Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Arrow Electronics First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Steve O’Brien with Arrow Electronics Investor Relations, you may begin your conference. Steven O’Brien: Thanks, Rob. Good day and welcome to Arrow Electronics first quarter 2019 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 certain prior period figures have been adjusted for the adoption of 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.

Thanks, Steve. Thanks to all of you for taking the time to join us today. After two years of favorable industry conditions, a market change is underway in the global components space. We’re seeing this in the form of less favorable regional sales mix, less favorable product sales mix within the regions. The near-term impacts are lower margins and delayed cash flow. We’ve seen market corrections before and expect these conditions to persist into the second quarter. However, unlike other correction, this one looks unusual, because we’re not seeing lower sales volumes. For the time being, global components market conditions have had a minimal impact on our Enterprise Computing Solutions business. We see this as the validation of our broad portfolio of technology solutions. However, we’re also aware that parts of our business see earlier and later cycle economic impacts. We have been and continue to make tough decisions around the timing of our investments. Those decisions are informed by what we see as the length and depth of this challenging environment. Over the last two quarters, we saw decelerating growth rates for our industry. In the first quarter this resulted in a change to our product and customer mix. The broader industrial decline reduced purchases for products and services that carry higher margins. This was offset by strong demand for lower margin products. Due to timing of this change, our countercyclical cash flow performance was temporarily impacted. We received inventory at the beginning of the quarter that we paid for but did not sell through during the quarter. We also had to buy more inventory of lower value products to meet demand. In addition, collections were delayed as customers evaluated tariffs and preserved cash. Some customers are moving manufacturing to lower cost regions to avoid tariffs and other unnecessary…

Thanks, Mike. First quarter sales of $7.16 billion were at the high-end of our prior guidance range. Sales increased 4% year-over-year and 7% adjusted for changes in foreign currencies. The actual exchange rate for the quarter was $1.14 to €1 in line with the rate we had previously used for our forecast. Global components sales of $5.19 billion, increased 5% year-over-year and increased 8% year-over-year adjusted for changes in foreign currencies. Sales were above the high-end of our prior expectation. We had record first quarter sales in all three regions. In Europe, sales increased 10% year-over-year adjusted for changes in foreign currencies and increased 2% as reported. Europe sales have increased year-over-year for 24 straight quarters, adjusted for acquisitions and changes in foreign currencies. In the Americas, sales increased 6% year-over-year, growth was driven by demand for lower cost commodity parts. Asia sales increased 8% year-over-year, our strong volume in the region is partially attributable to an upsurge in our lower margin wireless device business due to increased customer preference for local brands. Global components operating income increased 2% year-over-year and increased 6% adjusted for changes in foreign currencies. Operating margin decreased 10 basis points year-over-year. We continue to believe the 5% operating margin level we achieved in 2018 is an appropriate benchmark for global components. However, in the near-term our product and regional mix dampened this. In addition to current market pressures, Mike previously mentioned an ancillary business, whose results are dragging down global components performance. Last year, it was operating near breakeven. However, conditions worsened resulting in an operating income loss of $10 million in the first quarter and we expect to $12 million loss in the second quarter. We will announce the change to our approach to this operation by mid-year. Enterprise computing solutions sales of $1.96…

Thank you, Chris. Rob, would you please open up the call to questions at this time?

[Operator Instructions] And your first question comes from the line of Shawn Harrison from Longbow Research. Your line is open.

Hi, everybody. To an extent, Mike, your commentary sounded a bit like déjà vu of everybody else’s earning season 90 days ago. And so, wondering maybe why some of these weak dynamics that you’re experiencing are a bit delayed relative to maybe what your peer down in Phoenix highlighted 90 days ago or what the suppliers had been highlighting for a while. Just mix of business, other factors that could be at work in terms of why you’re seeing some of this delayed that everybody else has seen.

