officer; Andy King, President, Global Components; and Sean Kerins, President, Global Enterprise Computing Solutions. As a reminder, you can access all our earnings materials at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation and a webcast of this call. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. I will now hand the call to our Chairman, President and CEO, Mike Long.

Thank you, Steve, and thanks to all of you for taking the time to join us today. The most successful year in Arrow history is well in hand. I'm pleased to report record third quarter sales of $7 billion, gross profit of $843 million, operating income of $265 million and earnings per share of $1.82. We've been on a mission to become the leading global value-added distributor on electronic components and IT solutions. To do this, we recognize that we needed solutions that address the full lifecycle of our customers' products from Sensor to Sunset. We needed to solve customer problems to help make their products the best they can be. In turn, we knew we could drive more sales on behalf of our suppliers. We also recognize that achieving our strategic goals would require investments. As you've heard from us in many quarters in a row, we've been investing all the long ways. Our results to-date of 2017 continue to validate our strategy. We're distancing ourselves from the competition with a diverse set of unmatched capabilities. Our customers and suppliers have never been more pleased with the positive outcomes we're delivering. This has created a virtuous circle for Arrow. Our customers and suppliers are opening up new opportunities for our company, opportunities with very attractive profits and returns. We will make strategic investments to keep that virtuous circle going. To be clear, our business model is performing as we expect it to. We've broadened our supplier franchises to bring in new sales and new customers. We invested in working capital to support those sales. This quarter, you can see an acceleration in our gross profit, operating profit and earnings growth. You can also see us capture some of the cash returns on our investments. We invested some of the…

Thanks, Mike. Third quarter sales of $6.95 billion were above the high-end of our prior guidance range. Sales increased 17% year-over-year and 16% adjusted for changes in foreign currencies. The stronger euro and British pound relative to the dollar increased our sales growth by approximately $83 million or 1% compared to the third quarter of 2016. The actual exchange rate for the quarter was €1.175 to $1 versus the rate at €1.15 to $1 we previously used for our forecast. This had insignificant impacts on our third quarter sales and profits. Third quarter global components sales of $4.86 billion grew 25% year-over-year and grew 23% adjusted for changes in foreign currencies. Global components sales were above the high-end of our expectations for the fourth quarter in a row. We had record third quarter sales and greater than 20% year-over-year growth in all three regions. Exiting the third quarter, we have largely achieved full run rate sales from suppliers awarding more business to Arrow. Despite the challenging comparison to the third quarter of 2016, Asia again produced exceptional growth. Asia sales increased 24% year-over-year, marking the fifth straight quarter of double-digit growth. In the Americas, sales grew 24% year-over-year, driven by our core, which absorbed the supplier awards in the region. Americas growth was also driven by our digital platform and by our sustainable technology solutions. In Europe, sales grew 25% year-over-year and grew 19% adjusted for changes in foreign currencies. Europe sales have grown year-over-year for 18 straight quarters, adjusted for acquisitions and changes in foreign currencies. Global components third quarter book-to-bill was 1.07, which is above 1.04 in the third quarter of 2016. Third quarter global components operating income grew 20% year-over-year. Operating margin declined 20 basis points year-over-year primarily due to mix. Operating margins in Asia and Europe…

Thanks, Chris. Natalie, please open up the call to questions at this time.

Your first question comes from the line of Mr. Steven Fox with Cross Research. Please proceed.

Hi, good afternoon. First question on the investments that you highlighted, I was wondering if you could provide a little bit more detail on exactly what those are aimed at, whether it's adding people or promotional activities or other things that maybe I'm not thinking of. And then, along similar lines, can you sort of walk through the corporate expense line, which jumped up, and whether that's a reflection of some of these investments and how that would trend maybe in the fourth quarter? And then, I have a follow-up.

Steve, this is Mike. I'll take a stab at the first part of that. The biggest increase we had with promotional activities on the web to drive future sales, that's where that led, that's not a permanent sort of head count increase. That's something we've been doing all along as we go into the new year and we've been seeing good growth in there and we're trying to push it a little further and we have the opportunity to clear the – do that this quarter. So, that would be the largest piece. I'll let Chris comment on the corporate expenses.

