Good day, and welcome to Arrow Electronics Q3 2022 Earnings Conference Call. Please note today's Conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one again. Thank you. At this time, I would like to turn the conference over to Rick Seidlitz. Mr. Seidlitz, you may begin your Conference. Thank you. Good day, and welcome to the Arrow Electronics Q3 2022 earnings conference call. With us on the call today are Sean Kerins, President and Chief Executive Officer, and Raj Agrawal, Senior Vice President and Chief Financial Officer. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, 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 the risk factors in our most recent 10-K and 10-Q filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements. As a reminder, some of the figures we will discuss on today's call are non-GAAP. We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. You can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation, and a replay of this call. Following our prepared remarks today, we will be available to take questions. I will now hand the call to our President and CEO, Sean Kerins. Thanks, Rick, and thanks to all of you for joining us today. Before I discuss our most recent results, I'd like to share some thoughts about my first full quarter as the CEO of Arrow Electronics. You know, I spent much of this time meeting with suppliers and customers who continue to validate the essential role we play in their success. I've also had the chance to engage our leadership team to review our strategic priorities, explore opportunities for accelerated growth, and begin the process of refining our roadmap for the years to come. I look forward to sharing more about this with you over the coming quarters. Three months ago, I expressed how excited and confident I am about the future of the company. Today, I am even more motivated to lead this great company on a journey to realize its full potential, as well as the noble purpose we fulfill in the process. I'm also very pleased today to be joined by our new CFO, Raj Agrawal. Raj will be a key contributor toward helping us focus our resources and investments for growth, leveraging the totality of Arrow's capabilities to extend our market leadership, and advancing stakeholder engagement through our finance and other support teams throughout the world. I believe his strong financial acumen and business experience make him the ideal executive to lead our finance and accounting team and be an instrumental part of driving the continued growth and success of Arrow. Now, turning to our results, I'm delighted to report that this was our best Q3 ever, with sales growth of 14% year-over-year on a constant currency basis. This is a function of strong performance by both our Global Components business and our Global Enterprise Computing Solutions business as well. The dedication and focused execution by our team helped us deliver strong quarterly sales, gross profit, operating income, and earnings per share. While market conditions remain challenging, they also provide ample opportunities for us to showcase our commitment to the success of our customers and suppliers. In our Global Components business, demand for electronic components and associated design, engineering, and supply chain services generally remain healthy. On a constant currency basis, sales grew 15% versus prior year. Bookings have returned to a normalized rate following the exceptionally high levels we have experienced since late 2020. Yet despite bookings coming off all-time highs, we still carry a significant open backlog. While we are seeing some orders push out, we are not seeing cancellations to any material degree. Lead times, while relatively stable since prior quarter, remain extended for the majority of products we sell. While supply is improving modestly, it is still insufficient to support the delinquent backlog, which has built over many quarters. Therefore, customer service and support remain our top priorities, and our teams continue to work tirelessly to support the deliveries needed by our customers. Both the Americas and EMEA regions produced year-over-year growth rates in excess of 20%, as both regions experienced robust demand across most end markets and industries, in particular transportation, industrial, and aerospace. The business in both regions remains very healthy, due in part to our ongoing investments in design and engineering capabilities, which have generated growth in demand creation revenue. In the Americas, we did see some softness in our shortage market services as bookings normalize and supply begins to improve. This was the primary driver to the sequential sales decline in the Americas, as well as the margin compression for the Global Components business overall. Sales in our Asia region declined due to weakening demand in several end markets, along with supply chain constraints as fewer parts were allocated to the region. However, overall backlog in the region remains healthy as we benefit from servicing a variety of industries and providing products from a diverse group of suppliers. We are not overly concentrated in any one piece of the market. Again, in this challenging environment, we continue to work with our suppliers to secure parts for the most critical customer needs. In our enterprise computing solutions business, sales for the third quarter were above the midpoint of our guidance