Good day, ladies and gentlemen, and welcome to Arrow Electronics First Quarter 2018 Earnings Conference Call. My name is Alyssa. I will be the operator. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host for today, Steven O'Brien. Please proceed.

Thanks, Alyssa. Good day and welcome to Arrow Electronics first quarter 2018 earnings conference call. With us on the call today 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, some of the figures discussed on today's call are non-GAAP. You can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation, and a webcast of this call. Please note, prior-period figures have been adjusted for the adoption of the new accounting standards. 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. I'm pleased to report a strong start to 2018. For the first quarter, we achieved record sales of $6.88 billion, gross profit of $869 million, operating income of $272 million and earnings per share of $1.88. We delivered good leverage with operating income and earnings per share growing meaningfully faster than sales. Our strategy to be the full service solution provider in the electronics industry is working well. Our Sensor to Sunset capabilities are unmatched by the competition, and this leads to more business from our suppliers. Our business model is performing just as we expected to, and our broader supplier engagements brought in new sales and new customers. Our investments in working capital are driving sales, profit growth, and higher returns. We expected last year's healthy momentum for the electronic components to carry into 2018. We've capitalized on the favorable industry backdrop to increase the scale of our business. If you consider, Asia and Europe components businesses are about 40% bigger than they were two years ago and our Americas business is about 25% bigger. Increasingly, we are the only company for suppliers wanting to reach depth and relevance in fast-growing markets like IoT, industrial automation, smart cities, homes, and vehicles. In the first quarter, global components again experienced robust demand. Sales were $4.93 billion, up 21% year-over-year and were above the high end of our expectations. We captured double-digit growth in all three regions. We saw broad strength across our industrial, manufacturing, and mass-market customers. Growing electronic content continues to be a tailwind for our transportation vertical sales in all three regions. We also saw strong demand from aerospace and defense customers in the Americas and Europe in the first quarter.…

Thanks, Mike. First quarter sales of $6.88 billion were above the high end of our prior guidance range. Sales increased 20% year-over-year and 14% adjusted for changes in foreign currencies. The net of two divestitures and two acquisitions does not change the consolidated sales growth rate. The actual exchange rate for the quarter was $1.23 to €1, in line with the rate we previously used for our forecast. First quarter global component sales of $4.93 billion increased 21% year-over-year and 16%, adjusted for acquisitions and changes in foreign currencies. Global components sales have been at or above the high end of our expectations for seven quarters in a row. We had record first quarter sales in all three regions. In Europe, sales increased 32% year-over-year and increased 16%, adjusted for changes in foreign currencies. Europe sales have increased year-over-year for 20 straight quarters, adjusted for acquisitions and changes in foreign currencies, as we continue to gain share in the marketplace. Asia again produced strong growth this quarter. Asia sales increased 20% year-over-year, marking the seventh straight quarter of double-digit growth. Asia sales increased 19% year-over-year, adjusted for changes in foreign currencies. Our acquisition of eInfochips closed in early January. The financial contribution was included in our first quarter guidance and was recognized in our Americas components region as the business was centered in the United States. In the Americas, sales increased 15% year-over-year and increased 13%, adjusted for acquisitions and changes in foreign currencies. Demand continues to be strong across our base of industrial and manufacturing customers, with notable growth from the aerospace and defense and transportation end markets. First quarter global components operating income increased 32% year-over-year and increased more than our 21% sales growth. Operating margin increased 40 basis points year-over-year. In short, we are capturing the leverage…

Thank you, Chris. Alyssa, please open up the call to questions at this time.

The first question comes from the line of Adam Tindle, Raymond James. Please proceed. Adam Tindle - Raymond James & Associates, Inc.: Okay. Thanks. Good afternoon. Just wanted to start with Chris, in your comments in the CFO commentary, you talked about the substantial investments in working capital that you've made to support growth and the opportunity moving forward to drive improvements in working capital management, returns and cash flow in the coming quarters. Can you help us quantify what that means and how we can grade that as the year progresses? And how you would anticipate use of capital as buybacks have been a little bit below historical levels?