Yeah, the biggest impact in corporate, Steve, are expenses related to our ERP rollout. And we don't expect those to be permanent obviously as that project is finalized. We aren't specific in terms of when we will do that, but that project is nearing an end.

Great, that's helpful. And then, just in terms of the component environment, I know you mentioned that lead times haven't gone out in general, but you do have some tight areas. Can you sort of talk about whether some of the areas that maybe are tighter, how the lead time is affected there? And then, there has been – a number of large companies are having procurement issues and I was curious if you could maybe just talk broadly about all the timing that goes into procuring components and whether that's impacting your business in any way.

Yeah. I'll start off and then I'll let Andy follow up and get more specific by some of the products. You know what's interesting, Steve, is that our survey continues to show a decline in customers saying that they have too much inventory. That's something that we monitor pretty close and if you couple that with the book-to-bill that we've got going on now and for the third quarter, our backlogs continue to grow. There is also a percentage of customers saying they don't have enough inventory right now is substantially higher than what we saw anywhere through the 2011 to 2016 timeframe of the survey. So, what that sort of tells us is the underlying demand for the business continues, it also suggests that if there would be a slowdown, it looks to be a slower slowdown than maybe what we've seen in the past years with some of the violent changes in the business. I'll let Andy go on and talk to you about some of the products that exist now.

Yeah. Hi, Steve, it's Andy. Mike covered the kind of headlines in his script really. I mean the products that are really being extended out here are the products that really go into the mass market. We're seeing broad-based market strength across all major geos and across all major verticals and that's really driving those more standard mass market products into extended lead times. The interesting thing is, as I said, that's not driven by one end-market, that's driven by a whole roster of verticals and end geographic markets. And as we continued to build the order book and we pushed our customers to give us extended commitment further out, we're able to manage and navigate our way through that with our supply chain services, but I don't see an end for that particular trend in the coming weeks and months. That answers your question?

Yeah. It does. Thank you for that.

Your next question comes from the line of Matt Sheerin with Stifel. Your line is now open. You may now proceed. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Yes. Thank you. Just on the components business, obviously, very strong growth there. I'm trying to figure out how much of that growth in the quarter and the upside to your revenue was the incremental revenue opportunities from the semiconductor consolidation, Analog Devices and some of the others and what regions was that in? And is that basically an all-in number right now, so the guidance that we see for the December quarter is just seasonal guidance in those three areas – regions?

Yeah, Matt. This is Mike. Let me sort of take your question and try to dissect it from larger to smaller. The guidance that you see for the fourth quarter largely has everything in there, which would suggest that what you see right now is sort of the worst of the margin. And from there, we can build on it. So, I'll start with that. Secondly, the fourth quarter, you typically see a decline, seasonality decline in the components business and you can see we're not declining, which would suggest that there is probably a little more to come on the overall sales line for us. What's interesting now is it's getting hard to disseminate which is what because of some of the additional businesses that we've been able to bring in on our own over and above what is being transferred to us. Having said that, I think, if your models sort of look at where you are now with us and say, that's it going forward and then over time, with these new sales we're bringing in, we'll be able to add design win activity to them, sell different products. That's how we can ride the margin back up. And I would say, you can go back into history and see where we've done that before, when we first got in the engineering business and I might suggest to you, you would see the same kind of activity in the future, because we're really not going to change how we do it that much. And, all-in-all, it's a good business. We expect the growth to continue to go through at least the first half of next year. It's very hard for us to see past that, it's even harder to see there, but right now, with everything we have, there's a lot of good news on the horizon and there's a lot of things that we can do to even improve our business from here. So, hopefully, that takes you where you needed to be. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Okay, great. And you've sort of answered some of the follow-up question that I had just on margins in general. And obviously, with an incremental $1 billion in annual revenue run rate in demand fulfillment business until you get those design wins, that's going to weigh on your gross margin. But just trying to figure out what we should expect in terms of operating margin expansion getting closer to that 5% goal. And then, obviously on the computing side, the margins were down year-over-year, you talked about mix there as well, but maybe talk about how are you going to increase margins there?

