Arrow Electronics, Inc. (ARW) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Melissa Fairbanks. I am the analog semiconductor and IT supply chain analyst here at Raymond James. We are thrilled to have the team from Arrow Electronics with us this morning. Joining us today, we've got Rick Seidlitz, VP, Corporate Controller; and Anthony Bencivenga, their new Head of Investor Relations. So I think, Rick, you've got some slides that you're going to go through, just give an introductory overview of the company, and then we'll go into Q&A.

All right. Thanks, Melissa. Thanks for having us. Really appreciate the invitation and the opportunity to spend time with everyone here today. I see a couple of familiar faces from meetings this morning and a whole bunch of new ones. So I appreciate all of your interest. And I'll give you a quick overview on Arrow Electronics, referring for who may not be familiar. I'll try to go through this pretty quickly because I want to leave more time for Q&A from anyone in the audience or from Melissa. So we are Arrow Electronics. We are a global provider of technology, products, services and solutions. And I'll break that out for you in 2 different segments. We operate in the electronic component space as well as the enterprise computing solutions space. A lot of this is distribution. A lot of you are going to know us as a distributor, and that remains true to this day that, that is sort of the backbone of what we do. But there's a lot more to that. There's a lot of services and solutions out there. And we'll talk a little bit about that more today, so you have a better understanding of everything that we do. So a little bit about the company. We'll give you a few highlights on financials, talk a little bit about capital allocation. Just touch on the guide for Q1 that we gave about a month ago. I won't totally reiterate all of that just because I imagine a lot of you saw the earnings release, but we'll touch on it and then honestly, open it up for questions. So as I mentioned, we are a global technology company. And with that, everything we do is technology related. We really do believe that there's a long-term benefit here for technology improving lives. I think as we talk about ESG, you'll hear us touch on this. And if you read our ESG report, you'll continue to hear more and more tie-ins that what we do is obviously more than just the products and services, but it's about getting technology out there for the benefit of all. That is what we do call our noble purpose, and it's about technology making life better. Arrow's history. We are -- we were founded in 1935, really as a small shop on Radio Row in New York City. Today, we jumped all the way to 2023, and we are #104 on the Fortune 500, $37 billion technology company. We serve over 200,000 customers across the world. And again, this is about technology solutions that meet our customers' needs, meet our suppliers' needs and help improve daily life. Some of the numbers, again, over 200,000 customers, 22,000 employees and growing. We are based in Colorado. I didn't touch on that, but that has been our headquarters for a while now and $37 million of revenue. As I talk about the 2 segments, again, I think this will help everybody sort of get a better understanding of what we do. If I start with global components. Most everyone starts with semiconductors and that is the right place to start. That is the bulk of the business here, but also IP&E. And within this space, again, it's not just about fulfilling orders. We are about services. It is about demand creation, design engineering services, supply chain services and some integration services. These -- this is the value add. This is the accretion to our margins. This is what I think a lot of you see if you look at our numbers over the last few years. A lot of what we see is not just market driven. It is our ongoing investments in these areas that really help us become more than just a distributor. It's services. It's creating those solutions for our customers. On the enterprise computing solutions space, again, this is -- a lot of what you're going to be thinking about here is traditional storage, security, but also software distribution as well. And we're very much positioned to be part of the ongoing transition to the cloud and IT as a service. This is a space we have invested in, in terms of our platform capabilities, to try to make this something that our customers see as value as well as our suppliers. A little bit more on the services. Again, I'm not going to touch on every one of these in detail, but engineering, design, supply chain, this is huge for us in the component space. We've invested a lot of time and effort and resources into our engineering capabilities. Just as much as the sales force, the engineers really helping us to solve customers' problems, and that also creates demand for suppliers that didn't exist before. And we see the benefit of that in our returns. As I said, these are areas that are accretive for us and growing. Same thing with the supply chain. This is another area where we can really help customers who maybe don't need sort of the distribution from us, but maybe they need help managing complex supply chains. This is a space we fit in nicely and it's very complementary to what we do in distribution. But this is also a growing area where we have a lot of opportunity. Moving on a little bit over some of the managed services. You see a lot of this in the ECS space. Again, it's not just about the product, but it is about managing usage, managing seats, some financial services that go with that. In particular, I mentioned like Infrastructure as a Service, everything is going to continue to move to a service, at least a large portion of it over the next several years, and we are well positioned here. Industries we serve -- all of them. I think we're not heavily concentrated in any one end market. I think anywhere you look where technology is in use, we were there, whether that's automotive, industrial, health care, aerospace, all of that. And when we think about the ECS side of the business, again, it's not just one technology. It's many, many different line cards, whether it's security, storage, it doesn't really matter what that is. We're certainly involved on the enterprise computing solutions in pretty much any way you can think of. We're global. We are spread out across 90 countries. When we think about the business, we're thinking really in 3 regions: the Americas, EMEA and Asia. I'll show you some data on how that -- how our revenue sort of splits out across each of the businesses. But again, we have over 40 distribution value-added facilities across the globe, over 200 sales facilities. We're really everywhere. And I think our global reach on both of these businesses is not really matched by