Yeah. So, we have talked previously that growth is in more of a normalized range, particularly in the components business of 10% or less, that we thought we could be in the $400 million to $500 million range of operating cash flow for the year. We've also mentioned that we would continue with buybacks, but that we would be working to reduce our debt in the range of about $0.5 billion over the course of the year. I think the challenge that we have near term is we continue to see growth rates where they are, that challenges that somewhat. I certainly don't want to predict the year at this point. It's a great problem to have. But if there's a choice point to be made, we will continue to focus on growth and the investments to fuel that growth. We will stay focused on cash flow over that timeframe. And I think, irregardless, we can drive an improvement in our cash conversion cycle. So, more to come. I think by the time we get through Q2 and guide Q3, we'll have a better ability to give some tighter color on the year. Adam Tindle - Raymond James & Associates, Inc.: Okay. And just as a follow-up for Sean. I think guidance implies well below historical level sequential revenue growth, even if we add back the divestiture headwind. And it doesn't look like ECS margin is improving more than historical levels, sequentially. So, I couldn't attribute it to mix necessarily. But is there something I'm not thinking about there in terms of the sequential implied revenue growth for ECS? And then maybe just bigger picture, help us to understand how we can think about profit dollar growth in the business moving forward. Thanks.

Sure, Adam. Well, if you start with the revenue growth, and I think we talked about it in the opening comments, but we had a very strong first quarter in hardware. Some of that, obviously, was driven by market as customers continue to move to new architectures and next-gen technologies. We're well positioned for that. And some of that was driven by really strong backlog that we brought into the first quarter from last year. Last year, as you may recall, supply chain performance was fairly weak for most of the year. So, we were pretty conservative in what we thought we'd actually ship and bill in Q1, and that turned out to be much better than expected. So, I'm looking for a normalized pivot to software as a function of our mix in Q2. And as you know, we treat that differently from a sales perspective. So, it means a little bit less growth, but certainly better operating income. And then, I think if we look to the full year, be it net new customers that maybe aren't as margin-rich in the short run and/or mix changes that we're navigating over time to earn incentives from our various suppliers differently, I think we will continue to improve it, although it will take more than 90 days to do so.

Alyssa, can we move on to the next question, please?

Yeah. The next question comes from the line of Steven Fox, Cross Research. Please proceed.

Hi. Good afternoon. My first question was regarding, Mike, the comment you made about managing the sales and not orders, given the book-to-bill. Can you sort of talk about what looks atypical to you maybe in the recent quarter into the orders and what you're comfortable with based on what you're seeing? And then I had a follow-up.

Yeah, I think you also heard in the comments that we see lead times stretching a little bit. And I think it would be a little naive to think that the 1.22 book-to-bill is all for orders today or this quarter, or going into the forecasted number for next quarter given that. So right now, it's best for us, our guidance to forecast based off of the backlog that we believe is actually going to ship in the second quarter, as well as our day-to-day billings or bookings that we see that are for immediate shipment, and try to take that percentage out. That's one reason you see the difference. That's also another reason that you may see the inventory come in at a certain level. That's taken into account of what inventory is supposed to ship also. But the increased orders are likely because of the lead time stretches and that's why I used the term we like to manage towards the order better than we like to manage to that multiple on bookings. Does that make sense?

Yeah, makes a lot of sense. And then as a follow-up, it sounded like you captured some of the leverage during the quarter you'd been talking about with some of the supplier relationships that you've added. But then there's still others to come across the two businesses. Can you sort of describe what maybe you've captured in Q1 that helped margins and what we should look forward to maybe in the next quarter or two that you would (19:44)...