Yeah, I think if you historically look at it, we’ve typically seen a delayed weakness from the suppliers largely due to their initial business in China versus what our magnitude used to be in China. And I’m talking most of the big wireless phone type activities that existed that we didn’t participate in. Those are usually the industries that got hit first. And I think that continued on. Plus there’s been over time, as you know, we’ve had some favorable sales conditions here. That is also elevated our backlog, that has helped us work our way through this process. I think what you largely see one of the things that got us off guard is that during the supply chain we had a lot of high dollar product in our inventory that was engineering based. Those products started to get pushed out in March, which was late in the quarter. And replaced with inventory that people use more of or didn’t sort of hoard during tough conditions. So we had to buy inventory to support more commodity products. And I think that’s what you saw, largely a timing issue there. But in general, this is acting just like any historical downturn, albeit more muted, the other thing is interesting about this downturn is we’ve yet to see the sales decline. We’re still seeing sales growth. And that’s largely just because of the mix of product, in the mix and regions that’s materializing right now.

And then as a follow-up, I guess, the duration of this margin pressure [if your hazard, I guess] [ph] inclusive of that, I don’t know if non-core type business that’s a $10-million-plus drag. But when would you expect to see kind of a normalization of the more highly engineered demand coming back along with the shift in the business mix? Is this a two quarter event? Do we have to wait till 2020?

We’re anticipating around the two [quarter] [ph] event. And I say that based upon the same information you guys are seeing and hearing, and our current bookings, our design win activity grew about 3% year-over-year, which means the products are still being designed albeit at a much slower pace. And I think what you’re seeing in our second quarter guidance is the downside of the product mix changes, also some regional mix changes of Asia growing faster than the Americas. And really, to me this equation starts to change as the Americas start to strengthen. And we just see them go in. So I would anticipate, right now, from what we see, a quarter or two. But I’d lean more towards the two quarter end of it.

Thank you.

Your next question comes from the line of William Stein from SunTrust. Your line is open.

Great. Thank you for taking my question. Mike, frankly, I’m more confused than I have been in quite some time with Arrow. I think the words it fit very well with the sort of long-term narrative and the long-term sort of timing difference in the cycle of the distributors relative to the suppliers. Namely, you’re seeing things a little bit later. And that’s what’s terribly surprising. But something you mentioned on the call aligns more with the numbers that we’re seeing, which is it looks like you’re talking about a downturn, but the way it’s materializing in the P&L is revenue in Q2 that’s being guided what I think is above normal seasonality, but more of a hit on the margins. So is there something going on here that’s driving revenue above normal seasonality despite the narrative of a weaker demand environment? Like is the company going after or doing something unusual with regard to revenue or taking a business that it wouldn’t normally take in order to counter the more normal effects of a downturn? Any – sorry for the longwinded question, but I’m really confused.

Yeah, I know. I think I can maybe piece it together a little bit for you. We’re still seeing faster growth out of Asia, than we have seen. Also, there is some work that has been going on there for quite some time and we’re seeing the vestiges of a sales increase. What’s interesting about that for Q2, that sales increase comes in. But as you know, our returns in Asia are less than in the U.S., so the mix of Asia product is growing at a faster clip than we’re seeing in the U.S. and/or Europe. So while I would say that what we’re taking in Asia is good for Asia sort of returns, it is different than what we’re seeing. And we’re seeing more of the slowdown happen in the U.S. and possibly in Europe for the second quarter, given the bookings we see. So you have two things, really one was product mix that we talked about. The other one is now regional sales mix within that product. But the operations themselves are remaining, frankly, much healthier than we’ve seen in past downturns, even into the first one. We’re talking basis points here on profit that we’ve been able to offset this with. And so, that’s our struggle right now. It’s a pretty dramatic sales mix change between the regions. And I would say a lot of it had to do with the fact of what we’ve been working on, and now more customers are coming to us and we’re still seeing more new business that we have a chance to sell more engineering services to. So that remains intact, that thesis remains intact. But right now that’s what we’re dealing with.