as demand for more complex enterprise IT content was healthy in both regions. On a constant currency basis, sales grew 10% versus prior year, fueled by growth in both regions. While supply constraints remain a challenge, we are starting to see some benefit from our historically high backlog. We continue to see strength in cloud, software, and enterprise IT infrastructure, and are well-positioned for the transition to IT as a service. In EMEA, we experienced strong growth in all of our markets and technologies. In the Americas, our growth came primarily from strength in compute, storage, and data intelligence. We continue to measure this business on operating profit growth, and we are pleased to report 9% growth in operating income on a year-over-year basis. We believe the prospects for this business will continue to improve across the balance of 2022 and into 2023. Now, before handing over the call, I do want to reiterate that our backlog remains strong and point out that our design win activities are at record levels. While there are indications that supply-demand imbalances will moderate over the coming quarters, I am confident that our capabilities are unmatched and that we are uniquely positioned to help our customers and suppliers navigate the road ahead. With that, I will now hand the call over to Raj to provide more details on our results and our go-forward expectations. Thanks, Sean, and thank you for the warm welcome to Arrow. A few moments ago, Sean shared his excitement and confidence about the future of Arrow. I share his enthusiasm and am extremely grateful for the opportunity to join the company and help it realize its full potential. I am impressed with the strong talent level in the organization, the deep business expertise, and significant opportunities for long-term growth throughout the business. I look forward to engaging more deeply with shareholders, employees, and partners over the coming months. Turning to our results. Q3 sales grew by 9% versus prior year or 14% on a constant currency basis. Changes in foreign currencies impacted sales growth by approximately $380 million year-over-year, which was slightly more than our expectation of $350 million. Sequentially, the business declined by 2%, primarily due to currency impacts. The average euro-dollar exchange rate for the quarter was $1.01 to EUR 1, compared to our previous expectation of $1.02 to EUR 1. Third quarter gross margin of 12.8% was up 20 basis points year-over-year, driven by higher margins in both Global Components and Global Enterprise Computing Solutions. Gross margin declined 30 basis points sequentially due to the normalization of our shortage market activities discussed earlier. Operating expenses as a percent of sales were 7.3%, down 50 basis points year-over-year. Interest and other expense totaled $51 million, above our prior expectation of $46 million due to higher rates on floating rate debt and higher borrowings. The effective tax rate for the quarter was 23.5%, in line with prior expectation and the target long-term range of 23% to 25%. Turning to cash flow and the balance sheet. Our Q3 operating cash flow was $141 million. Our cash cycle of approximately 63 days increased three days from the Q2 and 12 days year- over- year, primarily due to inventory increases, which are largely related to pricing. We have continued to make inventory investments to support customer demand and backlog and generated strong returns in the process. Our return on invested capital and return on working capital remain near all-time highs. At the end of the quarter, net debt totaled $3.5 billion, and total liquidity stands at over $2.3 billion, including cash of $334 million. Our liquidity remains in one of the strongest positions we have had in recent periods. Our strong financial position and flexible balance sheet positioned us to maintain our commitment to returning cash to shareholders through the repurchase of $259 million of shares during the quarter. At the end of the Q3, our remaining repurchase authorization stands at $629 million. Please keep in mind that the information I've shared during the call today is a high-level summary of our financial results. For more detail regarding the business segment results, please refer to the CFO commentary, which we published on our website this morning. Also note that the CFO commentary includes information on our fiscal calendar closing dates. Now, turning to guidance, midpoint sales and EPS guidance imply records for the Q4. Our guidance reflects normal seasonality and a continuation of the current market conditions which we have discussed. Midpoint, Global Components sales reflects an expected growth rate of 4% compared to prior year and 9% on a constant currency basis. Our forecast suggests Enterprise Computing Solutions sales will decline 2% year-over-year, but grow 5% on a constant currency basis. We estimate that the strengthening of the U.S. dollar, compared principally to the euro, will result in a reduction to sales growth of $420 million and EPS growth of $0.25. Compared to the prior quarter, we estimate that the impact will be $100 million to sales and $0.07 to EPS. I will now turn the call over to the operator for Q&A. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Sheerin with Stifel. Yes. Thank you. Hello, everyone. Good afternoon. Just my first question, Sean. I'm just hoping you can provide a little bit more color on the bookings and the backlog within the components business. You said it sounds like book-to-bill is around one, if you could clarify that. In terms of the pushouts you're seeing, what are the reasons? We're hearing from others that, you know, there's an imbalance and customers are waiting for other parts. Is it that or other issues? Are there any specific markets where you're seeing more of that versus others? Sure, Matt. Thank you. Happy to do some of that. You're right. Our book-to-bill rates have normalized. We're at parity, that's for sure. You know, as we said, you know, demand in China is a little more challenging than it is in the West. I think the demand trends in the West are more broad-based, and appear to be holding up, certainly in the Q4. I think if you look at our backlogs, our backlogs are still at, you know, all-time highs. They came down from, you know, its most recent high in Q2, but just a little bit. One thing our teams continue to do a great job of is working with customers and suppliers to validate and revalidate that backlog on a constant basis. It's still well beyond historical levels. Maybe 25% or more of our backlog is what we would call delinquent. We think that through all the validation work that we do, that a good chunk of the backlog is firm versus forecasted, which gives us some confidence in our outlook, certainly for Q4. You asked about pushouts. You know, we're seeing some pushouts that's been mainly in China, but as I said earlier, almost no cancellation activity. You know, to the extent that customers are looking to push out orders, it has more to do with them thinking about their production requirements for the long term. You know, demand patterns have not, you know, dropped precipitously except for maybe in segments that are closely related to, you know, consumer technologies. Okay. Thanks for that. As a follow-up, just on the margins, it looks like based on your guidance, gross margins are gonna be roughly flat quarter-over-quarter, so down 50 basis points year-over-year. I imagine part of that is due to the softness you're seeing in that sourcing services business. I think that's called Converge. Are there any other reasons for that? Is it mix issues or anything else? Matt, if you look at the, you know, the margin compression we saw in Q3 and some of which we'll see in Q4, you're right. It's primarily a function of just the normalization we're starting to see in the market and the, you know, the softness in the shortage related services that we provide. You know, it's probably good to go back and just, you know, remind everybody, you know, what we talked about when we described the drivers for our operating margin expansion over the past several quarters. You know, we said it was one part mix, you know, both region and technology. It was one part pricing, but it was also one part structural. You know, what gives me confidence about the future is, you know, while shortage related services are one part of our structural value add, the reality is we've invested for lots of other capabilities as well. You know, we continue to see the benefits of our engineering investments to capture design win margins. I think as I said in the script, our demand creation revenue mix improved, both sequentially and year-over-year, and that's, I think still has runway in it for many years to come. Our supply chain capabilities are now helping us serve our customers in different and value adding ways. You know, for example, we're now finding ourselves with a viable role in the automotive industry in a more direct capacity than we would have ever imagined in the past. When I look longer term, you know, yeah, we'll see some margin compression as it relates to shortage, but there's a lot of other structural, you know, investments that we've made to the model, which I think point us to, sustainable returns. Okay, that was very helpful. Thank you very much. Your next question comes from the line of Melissa Dailey Fairbanks with Raymond James & Associates. Hi, guys. Hello, Melissa. Thanks very much. Hello. Good. Good, thanks. I was just wondering, you had mentioned that, on the inventory increase, a lot of the increase was largely related to pricing. I was just wondering, in general, what are you seeing in terms of pricing across the portfolio, either from the suppliers, how much of that is, maybe providing a tailwind to revenue or operating profit? And then secondarily, you know, as your inventory, you are investing in inventory at kind of higher prices. Is there a risk that as kind of supply starts to normalize, maybe as we go into next year, some of the pricing that you're able to pass along, also normalizes? Hi, Melissa. Sure. I think I can easily speak to both of those questions. If we tackle kind of pricing first, just so you have, you know, some broader context. Price increases did drive the bulk of our year-over-year revenue growth. You know, we have seen price increases kind of abate in terms of number and frequency, but they've not disappeared altogether. You know, what we were able to kind of monitor in the Q3 is that we still have been able to pass on price increases and haven't yet seen any real erosion. You know, unless demand were to drop precipitously, I think prices are gonna remain fairly stable, especially in the technology sets, you know, still with longer lead times. If we go back to inventory and