Yeah. If you remember, we talked about the big expense that supply chain orders had come in here and the design win orders had not caught up. And the good news in the first quarter is that our design wins were up 27% year-over-year and the growth rate in Andy's business was up around 21%. So now, you're starting to see that leverage come in, and you're seeing our engineers go to work. Now, remember, the good news with this is that before all the supply chain business came in, we had about 35% of our business was design win that would go out into a quarter. So, we still have what I think is a significant amount of room to leverage up the components business through more engineering and more design wins over the next several quarters, and that's one of the reasons we're still bullish on it. And then contrary to that, we see the same thing actually in Sean's business with some of the supply chain stuff, as I would call it, around hardware, coming in here, which hasn't been our natural forte, and now these resellers wanting to get involved around the cloud and with software and with services. So, I see the exact same thing coming into his business now that we had told you would happen in the components business prior to. So, we're feeling pretty good about it.

Great. That's really helpful. Thank you.

The next question comes from the line of Matt Sheerin from Stifel. Please proceed. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Yes. Thanks very much. Just a couple of follow-ups from the first couple of questions in each business. On the growth in the enterprise computing business, you did talk, Mike, about share gains. And I know going back a year plus, you've talked about the opportunity to take I think you said about $350 million of revenue market share from the Tech Data-Avnet merger. Could you update us? Is that a lot of the share gains that you're seeing, and could you give us an idea of what that run rate is?

Now, Matt, I know myself pretty well, and I'm pretty sure I didn't use the terminology or name another competitor. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Okay. Well, you just said market share.

I'm pretty sure... Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Well, those are my words. Okay.

Yeah. I'll let Sean answer it, but yes, we are seeing some uplift from the market at this point in time.

So, Matt, thanks. We quoted a run rate that we had captured at some point last year. It certainly has improved from there. But I would tell you that that was not the majority of what drove our growth in Q1. And I do expect that there's still a little bit more of that pipeline that will still roll into the business going forward. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Well, then who are you taking market share from, number one? And number two, it looks like the margins in that business were down. So, it looks like there's either costs or perhaps some margin concession that you're making to win some business. So, how should we think about that? And again, where is the share coming from then?

Yeah, Matt. I think if you take a look – if I'm understanding, your question is you think the share that came in is primarily hardware share, and that would have come in from some of the conversations you're hearing about the increased competition, I think, in the marketplace that we said we were happy to welcome. You're also seeing our forecast for next quarter show us returning to a more normal profit level as some of the software and some of the services will start penetrating some of these new VARs, as well as some of the additional hardware business, our current VARs one (23:48). Don't misunderstand, also there was a huge growth rate in Europe, and Europe gained a fair amount of share. And remember, Europe's bottom line is a little less than the U.S. So, that has a negative mix impact on us until those sales convert also. So a bunch of moving pieces, but hopefully that hit everything that we saw this quarter. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Okay. Thanks. And on the component side, your inventory obviously remains elevated for the reasons that you stated, lead time expansions and good demand. At what point – I mean, are you getting any signs from suppliers that lead times will start to come in and then you'll be able to manage down the inventory and then, of course, your customer orders may also be down as well at that point, right?

We're fortunately, right now, not seeing those indications of anything backing off. We have gone through everything over and over. And I think what you'll see – if the demand remains high, you'll continue to see lead times stretch at this point. But most of the lead times being out are forcing us to buy out further. So, I don't think you're going to see any dramatic swings in inventory. In fact, if we look at our ratios in-house, our turns are just about the same as they were a year ago. So, we believe we're managing to the demand, not to some expected demand that could be out there or even the conversation around double ordering right now. Suppliers are starting to put controls in to make sure that the double ordering isn't happening, and they're even going back and checking from all of us to see if our orders are going to the same location. So, there's a bunch of work being done on that right now. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Okay. Fair enough. Thanks a lot, Mike.

You bet. Thank you.

And the next question comes from the line of Param Singh from Merrill Lynch. Please proceed.

Hi. Thank you for taking my question. So, we've obviously heard of some parts being on allocation and just as you mentioned. We've also heard of premium pricing on some of the lower-priced product, some lower passives and discrete. How much of your revenue and margin expansion this quarter would you attribute to that? And do you think that could actually go up as parts remain on allocation possibly until the end of the year?

