Good day and welcome to the Arrow Electronics First Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brad Wendigler, Arrow's Treasurer and Vice President of Investor Relations. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to the Arrow Electronics First Quarter 2025 Earnings Conference Joining me on the call today is our President and Chief Executive Officer, Sean Karens, our Chief Financial Officer, Raj Agarwal, our President of Global Components, Rick Murano, and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans, and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release, and our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.aero.com, along with a replay of this call. We've also posted a slide presentation to this website to accompany our prepared remarks and encourage you to reference these slides during the webcast. Following our prepared remarks today, Sean and Raj will be available to take your questions. I'll now hand the call over to our president and CEO, Sean Kerins.

Thank you, Brad, and thank you all for joining us. Today, I'd like to discuss our first quarter performance, provide some commentary on the broader market environment, and then close with some thoughts as we look to the balance of the year. I'll then turn things over to Raj for more detail on our financials, as well as our outlook for the second quarter. For the first quarter, I'm pleased to report both consolidated and segment sales, as well as earnings per share that exceeded the high end of our guidance ranges. The overachievement was a function of several factors most notably in global components we saw improving trends across the broader market including healthy momentum in emea our enterprise computing solutions business delivered year-over-year billings growth with solid operating leverage and we continue to benefit from both our value-added offerings and our ongoing expense management initiatives now taking a closer look at our global components business our first quarter results were highlighted by stronger sales than anticipated with all three regions performing ahead of typical seasonality. In addition to the momentum we cited in EMEA, we saw sequential improvement in our industrial markets on a global basis alongside resilience in transportation, especially in the west. Both verticals represent a significant portion of our overall mix. We also enjoyed sequential growth in the market for IP&E, underscoring our continued initiative to specialize our go-to-market efforts in this attractive segment. Lastly, our value-added offerings, namely supply chain management and integration services, were once again accretive to our operating results. Now for some color commentary on a regional basis. Our results in the Americas were highlighted by a return to sequential growth in both the industrial and transportation segments. In Asia, we saw improving momentum across a number of verticals, including compute and consumer markets, And given first-quarter Lunar New Year celebrations, we were pleased to see sales results ahead of seasonal expectations. And then finally, our performance in EMEA was marked by strong sales activity in our industrial, transportation, and aerospace and defense verticals. Taking a closer look at the market more broadly, our leading indicators continue to trend positively. Our book-to-bill ratios improved throughout the quarter and now sit at or above parity in all three regions. Even with steady and manageable lead times, our backlog is growing again and should contribute to improving visibility. And notably, industry-wide intelligence continues to indicate customer inventory levels in areas of the market are trending for replenishment. Considering these and other factors, our guidance reflects our belief that demand trends are at a cyclical turning point and the business is beginning to return to more normal and seasonal patterns, creating a foundation for the future. As we move into the second quarter and consistent with the earlier stages of cyclical improvement, we do anticipate stronger trends in Asia and across the larger OEM customer base. Finally, rapidly evolving trade policies are clearly top of mind throughout the electronics industry. While we continue to both assess and mitigate the impacts of tariffs to our business, our top priority lies with our suppliers and customers. Leveraging our global supply chain network and related services offerings, whether aimed at improving their supply chain visibility or guiding them through effective component level selection, sourcing, and staging options, we are well poised to help them navigate an uncertain trade landscape. Specific to the impact of tariffs on near-term demand trends, we've not yet seen changes in customer behavior in the form of order acceleration to any material degree. While the tariff environment remains highly fluid and until the dust fully settles, longer-term implications are more difficult to predict. Now turning to our global ECS business. In the first quarter, we again delivered year-over-year growth in billings, gross profit, and operating income. Generally speaking, what we experienced in the fourth quarter of 2024 continued into the early stages of 2025. Our top-line momentum was characterized by continued strength in cloud and infrastructure software, along with an uptick in hybrid cloud technologies. Regionally, our performance in EMEA was broad-based, with growth across all of our enterprise technology categories. And in North America, we saw improving activity levels in the enterprise data center, along with continued acceleration of our cloud portfolio. Most importantly, our ECS backlog grew in the first quarter by more than 50% year over year. We believe this reflects our ongoing alignment to the higher growth demand trends across enterprise IT, many of which are now being served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes, now approaching one-third of our total billings mix. Last quarter, we highlighted several factors that gave us a level of optimism regarding our full-year outlook. These include recent supplier and customer-based expansion wins, along with the continued adoption of our Aerosphere digital platform. Given that context, our second quarter outlook reflects continued momentum in both regions, poised again for year year-over-year growth in billings, gross profit, and operating income when normalized. In closing, we're encouraged by the positive momentum we see in both of our operating segments. We believe it's the result of modestly improving demand trends and a relentless pursuit of our growth priorities. While we recognize the current broader economic and geopolitical landscape contributes to uncertainty, we remain focused on the factors within our control, those that we believe will keep the business on an improving trajectory. Lastly, I'm grateful for and impressed by the resilience of all of our Aero teams and employees across the globe. They continue to lead us through the most pronounced cyclical correction in recent memory, and they do so with determination and dedication each and every day. With that, I'll hand things over to Raj.