Yeah. It's an interesting phenomenon if you look at the mix and you start talking about mix, there were several things that happened this quarter. First off, as a percentage, all three regions were over 20%. So, you'd say on first blush, there is no mix issue there. However, when you look at it closer, you had about $100 million growth in North America, you had about $100 million growth in Europe and you had about $200 million growth in Asia, which is our lowest gross margin region. What we also had was an improvement in operating income in Asia Pac, we had an improvement in operating income in Europe and then we had a slight decline in North America, which drove most of that, but North America is where most of the transfer business at supply chain margins came in. So, that kind of explains what you've seen and even though, it's dramatic, there was a lot. Don't forget we have one large supplier that changed the program, which was no new news for anybody. That's at full run rate. We've got pretty much full run rate in any of the supply chain stuff that's in and now we have the ability to build on that. On the computer side, yeah, Europe grew faster, it's not as big as North America, so we won't get quite the same leverage yet, but we will. And the second thing is we had hardware for the first time, it looked pretty good in here, if you think of this slowing decline on one portion of the hardware and increase in the other, we're now hitting that break-over point where we told you that we thought we would get to, frankly, last quarter and we're just getting there now. So, the outlook going forward on that is fine. As far as getting to the targets, now, I'm going to turn it over to Chris to give some additional info.

Yes, Matt, the only thing I would add is, is that if you look at operating leverage, so operating income growth versus sales growth, you will see continued improvement in Q4. So, we've been, I think, pretty clear in communicating that. We knew in the short run as we were transferring in the new business that leverage would be challenged, but that, as we got the volume in without substantially increasing OpEx, we could drive leverage. And so, you will see sequential leverage improvements as you move from Q3 to Q4 as well. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Okay, great. Thanks a lot.

Your next question comes from the line of Param Singh with Merrill Lynch. Your line is now open. You may proceed.

Hi. Thank you for taking my questions. So, actually, yes, I wanted to follow up on the ECS margin question. So, you're down about 80 bps sequentially in your ECS margin, which is much more than seasonal, actually twice as much as seasonal that you had in the past. Now, would you expect the margin to be structurally lower, because now you have hardware coming back and that's the way we should be thinking about it? And do you think you can be up year-over-year on ECS margins in the December quarter, partly because of the software mix itself?

So, Param, Sean here. Thank you. So, as we look at the increase in sales, as Mike said, we feel better about that going forward, a part of that is being driven by the competitive win rate that continues to improve. And when it comes to margin improvement, we follow a similar formula, which is bring in a new customer, convert them from a product sale to a solution sale and then cross-sell from our complete portfolio. Over time, that means that we can derive a more efficient relationship while still selling from our complete Line Card. More generally, if you look at our Q4 guidance, we are guiding modest profit growth and that fully reflects the investments that we still believe we have to make, namely around our cloud portfolio and capabilities and, of course, ramping new suppliers and new customers. I'm not sure that we look at seasonality in the same way we once did, because some of that has changed as our business has diversified over time both in different segments and in different geographies.

Right. So, my question was, would I expect more of a decline because of hardware in your ECS margin, is it structured a little lower, because now you're getting higher revenue from a lower margin business, is that the way I should think about it?

Actually I think it's a good new story that hardware came back to roughly flattish year-on-year in the quarter. You're going to see hardware ebb and flow, but we're still in the hardware business and it's still part of a complete solution sale. I don't think that, that alone contributed to the margin problem, but as part of an overall mix, hardware, Europe and certainly kind of what we saw with the Intel server business, yes, it did contribute to some operating margin pressure in the quarter, but we don't think that that's something that persists indefinitely. Remember, our software grew on a billings basis significantly in the quarter, both overall and certainly from a security perspective as well.