Andy, you want to take that one?

Yeah. Sure, Mike. Hi, Param. It's Andy. Yeah. We've seen some ASP increase, Param, for sure, but the vast majority of the growth is coming from units shipped out the door, candidly. And we continue to sort of see that being the big driver of the upside that you see in the actuals and in the forecast. I don't see that changing any time soon, as Mike pointed out. The lead times, if anything, are hardening in those areas, not softening. So, we'll continue to see, I think, those trends.

Okay. Got it. Thanks. And then switching gears to the ECS side, you guys have previously mentioned that you could see ECS margins still stand (27:14) for calendar 2018 year-over-year given the volume leverage. I mean, would this still hold true with a higher hardware mix? And then I've got a follow-up.

Well, again, Param, I think the hardware versus software mix should normalize in Q2 and beyond. There were some things that drove abnormal hardware growth in the first quarter. So I think that you'll see the operating margin line improve from here. And we'll work on the various ways to improve that over time, as Mike mentioned. When we win new customers, we get a chance to cross-sell from our more complete portfolio and attach more services. We also learn to serve those relationships more efficiently. And as you know, suppliers rotate their channels to new market segments and new product offerings, we get a chance to earn incentives differently, but that does take a little bit of time to play out. But I do expect, as you can see in our guidance, sequential improvements, both in leverage and continued OI dollar growth.

Great. And then, one last question, you talked about 30% storage growth. What kind of vendors are you seeing this growth from? Are they emerging vendors and some of the legacy vendors that kind of read on that platform? And also, one of the largest storage vendors, which will go unnamed, has made some changes to their channel program very recently. What are you seeing as an impact from that vendor and will that change either the margins, incentives up or down for you guys?

Well, I won't talk about any specific vendor, but I can tell you that the storage uptick in the first quarter was sort of broad based. The good news is, as we talked about last quarter, we are now selling more, what I call, next-gen technology as a function of storage in total versus traditional spinning desk, which is a good sign for the crossover point in that segment of our business. But I think we saw growth with just about every storage vendor we work with, both the big established ones as well as the newer smaller up-and-comers who focus mainly on the next-generation hyper-converged and related technologies.

Got it. Thank you so much.

And the next question comes from the line of Mark Delaney, Goldman Sachs. Please proceed. Mark Delaney - Goldman Sachs & Co. LLC: Yes. Good afternoon. Thanks for taking the questions. First question is for – I think for Chris about the OpEx leverage, and company did a great job, about 80 bps of improvement on SG&A to revenue year-over-year. How much of that leverage should we think about flowing through to the rest of the year, and then maybe how much is reinvested to fund some of Arrow's investments in engineering and growth initiatives?

Yeah. If you look at the leverage that we're experiencing right now, we would expect that to continue. I mean, we are investing in the business in Q1. We're guiding it in Q2. So I don't think you're going to see any step change in that. And that leverage is really a key focal point for us. And frankly, Mark, it's not just as a percentage of sales. It's also as a percentage of GP. So we're laser-focused on that, but we're also continuing to invest in those areas that we believe will drive future growth and value for suppliers and customers. Mark Delaney - Goldman Sachs & Co. LLC: That's helpful. Second question is for, I guess, either Mike or Sean. I was hoping to better understand the strategic rationale for the systems integration business divestiture. It seems that that type of a capability would be supportive of Arrow's goal of selling a full solution. So curious why the company made the decision to divest that. And related to the broader strategic and M&A environment, any areas you like to be investing in with additional M&A.

