Okay, good morning. Day two of our conference. This is Melissa Fairbanks. I am the IT Supply Chain and Analog Semiconductors Analyst here at Raymond James. We are happy to have the team from Arrow with us today. Joining us is Anthony Bencivenga, he's Director of Investor Relations, and we've got a new team member with us today, Nathan Troscinski. Excuse me, Nathan. So we'll kick off the Q&A now. We're just doing a fireside chat. Maybe the best way to kick it off is, Anthony, if you could give a quick review of the September quarter results, and then also get into a little bit of the December quarter outlook. Yeah, sure. Thanks, Melissa. Thank you for the invitation, and thank you for the opportunity to talk with you today. Appreciate that. You know, looking at our Q3 results, they were really pretty much align with our expectations for the quarter. However, our expectations incorporated an inventory correction, where we are today in our components business, and some softness in our ECS business. So I'll unpack that a little bit for you. In our ECS business, we go to market primarily in two regions, in Europe, as well as North America. In the Europe region, our Enterprise Computing Solutions business, this is our IT business, if you will. We sell IT, cloud access, software as a service, and hardware, through a two-tier model, through VARs and MSPs to our end customers. Europe has been very strong for a number of quarters. A little softer more recently, but really on some difficult compares, because of the strength recently. Whereas in North America, a little lighter in terms of IT spend in North America being a bit softer. Some of the larger customers there are a little more conservative with their IT spend. So that's the backdrop in our Enterprise Computing Solutions business. In our components business, you've got, I'll call it steady demand in the West. So in Europe and in North America, demand really has been holding up, I would say, with our end customers. But there's an elevated level of inventory because our suppliers, our component suppliers, lead times were so long, so elongated, for a period of time, you know, through the pandemic. Now that lead times have come down and suppliers' ability to ship, kind of, has come to fruition, they're shipping past due backlog and creating an inventory situation where most customers, contract manufacturers, as well as OEMs, are claiming that they have, you know, excess inventory compared to their demand. So, in the West, while again, like I said, our demand has been, or our end customers' demand has been steady, there still is elevated levels of inventory causing muted ordering on distributors. And in Asia, there's a bit of a combination where, yes, there's the same situation with inventory, excess inventory, but there's also softening demand, which has been in place for, you know, probably better part of the year, right? If you look at earlier this year, China, which is a significant portion of our Asia business, was soft, you know, coming out of Chinese New Year, as well as the additional COVID lockdowns that they had. I don't think we've ever seen sort of the bounce back in China. And so Asia, overall, I would say, has been muted from a demand standpoint. So that's kind of what I meant with regard to the expectations, and our expectations incorporated that softness. The good news is, you know, as we, you know, look at this, you know, inventory correction that we're in and the cycle that we're going through, you know, Arrow has been through these cycles many times before, and we know how to manage them through them. We do it with, you know, careful consideration of costs, stay focused on working capital, while at the same time continuing to focus on some areas where we're adding value to customers and have some margin-accretive initiatives. We wanna remain focused in those areas as well, so that when the markets do fully normalize, we're kind of ready to come out, and we feel comfortable about our place through the cycle and how we'll come out of it. Okay, great. We'll talk about some of those margin-accretive initiatives that you're investing in in a little bit. But I did wanna kind of highlight one thing that's been unique about this cycle, for lack of... I don't know if we can really call it a true cycle this time, based on the way that the supply chain, you know, the- Right. It was kind of unprecedented. But even as we've seen some of the inventory correction and the demand begin to decline, your margins are still holding up reasonably, I mean, relatively well, very well compared to past cycles, I would say. Yeah. Yeah. So is this something that you believe is just we've got a more sustainable, profitable model longer term? Yeah. Yeah, thanks, Melissa. Thanks for that question. You know, if you look, if you look back, let's say, pre-pandemic, in a normal, normal environment, our operating margins in Global Components were in the, in the mid 3%-4% range. And if you look, you know, more recently, they're in that, you know, quarter, sort of 5-ish% range. We cited on, on the last couple of earnings calls that we think the long-term model in a normal market for the, for the components business is 5.5%-6%. So it, it's quite a structural change there. So margins have increased due to a number of factors, right? One is, kind of, pricing, which increased for a number of reasons through the pandemic, and drove, you know, tailwind to revenue as well as margin, and a lot of that is normalized. But most importantly, the