kind of look at it overall, we were actually pleased that it only crept up maybe 4%, quarter-over-quarter. I think that was the number. That was progressively less than we saw in Q2, in Q1 and so forth. You know, I think that you're right. The increase you see in inventory is almost entirely due to price increases. Our units were still down sequentially and year-over-year. I'd say, you know, we also feel pretty good about the quality of the inventory on hand. It's relatively current, and I'm not real concerned that we won't sell through it, you know, given the size of the backlog that we still see in front of us, and again, given the work we do to continue to validate, you know, its veracity. Great. Thanks. That's extremely helpful. Maybe just one quick follow-up on lead times. Are there any product sets or categories where lead times are still extended beyond normal ranges or is the supply starting to improve kind of across the board? You know, it's a mixed bag, Melissa. There are certain technology sets, you know, things like memory and CPU, where we've seen lead times come in somewhat, but there's still a great number of categories that, you know, for which lead times remain extended. For which we still carry, you know, significant backlog and, you know, that sort of gives some support to my point that I don't think, you know, prices are necessarily coming down anytime soon. You know, lead times will continue to come in as supply normalizes, but I think that's gonna play out over multiple quarters, and I think, you know, the overall demand in the market is still in excess of, you know, our ability to supply it. I think, you know, we're gonna watch this play out quarter to quarter, but I feel pretty good about where we sit today with our Q4 outlook. Excellent. Thanks very much. That's all for me. Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Hi. Thank you for taking my questions. I have two for Sean, and if I can sneak one for Raj, that'll be great. Sean, I wanted to ask you first on components. It looks like from the prepared remarks, you saw a year-over-year revenue decline in Asia, which seems to be a somewhat weaker performance than one of your main competitors. Can you talk a little bit about what impacted your revenues in Asia, and did you see any share shifts in that region? As we look into the December quarter, should we expect Asia to be stronger in the December quarter? What we saw in Asia in the Q3, Ruplu, was largely a function of the macro headwinds and COVID-related lockdowns that we experienced in China. You know, they were a little stronger and a little more persistent than we saw in Q2. We did also see a rotation of some level of supply from the East to the West, which meant a portion of our delinquent backlog in that market went unserved. You know, but I think the important point to kind of move to maybe at a higher level, Ruplu, is to think about our strategy. You know, we've been very intentional with our strategy in Asia and especially China, to focus on the industrial mass market, where we continue to see, you know, really healthy returns for our investments. To a much lesser degree, you know, the higher volume, lower return segments like mobility and compute. You know, so as I look at that market, you know, I think at some point the economic headwinds will, you know, diminish, and the economy will again improve. I wish I could tell you exactly when that will be, but I'm confident it will happen. Given our focus on, you know, the mass market, given the breadth of our line card, given the, you know, the substantial size of our customer base, I really like, you know, our position in the Asia market for the long term. Okay. Thanks for the details there, Sean. One more for you. In the ECS segment, in the Americas, you talked about muted growth due to supply chain constraints. Maybe can you talk about which parts were short and what was the impact on your sales from not having those parts? If you go back a little bit, Ruplu, you know, our business in North America has always been a little bit more weighted to infrastructure as compared to our business in Europe, which is a little bit more weighted to software and cloud. You know, our backlog in that business is also at all-time highs. And therefore, if you kind of map that to our regional mix, you know, North America carries a disproportionate amount of it. Some of the progress we did make in the quarter, you know, was a function of backlog relief, but the backlog levels are still high. I don't think that's gonna improve, you know, in the near term. You know, it tends to follow improvements in the semiconductor supply chain, you know, by a good couple of quarters. We will get benefit from that backlog over time, and that's why the, you know, kind of the top line in North America may be not as robust as what we saw in Europe. As we look forward, I think, again, we're continuing to make progress with software cloud and other aspects of our, you know, sort of IT as a service strategy. I think the momentum will continue to look better for us in North America over time. Okay. Thanks for the details there, Sean, I appreciate it. Raj, one question for you. Nice to have you on board. Yes. Can you Thank you. You know, I was just wondering if you can talk about your thoughts on two things. One is on the free cash flow expectation, the working capital, how should we think about Cash