Yeah. And I think we probably misguided you on that term. Systems integration, we still have a very robust systems integration business. It's about $1 billion here. That has been there and will continue to be a highlight of our business. What we did divest was our – basically our Avaya hardware business. And we didn't see a particular need for that. When we got into that business, there was some talk that data and voice were coming together in a way that we didn't want to miss. And we haven't seen what I would say that come together in a way that was working out for us. So, that's what that was. It was not a broad-based customer business. We didn't view the technologies as growing at a rate that would really warrant our management time or our increased effort to make it continue to grow. And we felt it should be with somebody who does that for a living and that's what we did. So, that's the business. It was the Avaya business. It wasn't the broad-based integration business that we have.

And the next question comes from the line of Shawn Harrison, Longbow Research. Please proceed.

Hi. This is Gausia Chowdhury on behalf of Shawn. Can you give a little bit more color on the IT spending environment? Do you think that IT spend accelerated for you guys or is it just the general spending environment? And how does it look for the rest of the year?

All indications that we have over the last two quarters and continuing on with our forecast this quarter, we still see it robust. I think product will start to get harder to get, but customers are starting to place orders with longer lead times now, and I view that as a good thing. That's a little different than what we've seen in the past with customers buying a lot of product to ship tomorrow. We're not seeing overwhelming shipments to any one particular type customer that we've seen in past allocations, where they just try to go out and buy everything they can buy. I think they're a little more thoughtful this go-around. But it's going to be a strong environment from everything we can tell right now.

Perfect. And then with the components demand creation improving, that means consolidated EBIT leverage accelerates in the 1.2x (33:54) that was just seen, correct?

I'm sorry. I didn't quite understand the question.

Sure. I was wondering about the EBIT leverage. I think it was 1.2x (34:05), and I want to know if that's going to improve with the components demand creation improving?

Yeah. Absolutely. When we get a higher percentage of our business and design wins, that definitely will drive that leverage up. That's why we do it.

Sorry. One last one from me, please. Just the size of your digital business, can you give us an update on that?

We talked at the end of Q4 that we were over $1 billion run rate, and we won't comment on that quarter-to-quarter, but we'll give you an update periodically as we go forward. I would tell you that it continues to grow rapidly, and it's a major growth vehicle for us, and it is growing faster than the core and it should grow faster than the core.

Thank you.

And the next question comes from the line of Jim Suva, Citi. Please proceed.

Thanks very much. I have one question for Mike and then one question for Chris. Mike, in your prepared comments, you mentioned growth in the medical devices on large supply chain customers. My question was on the comment on the large supply chain customers. Is that are you shipping and seeing more demand to consumer devices or EMS companies? You mentioned all three regions, America, Europe and Asia, which is encouraging. But how should we think about that? Is it more like the PC sector, smartphones, tablets, TVs? I'm just kind of curious about that.

Yeah. We're seeing growth in alternative energy, aerospace and defense, basically some computer and data processing. Consumer is up, but it's not the overall driver. And our contract manufacturer business is up. And frankly, our industrial business is up, too. And then don't forget automotive. So when you look at it across the board, the big supply chain customers in almost every segment are still moving along. We don't have an overwhelming amount, Jim, in wireless, in cell phones, in that type of activity, in what I would say pads or computers. So, we are really the broad-based type business.

Okay. And then a question for Chris on the inventory. I assume a large portion or some of the portion of the increase quarter-over-quarter was through the integration of eInfochips or maybe I'm wrong on that. And more importantly, are you at the level needed of your inventory, because you had some really big wins recently like with Analog Devices and others, or do you need to build some more inventory given the lead times?

Yeah, Jim. So eInfochips is not a driver. I mean eInfochips, over time, I think, can have more influence in terms of driving the sales of components. The real driver here is, as Mike mentioned earlier, is when you look at just order activity that's here, we have to make sure we have inventory staged to support that order activity. I would say that if we were looking at flat growth, I think our inventory was well-positioned for all the share shifts. We're not continuing to build inventory for those share shifts. It's really building inventory to support the orders that we see.

Great. Thanks so much for the details and clarifications. It's appreciated.

There are no additional questions in the queue. I would like to turn the call back over to Steven O'Brien.

Thanks, Alyssa. 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, you may now disconnect.