Got it. As my follow-up actually, on the ECS side, you had mentioned that you would be getting about $350 million in VAR channel wins in the back half. How much of that did you recognize in the September quarter? How much is kicking into December?

Yeah, it wasn't material, Param. We have continued to improve our competitive win rates, but these win rates and these wins take the form of all shapes and sizes. There's big ones, there's small ones, there's single vendor, there're multi vendor and when they come into the business, it's governed by a variety of things, including vendor program rules. So, we continue to compete. We think we're winning more than our fair share, but will come into the business over time. I'm confident that we would have seen some growth even without the addition to the portfolio, but we'll see that improve in Q4 and certainly next year as well.

Okay. Got it. Thank you so much, guys.

Your next question comes from the line of Shawn Harrison with Longbow Research. Your line is now open, you may proceed.

Hi. I guess, still good morning for you guys. Question on the margin dynamic, it looks like it's about implied at the midpoint of guidance, flat year-over-year on a consolidated basis at about 4.4%. How much of the kind of the flatness year-over-year is a function of the investments being made in digital or cloud or mix versus something else going on?

Yeah. Hey, Shawn, it's Chris. We don't really disclose how much of the investments are, for obvious reasons, but I would tell you that when you look at our operating leverage improvement, when you look at our OpEx as a percentage of sales coming down, that's coming down despite those investments. We continue to find internal efficiencies and that's what's allowing us to fund that. So, said another way, if we weren't investing, would OpEx be do lower? Yes, but that OpEx is also differentiating our sales trajectory over the long run.

And then, as a follow-up, Mike, if I may. The marketing investments you're making in digital, I'm guessing, some of that's like discounted shipping or things of that nature. Do you know whether that generates customer loyalty? I am just trying to figure out whether if you do that now, does that ensure 90 days from now, they come back and so that you're actually getting a return on that type of investment?

Yeah. It's a different type of investment than what you're just suggesting. It's actually brand awareness and the knowledge that your digital business is out there. As you build that brand, that is how you get moved up channel, so customers can actually find you and then try your platform, try your services and then get involved. And what we're finding is there is a high repetition of second purchases from people that come into our site. So, this additional expense is designed to get more people to the site, because we know once they're there and they do go on the platform, they like what's there, they come back, they tend to grow. The other thing that I would tell you is that there is almost a 10 to 1 benefit after somebody buys on the web from us. When they go into the normal channel, they typically buy 10 times the amount from us as we're seeing today. So, there is a great correlation in our business with our digital business and that's why we continue to invest in that. And as you know, that's the higher margin business for us, so it's good and we'll continue doing that as long as we see the benefit. But every dollar that goes into that does get measured. We measure it with number of hits, we measure it with number of customers, size of customer, what they buy and the ones that even do some designs on there. So, hopefully that answers your question, but it is not about free shipping, it is not about good price today, that's not really where the expense is.

Very helpful. Thank you.

The next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed. Mark Delaney - Goldman Sachs & Co. LLC: Yes. Thanks very much for taking the questions. First question is on the components business. Obviously, the revenue was very strong and all of the efforts that company has been engaged with are showing up and revenue is above guidance, but still a little confused about ECS coming in, in just above the midpoint of the guidance. And I know there is a few things within ECS that were some margin headwinds and you talked about some investments that you're making, but I was hoping to clarify specifically within components, are you seeing incremental pricing pressure beyond what you had anticipated when you issued guidance? Because, some of the things like the new (32:33) incentive change, I would have thought were known about when guidance was issued. So, is there anything incremental on pricing that was more negative than you thought and maybe you could also talk about, with lead times stretching, this is typically when Arrow is able to raise prices and are you expecting to be able to do that?

There's a whole lot in there, but what I would tell you is the additional sales that we did not forecast allowed us to invest in digital and in cloud over the course of the quarter to accelerate our future sales desk (33:14). And we've got some pretty pointed areas where we wanted to invest. So, we frankly we took that opportunity to do that, that's probably the difference in what you're seeing us deliver versus what you wanted, but frankly we made a commitment to you, we exceeded the commitment in all cases and I took the opportunity to invest where I could, because I think, it's going to be better for us in the future, nothing more and nothing less. Mark Delaney - Goldman Sachs & Co. LLC: And just in terms of where lead times are stretching, do you anticipate raising the prices as the industry has done historically?