Thanks, Sean. Consolidated sales for the first quarter 6.8 billion dollars exceeding our guidance range and down two percent versus prior year or flat year over year on a constant currency basis global component sales were 4.8 billion dollars above our guidance range and down one percent versus prior quarter or flat sequentially in constant currency terms enterprise computing solution sales were two billion dollars above our guidance range and 18% higher versus prior year, or 19% higher year over year in constant currency. ECS billings grew 5% in the quarter compared to the same period last year, moving to other financial metrics for the quarter. First quarter consolidated non-GAAP gross margin of 11.3% was down approximately 120 basis points versus prior year, driven primarily by overall mixed in both Global Components and ECS. Sequentially, our consolidated gross margin was lower by 40 basis points due to seasonality within the ECS business. Global Components gross margin was 11.6% and Enterprise Computing Solutions was 10.8%, both on a non-GAAP basis. Our first quarter non-GAAP operating expenses grew $13 million sequentially to $593 million as we balanced managing costs with reinvestment priorities. Non-GAAP expense levels continued to decline year-over-year, with the first quarter approximately $25 million lower compared to the same period last year, demonstrating the results of recent initiatives and our continuing focus on expense efficiency. In the first quarter, we generated non-GAAP operating income of $179 million, which was 2.6% of sales, with global components operating margin at 3.6% and enterprise computing solutions at 3.8%, both on a non-GAAP basis. Interest in other expense was $56 million in the first quarter, and our non-GAAP effective tax rate was 22.9%. And finally, non-GAAP diluted EPS for the first quarter was $1.80, which was above our guided range, mainly due to favorable sales results. Turning to working capital. Networking capital declined sequentially in the first quarter by approximately $340 million, ending the quarter at $6.4 billion. Inventory at the end of the first quarter was $4.8 billion. Our cash conversion cycle was unchanged in the first quarter at 77 days. Our cash flow from operations was $352 million in the first quarter. this was the seventh consecutive quarter of positive cash flow generation. Gross balance sheet debt at the end of the first quarter was $2.8 billion. We repurchased $50 million of shares in the first quarter, and our remaining repurchase authorization stands at approximately $275 million. In the short term, we are continuing to balance our capital priorities with managing our debt ratios.

Now turning to Q2 guidance.

We expect sales for the second quarter to be between $6.7 billion and $7.3 billion. We expect global component sales to be between $4.8 billion and $5.2 billion, which at the midpoint is up 4.6% from prior quarter. In enterprise computing solutions, we expect sales to be between $1.9 billion and $2.1 billion, which is approximately up 7.5% at the midpoint year-on-year. Recent tariffs represent uncertainty, so we have not factored in recently enacted policies into our revenue guidance. Based on what we know today and current policy, we estimate that incremental tariffs could increase global component sales by two to four percentage points sequentially, and we expect minimal impact on ECS sales. While tariffs introduce significant complexity, we are working with suppliers and customers end-to-end and our focus remains on mitigating impacts through intelligent routing and where necessary passing through and collecting incremental costs and potential credits. We are assuming a tax rate in the range of approximately 23 to 25 percent and interest expense of approximately 60 million dollars and our non-GAAP diluted earnings per share is expected to be between $1.90 and $2.10. And finally, given recent weakness in the U.S. dollar, particularly relative to the euro, we estimate changes in foreign currencies to be a tailwind in the second quarter, increasing reported sales by approximately 80 basis points or $60 million compared to the second quarter of 2024.

The details of foreign currency impact can be found in our earnings release with that sean and i are now ready to take your questions operator please open the line at this time if you'd like to ask a question press star then the number one on your telephone keypad our first question will come from the line of joe katrocki with wells fargo please go ahead yeah thanks for taking the questions uh maybe first just in in terms of the guidance commentary um can you help us just maybe understand a little bit more what you're trying to say in terms of the two to four percent increase in component sales not included in the guide is that to mean that essentially that price increases or surcharges or whatever you want to call it for for tariffs that's not contemplated in your guide for tariffs that could potentially go into effect for semiconductors that are right now exempt and then how do you think about i guess like the pass through of that or is that a potential kind of risk to EBIT as we think about the guidance?