So maybe said another way, a more typical seasonal and – more typical cyclical downturn or the beginning of a cyclical downturn in the richer margin western regions and somehow Asia just keeps going and that drags profitability in – okay.

Yeah, exactly.

So I have one more – okay, that’s very helpful. One more if I can – the mix with – the product mix you discussed, you said there was a push out of some of the products that were design win based. Is that concentrated any particular category that you could tell us about? And is it like suddenly you’re selling a lot more IPNE or what – any clarity there. Thank you.

Yeah. Typically – and I’m going to start off with that’s normal. We’ve seen that in other downturn. I’m going to say that a lot of manufacturers went into their inventories and started to assess their inventories. And during the first quarter and what we saw was if you remember last year, customers were building up their inventory, of these highly engineered products from all manufacturers were doing well. Those products were tough to get and they wanted to make sure that they had enough to manufacture. So they probably were carrying more than the normal standard 13 weeks of product that a manufacturer would carry. And they went through that. Secondly, when you’re trying to preserve cash as a manufacturer, you go to your highest dollar products that you have on the shelf. And if you have some to get you through for a quarter you stop buying. That was the phenomenon we saw and the lower commodity products that have less of a lead time issue, in fact, not really much of a lead time issue, we felt those purchases continue to go. And as a result that was the mix change. Not really uncommon that that’s kind of something that we do see. And then on top of that, we had customers – frankly some customers that at the end of the quarter played some games with us on paying, and we expect to go right back after that and get that sold. So that was really the two items that gave us the headaches in the first quarter and it’s all [hit in March] [ph].

And your next question comes from the line of Adam Tindle from Raymond James. Your line is open.

Okay. Thanks and good afternoon. I just wanted to ask, I mean, obviously quite an uncharacteristic first half of the year. So just trying to figure out how we can think about the second half from a margin and EPS perspective. Gross margins are typically down in the back half, but does that not happen this year. And then on an EPS perspective, the first half is normally around 45% of the full year. Is there something different about 2019 like the business that’s losing money that may exit or something like that, where the first half of the year could represent a different number than it has historically from an EPS perspective?

Yeah. What I can tell you is, we just highlighted that there was three buckets right of margin decline and one bucket that was – that is totally in our control. And I do expect to have that bucket handled by the first half year. So we would expect that third to come back in the second half. Automatically, the other two are going to depend as – the other regions start to return back to normal sales. So – we will correct the one, it’s unfortunate that came late in the quarter or two. But as I said that was sort of some vestiges of some old acquisition that we just need to get cleaned up and we’ll get cleaned up by the first half.

And Adam, just one thing to add to that. In the back half, tax and corporate expense are going to be lower than they are in the first half as well. So that helps.

Okay. That’s helpful, Chris. I – and I wanted to ask you a question. You touched on this, but I want to revisit, understand that mix impacted margins, but you often to your point to attractive returns on capital in the lower margin stuff, because asset velocity is high. When your competitors generated significant cash flow, for example, but Arrow used over $300 million in the quarter. Just help us bridge this? And imagine you’re going to talk about it’s a snapshot in timing related to help us with expectations on the June quarter and maybe even the full year? And if you could tie in capital allocation priority, it would be helpful.

Yeah. Sure thing, Adam. So if you look at our cash flow metrics for the quarter versus last year. The obvious one that ticks out is DSO creeping up a couple of days. And as Mike touched on, as I touched on as well, customers are a little slower to pay all over that. We did expect in the quarter going into the quarter to have a slight improvement on inventory turns as well as [DPO] [ph] that didn’t happen, because of this mix shift that happened mid-quarter, where we had to catch up. So when you look at the efforts against that, you’ll definitely see an improvement in Q2. And I think the back half of the year will be strong, it’s just going to take us a quarter to adjust back to where we need to be. As a capital allocation statement saying as we’ve said very consistent, which is we’re very focused on getting the debt down a little bit and returning everything we can to shareholders through buybacks.