margin-accretive initiatives, the value-added services that we've been investing in and providing to our suppliers and to our customers and for our suppliers, we think really have elevated our margins structurally, and it's the, you know, leading with engineering resources. We have several thousand engineers at the company, many of them are field applications engineers. We lead with our customers with field applications engineering, doing what's called demand creation for our suppliers. And so we're, you know, developing for our customers, designing in a component for our suppliers. When we do that, it's a kind of well-established practice, and the industry will register that design win with the supplier and earn a higher margin. We're focused on using our engineers for engineering services. So we have a business within Arrow, where we are helping our customers design full products, be they application-specific integrated circuits or entire products or software applications. So that's a higher margin as well. And then we also do supply chain services, where we help our customers manage their complex electronic supply chains. And that's a fee-based business, which is higher margin. So we've been investing in these areas over a, you know, number of years and much more recently been focusing on them more. And, you know, we think we've structurally improved the margin of the business. And, and the proof point that we look at is, if you kind of look at the last cycle that we've gone through, which would probably be like 2019, our operating margin in Global Components is about 100 basis points better now than it was back then. And so, you know, we've got something there. Our customers and our suppliers enjoy the services, and it's margin accretive. I think that's something really important to understand, and there's a little bit of confusion sometimes when I speak to investors about why your suppliers would be willing to give you a margin for demand creation. And it's just the fact that you've got such a broad-based- Mm ... footprint and network of customers, that it is valuable. And that is, you know, kind of you're partnering with your suppliers. Yeah. Absolutely. So, you know, just to maybe add on to that, we have, you know, 220 selling offices around the world, right? And so in these offices, we've got field selling people, we have inside salespeople, and we have field applications engineers. They all have intimate, intimate relationships with our customers. And so they know, you know, the components engineering teams within those customers. They work with them closely, and they do, you know, in a sense, create the demand for the supplier, right? 'Cause that product design that the customer's working on may not have housed that component from that supplier had we not- Yeah ... been involved. So I think the suppliers appreciate the demand creation- Yeah ... and they're willing to pay for it, and customers certainly appreciate it as well because they're getting assistance incorporating some components they may not be entirely familiar with or in fact might be just resources. We're helping them from a resource standpoint as well. So there's a number of ways we help, and I think suppliers and customers appreciate it. Excellent. I think it might be important, just before we move on to some longer-term trends, to talk about the shortage market. Because we did see, you know, if you're just looking at the headline numbers, for a period of time, your Global Components margins were well above that target. So maybe just a quick reminder, how did the tight supply market impact your revenue and growth over the past couple of years? The shortage market, what that is, and how that's normalized, so now we're looking at real true margin performance. Yeah. Yeah, that's good. Good, good question. So the, you know, again, through the pandemic lead times, which were historically normal at, let's call it 15-20 weeks on average. We're looking at- Mm ... very many classes of components, but if you just kinda take an average lead time of 15-20 weeks, those lead times ballooned to, you know, 40-50 weeks and sometimes more. Suppliers had a very difficult time, you know, really just supplying components. And so many sort of deep shortages of particular components were created during that timeframe. And that created a situation where you had to, you know, be sort of clever about how to provide these components to customers. We have a business within our components business, where we can deal with those types of components. We were able to help our customers through those situations and provide those components that were in real short supply. The golden screw, if you will, you've heard that term, right? And so, yeah, that created certainly a revenue tailwind for a period of time. It created a margin tailwind as well, because prices naturally, as you'd imagine, were elevated on those components that were in very short supply. So now, the shortage activity, 'cause we monitor shortage activity, requests for components that are short, again, it ballooned and peaked probably in the middle of last year- Mm-hmm ... and is, it is now sort of back to pre-pandemic, I'll call it, normal levels. So we think of the shortage market as fully normalized at this point. We think sort of on a go-forward basis, sequentially, there will be no sort of impact from that shortage market. There may still be some year-over-year tough compares- Sure ... because we had some, you know, year ago quarters that still incorporated some