Sure thing. Let me offer a little context as to how we've approached the tariffs puzzle, and then I'll let Raj maybe speak to some of the details. He's been in the thick of this for several weeks now, as you might imagine. So as you probably know, tariffs aren't new for us, but we do recognize how much more complex the recently implemented tariffs are. And so we've been taking that pretty seriously based on what's actually been implemented. We feel like we've got a pretty good handle on the top line estimate, and that's where the 2% to 4% comes from. And you're right, that would represent basically surcharges or price off lifts to reflect the charges that we have to pass on and that we can't mitigate otherwise. But we've also got a whole variety of mechanisms either in place or being put in place to mitigate margin risk. Those include things like intelligence sourcing and routing, foreign trade zone capabilities, and then a whole variety of process changes that we're implementing throughout our selling and support operations. I think even if existing or more significant tariffs don't take hold for the full year, we still have to largely assume they will. and plan accordingly so that we're prepared accordingly. I think, you know, we feel like Q2 is going to be a very transitional quarter. There's still plenty of confusion at the customer level, a lot of, you know, uncertainty surrounding what's ultimately going to play out. So with that, I'll let Raj maybe speak a little bit more about some of the numbers and how we're approaching the financials.

Yeah, Joe, we did want to call out the potential impact of the current tariff policies in a separate range because it is volatile. It keeps moving around, as you know. It's certainly complex, as Sean just described. And so it is meant to be a two to four percentage point incremental benefit to the top line of global components. That's not in our baseline guide. Our baseline guide is really meant to show you what we believe the core business is doing. Before we talk about the incremental impact of current tariff policy to the extent that something goes into place after today, that's not envisioned. It really is based on what we know today that's going to impact the top line. So we wanted to make sure that was called out separately so it's very clear to you on the impacts that we're talking about.

And part of the reason for that, Joe, is we really wanted to give you our best view of the underlying business and, you know, how the cycle is really playing out because we think we're at kind of a modest turning point and we didn't want to conflate the two conversations yeah understood and i guess just just to clarify and i've got a follow-up but just to clarify that the two to four percent assumes that like the the export uh exemptions for semiconductors into the u.s that's currently enacted continues for the entire quarter is that the right way to think about it yeah yeah the the two to four percent assumes that everything that's in place as of right now continues on for the balance of the quarter obviously things could change but we've not assumed any change at this stage okay and then just as a follow-up you talked about customer inventories trending towards replenishment kind of stages I guess how do we think about that comment relative to arrows inventory and in the in the trends that we should expect to see there Obviously, your inventory stayed somewhat elevated here, but I guess is it the right inventory in terms of where you're seeing the pull from customers?

Yeah, Joe, in general, we think we're at a pretty good level. Just as a reminder, I think we talked about last quarter that since late 23, inventories had come down over a billion dollars from their peak. I think, you know, we would consider the uptick in the first quarter of this year as fairly marginal, but your instinct is right. We feel like our turns are roughly in line with current sales levels. They're kind of in line with historical ranges, so we feel pretty good about them. It doesn't mean that there aren't still, you know, pockets of excess inventory and with certain component types, but we're pretty comfortable that the aging profile of our inventory continues to improve. And, you know, as the industry continues to eat through pockets of excess, you know, the good news here is that we see our inventory levels normalizing, you know, more closely in line with actual demand signals. And that's kind of where we want to be. And that will tell us that, you know, the market is normalizing in the right direction. I would say, though, to your point, since we're starting to see, you know, signs of incremental improvement, you know, we also want to be on our front feet, not our heels. And so we've got to be conscious of, you know, what customers are going to need, and we want to be able to support, you know, growth, you know, as and when the market recovers.

Okay. Thanks. Thanks for the details.

Our next question comes from the line of William Stein with Truist Securities. Please go ahead.

Great. Thank you. I'd like to revisit the inventory question. Maybe I didn't follow the question or the answer, but let me set it up this way. We just saw inventory increase. And, you know, your inventory days are still, I don't know, 15 or 20 days above where you were a few years ago. Perhaps what you're saying, and if so, that's fine. I just want to get it clear. Is this the approximately correct long-term level of inventories that we're shooting for, or are we still at an elevated level where, over time, we are trying to take it down?

You know, Will, I would start by saying that, you know, there are still some pockets of excess in our inventory profile, as I just mentioned. We have seen the aging profile improve. There's still probably a little bit more work to do. so turns could get incrementally better across the course of the year, especially if what we suspect is playing out does play out. But it won't be dramatic. We don't feel we're far from where we ought to be. And I would say the one incremental difference between where we sit now versus where we might have a few years ago is we have been somewhat intentional about our commitment to the market for IP&E that does require a different working capital profile so we can serve that business in the way that, you know, it's become accustomed to being served. But beyond that, no, we think we're in the right neighborhood.