Yeah, I would suggest that there's some products that as they become more scarce will in fact increase due to price. I think that it's an interesting deal right now, because there has been a good balance in what's available for customers versus what they want. And what I would say in most cases, I'm not aware of a kind of wind-down situation. I am aware that there's a lot of customers that would love to have more inventory than they have. So, there is such a thing as just in time and there is such a thing as just in case. So, we're really watching those two anomalies based on the surveys and based on our own discussions with customers and what they need. I have not seen hard stops in products, product is still flowing. There are some customers that get caught, because frankly they didn't plan correctly, but in this day and age, most customers are pretty well covered. Mark Delaney - Goldman Sachs & Co. LLC: Yeah. That's helpful. And then just for a second question, in the past, Mike, you shared metrics around some of the design registrations and how much of those have been growing, are there other measures to help us track the potential future mix of demand creation? Any sort of quantification you can help us with on that front. Thank you.

Yeah. So, basically, it's kind of an interesting thing. The old run rate business that we had, the number of design activity increased as you would expect it to normally. All of the new business that came in, which you can pretty much look at that and guess, there's a high portion of the run rate, there is zero activity on design win yet, because that won't really kick-in. The work on that will really start this quarter. So, then you're out six, seven, eight months for the realization of those design wins. So, we will be tracking our design wins on those new customers. We'll be tracking by our sales rep and by our engineers exactly what's coming in, so we'll be able to forecast over time a little uplift in margins based on that and based upon the same thing that happened in our old business when we were getting the rising margins up to a certain level and we know that – we know we can get it up to 36% of the total, so that's something we do now. Now, the question is how fast can we get the new stuff up there and then, is there a way to push it all even more than that? Mark Delaney - Goldman Sachs & Co. LLC: Thank you.

The next question comes from the line of Jim Suva with Citi. Your line is now open you may proceed.

Thank you very much. I have one question on the components and then one for the systems side and I'll just ask them both right now. On the components side, you mentioned mix. Did that have anything to do with the consolidation we've seen of the chip vendors, meaning you're selling more ADI product now than say you did ever in the past? Is that the mix you're talking about or are you talking about the mix of just like high priced and very low-value items? And then on the computing side, you mentioned some large transactions slipped out of Q3. Can you talk about, have the majority of those, or all of them closed since we're already a month into the quarter or are they the type of purchases where the customer will likely wait till kind of mid-December for system discounts and things like that? Thank you very much, gentlemen.

Yeah. So, Jim, on that second question, that is baked into our guidance and we believe that the vast majority of those are closed or closing at this point in time being into other quarters. We just had some spillover, which is not surprising, as there were some changes in the business, but it was worth noting. On the components side, there is all kinds of mix changes, but we have the geographic mix changes that we spoke about before between Asia, Europe and North America. Then, there's the semiconductor, where it's passive mix changes. One of the things you do see is that the passive and electromechanical devices tend to be a higher-margin sale for us. So, right now, semiconductors are growing faster. So, obviously that will pull down the total until you get the chance to sell those products to the new customers that are coming in here. So, all-in-all, that's why the outlook is up for us in several areas, because new customers that come in, now we have an opportunity to sell them even more and when we get into the services, the margin goes even higher. I'm not going to sit here and tell you it's going to be 100 basis points in the next 12 months, but we do believe there is going to be some meaningful growth in the margin and there is some meaningful growth opportunities for us in selling more of the passive customer or products to those new customers, getting more design wins from them, having more purchased over our digital platforms and more through the cloud, all of that is higher margin than the typical corporate average and those are the places where our business has frankly grown the fastest.

Thank you so much for the details and clarification. It's greatly appreciated.