Okay. And if I could just sneak in one last one, Mike, I understand that Asia and mix that we’re talking about is diluting margins and returns I just want to clarify and ask why even pursue this. You often say growth is the mindset, so this just where the growth is and you’re going towards that that you consider other options to walk away and maybe see revenue decline, but not dilute returns. Just clarification on that would be helpful. Thank you.

Yeah. I think, right now, there’s some business that we’re working on in conjunction with our suppliers that we know, we can improve the situation number of business we’re looking at. We’re not looking at filling the boat with low-margin business that is not going to give us a return. All that does, as you know, is eats our cash. That hasn’t been our style. So sort of a big supply chain deal, I don’t have to tell you with – none of that is coming in house. So we are not changing our portfolio of business one bit from what we have been doing. And I think, we have proven the fact that we can bring this business and do engineering to it, and raise the margin profile over time. I don’t think our strategy stops with that, just because there is a downturn. So hopefully that clarify that for you and there’s obviously work to do. But we need some economic health in the Americas and Europe to get it done too.

And your next question comes from the line of Joe Quatrochi from Wells Fargo. Your line is open.

Yeah. Thanks for taking the question. I was wondering if you could kind of remind us and some of the organizational things you’ve done on the component side and you’ve done something sent to improve the margins there and with that kind of change in mix, I was wondering, if there’s any additional flexibility that you can kind of work within that business aside from the kind of business [excluding some money] [ph]?

Yeah. Obviously, we’ve increased our digital business, that is still growing at a good clip and that is a higher margin profile than frankly all the businesses, so that one is one to continue to drive. As I said before we just – we kicked off our engineering services with freelancer, which are much more on line which starts to take care of our tale of customers some of the smaller customers wanting to do designs and need viable engineering services that we can provide like that. And I would think of that sort of as like the [uber] [ph] of engineering or something of that sort of ilk. We do have our [EMP chips] [ph], which is picking up on pure designs or customers and OEM manufacturers and then our FAEs. And as I said before, the engineering, the design win type activity was up 3% year-over-year, so that has not gone away. We just need to continue to drive that and we will certainly be putting our efforts to that during this downturn, because customers will be designing products and hopefully releasing that is the market starts change. So that’s going to be where our efforts is going to continue to be placed, and it is – serviced us well in the past and we expect to service at this time.

Okay. And then just a follow-up on the cash flow discussion, I just want to understand the high value inventory that you took on this quarter. Should we expect all that’s kind of flush out during this current June quarter? Or how do we think about that and then just same with kind of creep up in DSO should we see that kind of correct this quarter as well?

Yes. So on the inventory definitely we expect to bring that down in Q2. And on the DSO, yes, I would expect also bring that down in Q2, that is what we’re focused on right now on both fronts.

Thank you.

And your next question comes from the line of Matt Sheerin from Stifel. Your line is open.

Yes. Thank you. One other question, if I can just regarding the components business. It sounds like both North America and Europe could be below seasonal for a couple of quarters, we talked about the mix shift working against you. You haven’t talked about the pricing environment yet, and I would think that as volumes do come back and as in customers work through inventories. We could see a return at least more normal pricing, I know, last year pricing was it was favorable for suppliers and distributors. So is that factored into your thinking as we get through the year.

Yeah, absolutely, Matt. As we said before, I think about one-third, our $10 million of the decline was – with market pressures. We do expect that to return. What’s interesting, Matt, and you probably know that, because I remember you being around last time, when we went through one of these. That is really a pretty minimal decline for a downturn compared to historic. So the good news is we have better control on our margin then we had sort of the last couple of downturns. And so we’ve fully believe to get a complete recovery of the market pressure as things start to loosen up a little bit.

Okay. Is it likely that things could get worse before they get better though?

Well, I think, what they’re going to see in the second quarter is the regional mix, and we believe that that’s about where it’ll shake out. That’s our beliefs right now as we sit here today.