anybody. We're really the only player in both of these segments on a global scale at this point. Just to touch on ESG, again, very briefly. I don't want to skip this over or loss it over because it is very important to us. We talked about making life better through technology. But obviously, a lot of focus right now on a broader set of environmental, social and governance objectives and concerns throughout the world. I'm not going to dive into this too much other than to say that for us, it's not just talk. We have objective measurable goals that we're being -- we're holding ourselves accountable to. Executives are held to this. And I think we'll have our annual ESG report come out in about a month from now. And I just encourage everybody to go out to our website, pick that up and take -- try to understand a little bit about what we're doing other than running the business. A little bit more on the numbers. I already mentioned, hey, we're a $37 billion company in 2022. Between the 2 segments, that breaks out to about $29 billion on the components side and $8 billion on the computing solutions side. On the far right, [ and it ] shows each of our regional businesses. So I mentioned it's really 3 regions for components. It's -- like I said, it's Americas, EMEA and Asia. Breaks out about $10 billion, a little under $8 billion and then almost $12 billion for Asia components. On the ECS side, it's really only the 2 regions, Americas and EMEA, breaking out to about $5 billion and about $3.5 billion in terms of revenue there. This slide is really just -- obviously, I'm not going to go through all of this data. All of this is actually out on our website already. But I do want to just highlight in terms of full year results for 2022, it was a record year for us. And I think that's in terms of sales, profitability, margins really across the board. And one highlight I would point out here is on the operating margin line, where we saw over 100 basis points of growth year-over-year in our margins. And again, I think a lot of this goes back to sort of years of investment and capabilities beyond just distribution. It is all the service offerings that we have. No doubt, we've benefited from a sort of unprecedented market, severe supply and demand imbalances. But we do think there's a piece of this, a large piece of this that really goes to our value-add accretive activities, and we think those things are here to stay. And we have our work cut out for us because we need to keep investing here and keep delivering and keep executing. But we think that we have fundamentally improved the margin profile of the business over the past several years, and we'll keep making the investments to hopefully sustain those margins and hang on to them for the long term. One other thing I'd point out here, and I don't have a separate slide on the capital allocation priorities, but a few of you have been asking about that this morning. And our priorities really remain unchanged for the last several years. First and foremost, we're about reinvesting in the business for organic growth. As a distributor, a lot of that means, we're putting money into working capital as we're growing because if we don't have a product, you're not going to sell product in this space. At the same time, it's investing in our capabilities. I bet talk a lot about the design and engineering and supply chain services. That takes investment, whether that's in systems or in people, and we've made those investments, and we'll continue to do so. Beyond sort of the organic growth, we do evaluate strategic M&A activity. Those of you who have been tracking us for a while, no, we went through a long period where we did buy a whole bunch of companies. But we've been pretty quiet here for the last 4 or 5 years. I don't think -- we certainly haven't had significant acquisition in 5 years. It doesn't mean we don't evaluate it, but we haven't gone down that road for a few years now. After that, it's about share repurchases. Last year, we repurchased a little over $1 billion of our own shares. The year before that, I think it was about $900 million. So in the last 2 years, we're pretty close to $2 billion in share repurchases. Just last month or actually in January at this point, we did received another authorization for our Board for another $1 billion. So this remains a priority. We're committed to returning capital when we don't have a higher and better use for it in terms of growing the business. You can see that in the past results, and that remains a priority, and we have the authorization to continue doing it. One more sort of visualization of how all those segments or the 2 segments add up across the regions. Very much geographically diverse. Again, the Asia number is just the components space, and that's about a little under $12 billion. Americas adds up to about $14 billion and EMEA all in is about $11 billion. So we're, again, across the globe in both of these businesses, and no other company can really say that. Fourth quarter overview, I won't jump into the details here, but I think fourth quarter was another -- we ended the year just like we performed throughout the year. A very successful quarter for us. Certainly starting to see a few softspots out there. Our performance in Asia definitely reflected a slowing environment. And also, we see some normalization of some of our activities in the shortage market services. Otherwise, North America and Europe results remain strong and sort of brings to a little bit of our guidance for Q1. Again, won't jump into every detail on this. But I think our business has been resilient. I think there's a lot of uncertainty out there. And I think we hear a lot of different things from different customers and different suppliers about the outlook. But I think when we put out our guide, it was definitely a little bit better than expected. And I think we're guiding down sequentially a little bit, but it's certainly not approaching like a nose dive, like some people have been predicting. With that, I'd like to thank you for your time here this morning and those of you who scheduled one-on-ones, it's been great to dive in a little bit more detail. With that, I'll just open it up for questions.

Yes. Great. So I'm going to get started and then we'll open it up to some Q&A from the group. But one thing I wanted to touch on, there's historically been a view that competition in distribution is driven strictly by price. And I think your margin profile, everything that you highlighted above about the services and value add, that kind of -- I refute that argument. Can you discuss aside from the services and the value add, areas where you think Arrow has a competitive advantage, either through like automation within your distribution centers, we talked about the geographic footprint, line cards.