Conversion Cycle trending over the next couple of quarters, and then free cash flow for the year? Then also just in general, your capital allocation priorities. I mean, as you know, choose between buybacks or further delevering or M&A, I mean, just your thoughts on how you prioritize those different choices. Thank you. Absolutely. Let me take the second one first. The capital priorities, you know, our priorities really are to invest in the business. As you've seen over the last couple of years, we've invested a lot in our working capital, and that continues to be our number one priority to drive organic growth and expansion. Then, although we've not been too active on the M&A front the last couple of years, we continue to evaluate M&A opportunities, and that could be a use of cash. Then lastly, we use our excess cash flow over time, and I say over time because this business does go in cycles, to buy back our stock to the extent that we see as being attractive. We see our stock at this stage being quite attractive as an investment. That's why we've been buying back our stock. When we think about free cash flow and working capital, you know, we continue to have significant opportunity for more leverage as we need it. We've continued to invest in the inventory. As you've seen, the inventory balances have gone up over the last year or so, and we have, you know, As Sean said, we have a strong backlog and strong demand for the inventory balances that we have. You know, we feel good that we can clean out that inventory over time and really drive good cash flow in the business. I don't really see any issues with the business. You know, we have plenty of capital capacity in the business today to certainly invest more in the inventory and also to buy back more stock. That's really our strategy as we go forward. Okay. Thank you for all the details. Really appreciate it. Your next question comes from the line of Jim Suva with Citigroup. Thank you very much. You'd mentioned some order pushouts, you said geographically in China. Any sense on end market or end product like, you know, I don't know, industrial or surveillance or anything like that for end market? Hi, Jim. Yeah. It's been more a function of consumer-related sectors. You know, we did see a little bit of that bleed into, say, light industrial and parts of transportation in the quarter. But again, our teams still have a significant backlog, and even as they reschedule certain parts of it, you know, we still end up with near-term demand that is a challenge to satisfy. But I would say, you know, the pushouts have not been broad-based, and they're far less significant in the West. Okay. Cancellations have been really de- minimis. Then just a couple modeling things. Should we kind of anticipate inventory to sustain at these levels or be working down a little bit? I know it seems like pricing is starting to change a little bit and lead times are. Anything on inventory as we look at it? I mean, I don't view it as a bad investment, but I'm just wondering about since it's been building a lot through ASPs, how are you gonna be thinking about inventory looking ahead? I'm glad you said that, Jim, 'cause I kinda like the returns that we posted with the working capital in Q3 as well. Not to make light of it, we obviously watch this very carefully. You know, we take pride in the fact that we know how to walk the fine line between, you know, our returns as well as, you know, both supplier and customer satisfaction. We don't anticipate, you know, significant increases as this cycle plays out. Remember, in the aggregate, you know, we still have less supply than we have demand to go satisfy. As Raj points out, and as I said earlier, it's pretty current inventory. As you've seen through many cycles, I'm sure, you know, we've got, you know, great confidence in our ability to sell through it, at which point we start to generate lots of cash. I think we're managing that about as effectively as we can, given how complicated, you know, this market has been when it comes to trying to satisfy customers with scarce supply. Okay. Yesterday, the Fed raised interest rates. Can you help us understand what we should kinda be thinking about for interest rates for your company? I assume it would include the actions from yesterday, but if you can just help us with that. Thank you. Yeah. Jim, this is Raj. Our interest expense has been going up as you've seen in the Q3, and then we also guided to even more interest expense in the Q4, and that's largely related to the short-term rates going up over the last over this year actually, 'cause the Fed has raised from almost nothing to high threes now in terms of the federal funds rate. Our debt balance has been about 50/50 floating and fixed. That's why we're seeing the negative impact to the interest expense. It's quite manageable. It's still accretive for us to continue to, you know, do all the things that we've been doing, including buy back stock. You know, we'll sort of manage through it. as this business goes through its various cycles, you know, we'll get cash influx at some point in time, which will help us pay down some of the short-term debt. Thank you so much for the details. I will now turn the call over to Rick Seidlitz for any closing remarks. All right. Thank you for your interest in Arrow Electronics, and have a nice day. 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