The next question comes from the line of Adam Tindle with Raymond Jones (sic) [James] (40:04). You may now proceed.

Hi. This is Joe (40:08) filling in for Adam. So, return on working capital has been suppressed and we saw another decline in the quarter. There may be some transitory items with timing of inventory versus revenue recognition, but Arrow typically turns inventory very quickly. So, I'm trying to understand how you think about, one, the true normalized sustainable level of RWC, and two, the timing of when you think this will be achieved.

Yeah. So, it's Chris. Really what's impacting the short-term metrics is when we talked about last quarter and again this quarter, the amount of working capital investment we have to make in advance of sales coming through it. So, until we get to the point where the quarter has the full sales in it and frankly the full receivables collection and off of those sales, you're going to have this distortion effect on those return metrics. So, first step is build inventory. Second step was start selling to the new customers that have shipped it over and shipping. And then, the third step is doing all of those things and then beginning to collect. So, I would anticipate that we will be back to normalized levels by the time we close Q1.

Okay. Great. As my follow up, in Americas components, growth was partially attributable to large supply chain customers. A few quarters ago, you said a large supply chain customer had disengagements. Could you help us understand what changes were made to enable growth with this vertical and are they coming in at the same margin profile as previously?

It's Andy here. Can you just clarify that question? I didn't quite hear, what verticals you're referring to.

The large supply chain customers, so, I guess with components that would be.

Yeah. I mean in terms of the growth drivers in the Americas business, for sure, we have the big lion's share of the supply trends first that Mike spoke to you earlier on. We also have significant customer wins that have driven a lot of our supply chain engagements over and above that. And frankly, we've been winning in the mass market. Our digital investments and our field investments in that business has really allowed us to outperform that market now for some considerable period of time and we expect that to continue.

Great. Thank you for the clarity. I really appreciate it.

No problem.

Your next question comes from the line of Adrienne Colby with Deutsche Bank. Please proceed.

Thanks for taking my question. Within enterprise computing in Americas, you highlighted strong industry standard server growth. Is there any way to disaggregate how much could be budget flush activity versus signs of more sustainable market demand? And as we move into the fourth quarter, are you seeing signs of a broader recovery in hardware?

So, I'll take your first question first obviously. If you look at the Intel server growth that we cited in Q3, it was actually global and it wasn't just a function of the Americas, it was pretty strong across the board. And I it wouldn't attribute it to budget flush, because so many of our suppliers closed their fiscal cycles on different timeframes. It's a variety of many things, including customers that are on refresh or upgrade cycles, including the addition of certain suppliers to our Line Card in new and different (43:58) and then certainly our own efforts to drive demand gen campaigns on behalf of our suppliers and reselling partners, that takes a little bit of lead time, but that does pay off. So, we feel pretty good about that. It's not necessarily a function of budget flush. We'll have to be mindful about hardware going forward, but I think the prospects are good, especially if you think about our steady improvement in competitive win rates. That's going to give us a balance of both software and hardware going forward. So, I think, as I said earlier, we're still in the hardware game, it's still part of a complete solution. And I would also say, our growth rates with, what I would call, the new tech or the next generation technologies are again continuing to increase year-on-year as a function of our total hardware. So, that's a good sign in terms of us approaching across several points (44:48) in the future.

As a follow-up, do you expect the Americas to return to growth in the fourth quarter within enterprise computing?

Actually our billing spaces (44:59), they grew in Q3 and we are projecting a modest growth in Q4.

Thank you.

Ladies and gentlemen, that concludes today's Q&A session. I would now like to turn the call back over to Mr. Steve O'Brien.

Thank you, Natalie. And in closing, I will review Arrow's Safe Harbor statement. Some of the comments 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. And the company undertakes no obligation to update publicly or revise any of the forward-looking statements. Detailed information about these risks is included in Arrow's SEC filings. If you have any questions about the information presented today, please feel free to contact me. Thank you for your interest in Arrow Electronics and have a nice day.

Ladies and gentlemen, this concludes today's conference. You may now disconnect and have a wonderful day.