Yeah, just add, Will, that, you know, over the last year, or since the peak of inventory levels that we had, we've actually bottomed down by about a billion dollars. And, you know, so I think that's a good result. We've also generated a lot of cash flow, which is what you would expect when the business is declining. But now as we go into growth mode, You know, as you look at the absolute dollars, you know, we're going to want to deploy working capital wherever it's needed. So, yeah, the turns may look different or the number of days may look different, but those things will improve as the business grows.

Thank you. That's very helpful. One other, if I can, I think you posted upside relative to the high in both and markets, but I want to focus on the systems business for a moment. You know, very strong revenue performance, especially relative to how you guided and you've highlighted strength in Europe. A dynamic that many companies have highlighted this quarter is pull-ins in response to elevated future risks from tariffs. And I wonder if you think that is not what we're seeing in your business. and if not, can you explain it for us? Thank you.

Yeah, sure thing, Will. I kind of expected that question for the components business, not the ECS business, but there you go. We're pretty confident that we've not... All right, well, let's start with where you started on the ECS business. First of all, I would just say the short answer is we're pretty confident our outlook does not reflect any order acceleration in that business. And, you know, what we, I think, mentioned in our prepared remarks, you know, we feel really good about, which is the momentum we saw to close out the year continued into Q1. And we kind of see more of the same in Q2. We're kind of striking a good balance between, you know, the above average growth rates we're continuing to enjoy in cloud, along with some improvement in the traditional data center for hybrid cloud infrastructure, along with continued growth in our infrastructure software portfolio. So I would say steady as she goes. We're obviously trying to make sure that we continue to execute as well in North America as we have been in Europe, but we like the path we're on and you know it's important not to confuse the you know the reported sales line with the gross billings line because what that will do from time to time is sort of you know create some volatility in the the reported sales number from one quarter to the next and that's largely a function of how we account for all the different skews that that team sells but if you look at the underlying operating margins on a billing spaces they were flat year over year in Q1, and we assume they'll be at least flat year over year in Q2. The reported sales number will vary, but the underlying health of the business is strong and improving. Thank you.

Again, for any questions, press star one, and our next question comes from the line of Joseph Lehman with Bank of America. Please go ahead.

Hi, this is Joseph on for RooBlue. Were you seeing any pull forward in the quarter?

Hey, Joe, I assume your question is one more about our electronics business. And here's how we would answer that question. You know, I'd start with, we didn't really see any material impacts in that way in Q1. And then we don't really see a whole lot of that playing out in our Q2 outlook either. We are seeing some of that in Asia, specifically China of this quarter, but we don't think it's going to move the needle. And then when we look at our business in the U.S. where you'd expect that question to be very valid, we're obviously monitoring this very closely, but when we break it down, we haven't seen an uptick in our quick turns activity. That would be evidence of a lot of order expedites, and we haven't seen that. And when we look at the backlog for our U.S. business, we feel kind of good because it's not just building in magnitude, it's building out in time, meaning into Q3 and Q4. And obviously, if it was more about tariff avoidance, it would be, you know, more of the immediate term. And we haven't seen any abnormal, you know, uptick in order activity related to basically country of origin China for content. So all of those things tell us, you know, this outlook is, you know, probably not overly impacted by, you know, any of the tariff avoidance activity as best as we can see it today.

Okay, thank you. That makes a lot of sense. And then just one follow-up. So would you say you have improving visibility in C2H25?

Yeah, visibility is improving. You know, we always said the preconditions for an uptick as we go through this cycle would be, you know, first of all, you know, industry-wide inventory levels have got to come down, right? The industry has got to eat through all the excess. And so we think, you know, what we're seeing, what we saw in Q1, you know, certainly in Europe and what we see in Q2 is a level of replenishment playing out. You know, that had to happen. And then beyond that, you sort of say, well, what's going to signal you know the potential for recovery and we've always focused on three things you know one our book to bill ratios have to improve and they have uh two backlog has to grow again uh it grew again for the first time in quite some time in q1 and we expect it to grow again in q2 and as part of that the the backlog uh as i said is building out in time not just in magnitude so our visibility into Q3 and Q4 is improving and then the third condition you know we always pay close attention to you know the whole portfolio of suppliers we represent because ultimately they're going to lead us out of this and as we see their guides improve you know we think ours

should follow okay thank you thanks Jill and that will conclude our question and answer session I'll turn the call back over to Bradwin Bigler for any closing comments thank you all again for joining today's call have a great day ladies and gentlemen that will conclude today's call thank you all for joining