Yes. No, it's definitely more than -- it's more than price. Execution matters a lot in this business. Obviously, we're not without competition, so price does matter. But like I said, you got to be able to meet the customers' needs. It can't just be about giving them the best price. And so with that in mind, you do ask a question about automation. And I think we have varying degrees of automation at some of our facilities. Some of them are pretty impressive when you got to see the level of automation, how quickly product can turn around for us. And I do think that's a differentiating factor in our ability to service customers and do it quickly. But yes, at the end of the day, I think long term for us, it has to be more than just price and on-time delivery. It has to be about the value-added services. You have to be able to help customers solve problems and find the products they need. Sometimes that's created through some of the shortage market capabilities. Sometimes that's really about helping them design something that they couldn't solve for themselves. But that's where the opportunity is for us. It can't just be about price.

Okay. We do like to highlight your geographic footprint and just the scale and the scope of your business as being kind of a key differentiator. Can you discuss maybe differences in maybe the margin profiles, growth profiles between the geographies? Or is it fairly consistent across the network?

It's going to ebb and flow. I mean, just like everything, I think right now in terms of growth -- obviously, we're not seeing the growth in Asia right now. But like I said, North America and EMEA are holding up quite well. Margin profiles, again, North America and EMEA tend to be stronger than Asia. So at least in the near term, that should help us with a little bit of margin retention in terms of hanging on to the higher-margin volume in North America and EMEA. But I think you're going to continue to see globalization and consolidation across the way. So I think we're positioned as one of the only global competitors positions us to take advantage of shifting dynamics in terms of where is the volume? Where are prior -- parts available? Where is production happening? We can't control everything from a geopolitical perspective, but we're well positioned to adapt probably better than just by anybody else.

Over the past several years, probably a decade or more, we've seen a considerable amount of consolidation among your supplier base, and you've definitely been a beneficiary of that. With the consolidation largely settled in, in terms of the bigger suppliers, how does that -- have you seen any change in the way that they're using distribution -- with the exception of the one?

Yes. No, I think -- look, I think there's a critical role for us to play as a distributor. I think the past couple of years have really highlighted that. I think with the severe imbalances in supply and demand, you see it in our results. We've been able to execute and deliver in a way that maybe nobody else could and suppliers certainly weren't going to be able to solve this on their own, and customers aren't going able to solve this on their own. And so I think we're well positioned. We're servicing the entire ecosystem here. There's absolutely a role for distributors to play. How is that going to evolve over time? Every supplier is going to have their own preference to how they go to market, like you say, some have consolidated and others are staying away from that. We can't control that. We can control what -- where we invest our next dollar, right, which is in our capabilities and continuing to try to show both customers and suppliers the value we can create. And I would point out that this goes for both of our segments. It's not just the components. We talk a lot about -- we think even on the -- also on the ECS side that now is a great time to be a distributor and probably more important than ever, as everybody is trying to manage transition to more of everything as a service, that's not just going to happen on its own without companies like Arrow sort of in the middle.

Okay. You kind of touched on the supply and demand imbalance. Can you maybe highlight what you're seeing in terms of supply availability today? Have you seen any easing and lead times? Are there still some hotspots out there?

I think we've seen a little bit of easing. I talked to quite a few folks about that this morning. Broadly speaking, the lead times are still very much elongated. I think everyone has examples of, well, hey, didn't this improve? And the answer is, yes, there's areas of improvement. I'd say, broadly speaking, though, it's stabilized over the last few quarters with slight improvements.

It sounds like great news.

It is. I mean, obviously, we want to get to where -- I don't know if we'll ever get back to the old normal, who knows, but we certainly -- nobody likes to have lead times that extend out several quarters. That's just a very difficult environment for everybody to operate in. This is something we were able to help everybody navigate over the past 2 years, but everything gets a lot easier and smoother, more predictable once those lead times come in a little bit more.

Okay. I'm going to pause, see if there are any questions... Yes.

Do you have a recession of what your inventories are for your customers and what their [indiscernible]...

Yes. No, it's a good question. I think where they are today varies, right? When we talk to customers, some of them are certainly telling us that they have exactly what they need. Others are saying, got too much, and you see that with orders slowing down. You also have customers that still can't get what they want, what they need. So I don't think there's like a universal answer for this. It varies by customer and -- but...

But like your reception involved, your inventories [indiscernible] it's a 2 part depended to each spend...

Is it what?

Product depended.

I think it's a little bit product dependent and customer dependent. Again, I don't think there's an overall answer there. I think we've continued to see our own inventory increase quarter-over-quarter for the last, I don't know, we'll call it 6 to 8 quarters. But a lot of that really is -- all of that has really been in support of growth. And a lot of the inventory growth is tied directly to pricing increases rather than an increase in units. So again, it's been, I'll call it, healthy growth in our own inventory. And I think customers -- again, it absolutely varies. Longer term, I think it's maybe too soon to call whether sort of the models and buying behavior changes. I think there's opportunities there for us, but I think we have to trend a little bit more towards normal, see how this falls out. And before we really understand what do customers want and how can we best serve them.