shortage market activity, but going forward, it's largely normalized and behind us. Okay, great. Interestingly, outside of the shortage market, you know, that, that pricing is not sustainable or normal. You know, I think Raj may have said at one point, you know, 10-30 times what a normal price would be. People were willing to pay- Yep. For that. But outside of the shortage market, we've actually seen pricing hold up fairly firm. We've heard that from some of your suppliers, we've heard that some, you know, from some of my EMS coverage, and then certainly from you and the rest of the distribution market. What's your view of pricing longer term? Do we get back to a more normalized pricing environment next year, now that we've got kind of supply and demand in balance, but off of a higher level? Yeah. So, you know, you have to, I guess, think about the setup, and how or why we have the pricing that we have today, and it really comes down to the last 18 months to 2 years of inflation, right? So suppliers' costs are higher. Mm-hmm. They've been able to raise prices, which is something they haven't been able to do in probably a decade or more. And so, we don't see really a willingness to bring, let's call it, list prices down. And again, this is different from the- Sure ... shortage pricing. So this is, I would call, you know, list pricing, let's call it. Right, right, right. So, we don't see a sort of willingness to bring list prices down. There may be some normal market dynamics that ensue, we do believe off a higher base. And I think it's, you know, inflation may have come- Yeah ... back to more normal levels, and really that just means the pace of cost increase has slowed. Mm-hmm. But costs are still increasing. So yeah, this is kind of the scenario we see as it played out, where costs will- Mm ... remain somewhat elevated and take some normal market dynamics from this point forward. Okay, great. I think that leads into a good time to discuss the inventory levels, because I know some of the concerns, inventory levels on your balance sheet and pretty much across the industry are still elevated. There's some concern that we're going to see some massive price correction, and all of a sudden, you know, the inventory that you're holding is far less valuable. Maybe talk about your expectations for the inventory reduction. You have seen inventories come down somewhat modestly, but, you know, probably more than elsewhere in the industry. But is there any risk of obsolescence or some of that pricing risk? Yeah, yeah. You know, when we look at our inventory and kind of peel back the onion a bit and dissect it, there probably the majority of our inventory is either application specific or customer specific or use case specific in some way. These are not... Again, the majority is not purely commoditized. So we have, you know, some degree of confidence that customers need this inventory. Mm-hmm. In fact, you know, our backlog, the dynamics within our backlog are such that there's really been, I would say, more push-outs as opposed to cancellations. Again, that gives us some degree of confidence that they need this inventory. Sure. and you're right, inventory came down in Q2. It was a modest decline, about $75 million. Inventory in Q3, while it increased, there was a sort of a strategic acquisition of inventory we made for our supply chain services offering- Mm-hmm ... that that caused that inventory increase. Net of that, you know, we would have seen inventory levels decrease probably about the same as we saw in Q2. So we think that's the beginning of the countercyclicality in the business, right? So in a market upswing, we are investing in working capital. We're buying inventory to support the business. Whereas in a market downturn, generally speaking and looking at our history, we tend to reduce inventory and throw off some excess cash, gives us some balance sheet flexibility, right? So we think what we saw over the last couple of quarters is the start of that countercyclicality. We do expect, looking forward to reduce inventory. I can't tell you quarter- by- quarter. Sure. But generally speaking, in a downturn, we expect to reduce inventory and generate cash. Okay. So through the pandemic, some of your suppliers were generally holding inventory out of distribution. They preferred to hold it on their own balance sheets, you know, believing that they could better direct the supply when it was in shortage. So as lead times have normalized, have you... And maybe this was part of the strategic purchase of inventory in 3Q, but have suppliers started to push more or release more inventory to the channel? And are they kind of leaning on you to take more inventory, so maybe we're not going to see inventories correct quite as quickly as we had hoped? Yeah, I guess the way I think about it, the inventory that wasn't flowing- Mm-hmm ... was due more to longer lead times and inability to ship product. Okay. But I think as suppliers' ability to ship came back in line. And by the way, at this point in the cycle, when their lead times were coming down, they had already had, I would say, elevated levels of past due or delinquent backlog. Okay. Right? So, so their ability to ship, you know, comes at a time when they have this tremendous past due backlog, and they release the past due backlog, which is within their rights to do. It's past due. But it does create... This is the sort of supply surge- Right ... that has us exactly at this point where we are in the cycle with elevated inventories- Right ... kind of throughout the supply chain. Okay.... Great. Yeah. So I think now that, I mean, we've kind of been waiting for this working capital release, kind of waiting for some of the more normalized, you know, downcycle dynamics. As you are kind of generating more cash than maybe we have over the past couple of years, what are some of the priorities for cash use? How do you balance between buybacks? You know, you've been a tremendous re-purchaser of your own stock over the past few years. Yep, yep. Reducing, you know, the share count by, I think it's almost 20% over 3 years. Yes. Yeah. Something like that. I may have the math wrong, but, you know, in the near term, how are you balancing between further buyback activity? Yeah. or bringing down some of the interest expense Yep. -reducing some of that revolving debt? Yep, yep. Thanks. So the kind of first and foremost, when it comes to our priorities for, you know, use of capital, we operate within a framework of our investment grade credit rating, right? Mm-hmm. So that's important to us. We do carry debt, and we wanna maintain an investment-grade credit rating. So that's gonna guide some of our decision-making, our tactical decision-making. But the first priority would always be to invest in working capital, to invest in our organic, you know, growth initiatives. Now, ironically, I just said we would, you know, we have kind of elevated levels of inventory, and I think we're looking to reduce inventory in the near term, but generally speaking, we wanna be ready to invest in inventory, when the cycle- Sure ... you know, calls for it. The second priority would be, believe it or not, M&A. Now, we haven't done M&A in probably since 2018 in any significant way. But we do have these margin-accretive initiatives, and to the extent we can go faster in those areas, we would look to augment and do some M&A with the right target. And then third, like you said, we'll take the excess cash, and we'll deploy it, and we've been using buybacks pretty effectively over the last couple of years. Yeah. I guess maybe we could talk about some of those margin-accretive areas that you- Mm ... might be looking at M&A. Talk about, you know, would that be within components or ECS or- Yeah -just more investing in some of the demand creation- Yeah Supply chain services? Yeah. So I guess maybe I'll frame the these accretive initiatives, these growth opportunities, these areas where we add value for our customers and our suppliers. And it all kind of comes from or was built upon the foundation that Arrow has built over the last, you know, 80 or so years with I mentioned these 220 sales offices. We have 40-some-odd distribution facilities with value-add capabilities, and we operate in about 90 countries. So the suppliers and customers, you know, we've been listening, they've been asking: What more can we do? This is the areas that we're investing in, and so the first is demand creation. This is where we're utilizing our, you know, a portion of our thousands of engineers, leading with our customers to integrate components, as I mentioned earlier, design engineering, where we're designing full products, or portions of products for our customers. That's an engineering services type of business, so- Mm-hmm ... some accretive margins there. And, and maybe I didn't explain the supply chain services business all that much. I'll take the opportunity to do that now. This is where, again, we have this tremendous foundation of capability and logistics and warehousing and what have you, and we'll assist our customers in managing, literally managing their electronic supply chain. It could be an automotive manufacturer, could be a hyperscaler building out data centers, and they may need help with their electronics supply chain. And so we have the capabilities, we have the relationships with suppliers, we can house material for them, place orders for them, use our MRP system for them, ship to maybe they have a dozen plants all around the world and literally manage that supply chain and envelop it in a software product that we have called SiliconExpert, where we can provide visibility and transparency and control so that they can reduce risk in their global supply chains. So these are the areas where, you know, acquisition could play a role. It might be more engineering resources, it might be targeting a specific vertical, it might be targeting a specific capability and supply chain services. And again, to the extent of a target where an appropriate target were found, we would, we'd move forward in that area. Okay. Are these, are these areas that differentiate Arrow from others in distribution? You know, I know-... historically, it's just been a pure fulfillment type of business. Yeah. We've seen some others in the industry make some investments, you know, slightly different kind of targets. But more broadly, how does this differentiate Arrow? Yeah. Yeah. I think, again, pure fulfillment is the foundation. Mm-hmm. Yeah. You have to be able to do that well, and I think we do it probably as good as anyone in the world. And then it comes down to what more can you do for your suppliers and your customers? We have, you know, great supplier relationships. We serve and enable their ability to get to the mass market of tens of thousands of customers. And then in order to layer on these additional capabilities, we do it with scale and scope and the great team at Arrow. And I would say that altogether, that really encompasses kind of our advantage in the