Okay. Great. And on the enterprise computing business, looks like, that’s chugging along you’re seeing modest growth, I know, net billings is up. The mix is still working against you a little bit on the hardware side. We are also looking like we’re at the later stages of this multi-year refresh cycle, particularly on the servers. So how do you see that that business playing out and looks like it seasonal IT spending slowing a little bit, what’s your take there?

Yeah, Sean, you want to…?

Yeah. Matt, I think, I largely agree with your observations there have been a good handful of refresh cycles that we’ve been able to participate in just due to the size of our installed base. I think, as we look to the rest of the year, we’re going to continue to drive more software based solutions selling, as you know we always work to bring on more customers and part of the challenge is to help pivot them to the places that will lead to more software, and that’s good for our mix and margins over time. To your point, we made some progress in that regard in Q1, but we’ve still got some more work to do. We do know what that work is and we’re going to continue to make progress against this. I would also agree that I think the outlook is – a little bit of uncertainty surrounding IT spending, as we look to the full year I would say different people have different views. We intend to grow this quarter, but again the focus is on basically improving the profitability of the business we do take on.

Okay. Thank you.

And your next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.

Yes. Good afternoon. Thanks for take my questions. First, I want to spend a better understand around OpEx. Very good leverage there in the first quarter with OpEx dollars down. How should we think about that in the second quarter guiding for year-over-year revenue growth. So should we think about OpEx growing as well? Or is this leverage going to be sustained and keep OpEx pretty flattish still year-over-year? And maybe you can expand that as well into the second half, I would just think about OpEx growth on year-over-year basis.

Yeah. You just nailed it. We’re going to be hovering OpEx very tightly. I think, if you look at our strategic initiatives as we talked about we’ve invested in those over the years. We like where we are in OpEx. We like the leverage we’re driving, so our ability to hold that relatively flat is the goal for right now. So I don’t think you’ll see that change as we move through the year.

Okay. And just is that on a dollars basis that you’re referring to, just to be clear?

That’s a dollars basis, so with continued growth we obviously get additional leverage.

Yeah. Okay. And then my last question is to revisit this commentary about the first quarter of mix changes between higher margin and lower margin part. I appreciate all the thoughts on this from your team, it’s been helpful. The one aspect still I’m a little confused on about the first quarter is whether it would upside for lower margin types of parts. I mean, I understand why high margin would be some push outs, if the cycle is weakening. But can you better explain why across all regions there was upside demand for lower margin parts in the first quarter?

Well, the interesting thing is I would say the demand for those products would have been normal as a high dollar product not shutdown. The mix would have been that dramatically different, so we see there is a good portion of the commodity product come in during the quarter. And I think as customers went through their inventory. They were figuring that that was an area that they’ve been deficient of holding products, so they continue their orders and hope some of those orders been. I think, we’re really into more of inventory rebalancing situation by the customers, the manufacturer’s right at this point in time plus an uptick in business from Asia. So those are really the two phenomena that drove that, and we expect that – most of that to fully shake out by the second quarter. Then it’s going to be on the economy at that point.

Got it. Thank you.

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

Good afternoon. A couple of questions, please. First of all with the Asia component mix, my understanding was that you were putting field application engineers on the ground to go after more traditional distribution business normal to like what you do in Europe and the U.S.? So if that was the case, why would you pass these FAEs we’re taking just lower margin business. It sounds like they’re not as effective as you would like them to be and some discipline or some kind of controls was lost in the process. Can you just sort of address that please? And then I had a follow-up.

Actually – sure. Actually the vast majority of our sales that came into Asia – came in through the industrial base. They matched Asia’s returns. But Asia’s overall profit profile is less than U.S. and less than Europe. So we didn’t see you know a lot of low profit business coming in to Asia’s P&L compared to what it has been. So it is truly just been a regional mix change for Asia itself.

So sort of the bar is lower for those industrial customers in Asia versus, say, western regions. Is that correct?

Yeah, it has been forever in the business. And what is happening now is that margin will work up over time. But the P&L profile is not the same in Asia as it is in the U.S. and Europe.

Okay. I think I understand that. And then, in terms of just the trends in the U.S. and Europe, just to be clear. There’s no component mix issue that you’re seeing there or are you just saying that that’s a downturn? And if that’s correct, can you sort of highlight what end-markets or certain markets you think you’re being most affected by in terms of top-line, bottom-line pressure in those reasons?

Yeah, I’m taking a look at it right now. And the ranges are cross the board, but the biggest changes for us were in communications, contract manufacturing and industrial.

Great. That’s helpful. Thank you.

All right. Your next question comes from the line of Tim Yang from Citi. Your line is open.

Hey, thanks for taking the question. So you just mentioned industrials are the main softness. And can you give us some color on how large is your industrial exposure and how much of this softness actually contributed to your component margin softness? Then I have a follow-up.

Well, industrials is about half. So that should help you there.

Got it. And then…

[When talking to] [ph] Americas.

Your overall, is that like that happens, the contributions or half of that margin softness is from industrial, North America industrial or it’s…?

No, it would have come from all the categories that I just listed out on the call before, communications, contract manufacturing and industrial were going to be the biggest decliners. And as I said, most of that is because of the high product parts that got pushed out. And if you look at all three of those categories that totally makes sense. That they’d be rebalancing, because there’s still manufacturing. But that was really what it is.

Got it. Thanks. And then, on your ECS operating income, you had year-over-year growth for the quarter. And in the previous two quarters, you had operating income year-over-year decline due to some ramping up hardware sales for your new value added reseller relationship. Given this operating income back to positive growth, does that mean those hardware ramping is almost done. And then, how should we think about operating income growth for EPS going forward? Thanks.

Well, we committed that we would have the business rightsized and organized by midyear. We’re still on that same track.

Got it. Thank you.

And your next question comes from the line of Adrienne Colby from Deutsche Bank. Your line is open.

Hi. Thanks for taking my question. Most of my questions have been answered. But from the prepared remarks, on the components side, you’d mentioned growth in transportation in the Americas and Asia versus flat growth in Europe. Given your commentary about some of the mix shift you’re seeing to lower sort of commodity parts, I’m interested if you’re starting to see signs of growing caution within that vertical in Asia and the Americas?

Yeah, we’re seeing cautious signs across every industrial, every category of vertical market performance right now. There is not one, we’re not seeing any signs that are going to be fantastic. There’s nothing we can hang our head on that way.

Understood. So the strength that you commented on in the 1st quarter, that’s something that you started to see shipping in April, and then, I guess, a couple days into May.

We actually saw it starting in March. And you know we have seen some growth and it wouldn’t be surprising, because as you know we had a big automotive push going on with our engineers and things like that. So some of those are having delayed growth and are customers that we didn’t do business with before. Remember, we also increased our customer base, we’re juggling the fact that we’ve increased our customer base. And we have some declines in certain types of products. So we’re not seeing the total picture yet. We’ve got a great idea of the picture, but we’re not seeing the whole picture of what the decline is. And as I say, that part is going to be economic, not necessarily controllable here. And we’ve told you what’s controllable in here. And we think we’re in for a couple of quarters. But we don’t think it’s going to be an overall disaster. I guess that would be the way that I could put it to you.

Okay. That’s helpful. Thank you. And, Chris, as we think about cash flow for this year, is there any commentary you can offer about CapEx plans?

Our CapEx this year, the only investments that we’ve really got to make that are different from a normal year is some investments in warehousing, which I’ve talked about it at various conferences and investor meetings, just given our growth. But otherwise, our ERP investments have come down significantly. So we’re managing that tightly. And we got to get those behind us to support future growth.

Thank you.

And there are no further questions at this time. I will turn the call back over to Steve O’Brien for some closing remarks. Steven O’Brien: Thanks, Rob. 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.

This concludes today’s conference call. You may now disconnect.