market. Yeah. Yeah. It's great because historically, we've always thought of distribution as being, you know, just fiercely competitive on price. It's pretty clear that, you know, this is not the case anymore. Right, right. Makes for a much more rational industry. Yes, yes. Maybe I'll stop and see if there are any questions. Yep. Yeah, if I may, you know, there's a lot of talk about supply chain in China in terms of the geopolitical. I mean, how does that impact [audio distortion]? The question is on geopolitical risk in China, in the supply chain. Yeah. So we naturally sell into China. We have customers that are multinationals operating in China. Some have, you know, thought about moving or have moved operations out of China. We're sort of agnostic to that. I would say we're probably set up in somewhat of an agnostic way, that depending on how this plays out, if suppliers you know within China need distribution within China, we can do that. If suppliers outside of China need distribution within China or outside of China, we can do that. So I think we have all the bases covered and are remaining flexible and ready to kind of capitalize whenever this plays out. Then I wanted to ask, given your experience in prior IT downturns or maybe demand signals, where are we in this? And then also maybe a similar question on the component side, you know, we're maybe 2 quarters in, and then if you have Q4, maybe 3 quarters in, is this usually—you know, 3-4 quarters? If you could comment on both of those. Yeah. On the IT side, you know, there's a little bit of a different dynamic going on. We have real strong performance in Europe. That business is focused toward middle-market customers, and I would say in Europe, there's a you know, great willingness to adopt cloud and software as a service. And so we've been migrating along with our customers and really enabling that transition. In the U.S., North America, I would say we're a little more focused on larger enterprises and even global type national companies. And so the market in North America is a bit softer there, and we're investing modestly in North America to sort of make that line card and customer complexion look a little more like Europe. And I would say that, you know, we're dealing with some softness in North America, in IT spending, and part of it is, you know, exacerbated by our customer mix and our mix there. So that's something that we look to turn around, and I would say we expect some improvement next year. Nothing, maybe to, I wouldn't call it sort of- It can't get much lower. Yeah, yeah. I don't know that I'd call it a V-shaped improvement or... but nonetheless, we do expect some improvement for two reasons, as the market improves and as our mix improves. That's on the IT business. In components, I would say, you know, Asia, there's been some signs of improvement. Again, I don't know that we can call for broad recovery yet, but there's been some improvement in transportation, in networking, and communication, as well as computing. Typically, if you look in general at these types of cycles, they've lasted two to three quarters, where a quarter or two in, don't know if that means, you know, middle of next year, we start to see some improvement or not. It's really hard to predict, as you know. I know you're not looking for an answer in terms of a date. Give us, give us the exact date. Yeah. But, you know, I think, you know, we're gonna, you know, stay focused on the things that we can control. We're gonna stay focused on the areas that we're helping our customers, you know, with demand creation and helping our suppliers in that same regard. And again, I think we look at our backlog, we look at our book-to-bill, which is now stabilized, and we're starting to feel like, you know, this will end at some point, and we'll come out probably stronger than we came in, so. Yep. Primary way you're reducing your inventory is just ordering less? So if you look at our inventory levels, they're certainly higher than they were, let's say, a year ago. If you look at Q3's inventory sequentially and year-on-year, units are actually down, so pricing has driven inventory up quite a bit, over the last, I would say, year or so. And then, you know, there's a lot of blocking and tackling in this business, and so, yeah, we don't wanna take inventory in to the extent we don't need it, and we wanna ship our backlog to the extent we can help our, our customers with, with their orders. And, and through this blocking and tackling, yeah, we'll, we'll take in less than we'll ship and reduce inventory over time. I guess my point is, demand is not necessarily accelerating, helping reduce the inventory. Ordering less with stable demand. Oh, okay. Yeah, so I think the situation as I tried to describe it earlier when we talked about the shortage market is end demand in the West, in particular, is steady. We've seen some softness in demand in Asia, but at least in the West, in Europe and North America, that end market demand has been relatively steady, and so, yeah, it needs to just kind of work through. Our customers need to work through their excess inventory, and then they'll begin ordering at a more normal pace, and that'll reduce inventory over time. I can't believe it. We're actually out of time already. Any closing remarks just before they kick us out of the room? No, I just- Okay. again, wanna thank you for Okay. for your time. I appreciate being here. Thanks very much, Anthony. Thanks, Melissa. It's always great to have you. All right. Thanks, everyone.