We're gonna get started. Thanks again, everyone, for coming to the second day of our Global Technology Conference. My name is Ruplu Bhattacharya, I'm with the IT Hardware and Electronics Manufacturing Services Equity Research team at the Bank. Today, we're honored to have Arrow Electronics, which is a global leading distributor, and from the team, we have Raj Agrawal, who is the CFO. His spelling on the screen there is wrong, but I'm sure, you know, if, you know, I apologize for that. I forgive you for that. Sorry about that. Raj joined the company, I think, on September 6th of last year. Yes. You know, he's got lots of experience. Since 2014, he was the CFO of Western Union, but he's also been at GM and Chrysler and many other companies, so he's got lots of industry experience. We also have Anthony Bencivenga, you know, he's been with the company since February, and so, you know, we hope to have a great discussion with you. Thanks for coming. Thanks for having us. Yeah, it's great to be here. Great. Raj, I want to start with maybe a very high-level question. You know, I would say that we're living in the age of the cloud, if that's the case, then can you talk to us about how the role of a distributor has changed, right? Talk to us, you know, for those in the audience who don't know, what are the types of services that you provide? You know, one segment of your business is the ECS-based business, and a lot of the suppliers there are moving to an as-a-Service model. Yeah. As they change their business model, how have you guys evolved your model? Yeah, I think it's a good question, Ruplu, and it is really primarily an impact in our ECS business. I would say at a high level, we've also evolved our business model like our supplier side has and our customer base has. We have the traditional hardware sales, you know, whether it's servers or storage capacity or networking or other things from a hardware standpoint, we've been able to put together solutions and get them to our customers. We're also providing IT as a service along the way, and we've got cloud solutions, software as a service, other things that we're selling. The best example I can give you is our ArrowSphere platform that, you know, we've invested money in, which allows for the automation and the provisioning of cloud services and management of subscriptions, as well as overall workflow management, so we're certainly participating in that. This certainly has had an impact on the business in terms of as we migrate to more, you know, IT as a service, it is gonna have a mitigating impact in the short term on revenue, because instead of getting a hardware sale all upfront, we're gonna see it over time, right, if it's software as a service. We're certainly migrating with that. We think that is the direction of the future, and we're positioning our business to take advantage of that. There are also dynamics around the margins and the profitability of the business. Long term, we think that is the solution. We have, you know, differences in our, in our geographic regions within ECS. You know, we can certainly talk about that some more. You know, at a high level, we're sort of migrating as the space around us is also migrating. No, that's a great overview, and I want to touch on each of the segments and each of the regions, but maybe another high-level question. If we look at the semiconductor space, right, I mean, over the last several years, we've had a lot of consolidation, and there's really two types of consolidation. I mean, there's the suppliers have merged, and so there's consolidation of the vendor base or supplier base. There's also consolidation of electronics into single devices. Yeah. More and more electronics being packed into the PCBs. How has that impacted Arrow? You know, how do you think that impacts you going forward? Look, I would let the results speak for themselves. We've had tremendous growth in the business over the last few years, even while this consolidation has been taking place, both from a top-line and a bottom-line standpoint. At a headline level, we're participating quite well in this space. You know, whether if it's more consolidation in the actual technology, we also participate in that because, you know, that's also happened over time. It's not a new activity. The chips that existed a few years ago are more advanced today than they were a few years ago, and so on and so forth. We continue to participate in the overall environment of consolidation, so that really, you know, plays to our strengths. We continue to add a lot of value in other ways, as we've talked before, but I don't really see that as a negative to us. We're gonna continue to participate. Look, we operate in an environment, in a space that has significant growth prospects ahead of it for the foreseeable future, right? The technology there is gonna continue to grow. We're gonna participate in that growth, and what we've done in the last few years is a great example of that. Great. You know, when I think about the semiconductor OEMs, I think that they can really target only their top 10- 15 customers directly. Really, I've always felt that they need distribution because there are thousands of other customers, whether it's. Yeah in the middle market or SMB space, that really they can't target on their own. Over the last year, I've had this question come up from clients, I want to ask you this: Are you seeing more suppliers going direct? Is there a threat that, you know, more of these companies can go direct to their sales force, take business in-house, and how do you think about that impacting your revenues? Yeah. Look, I would say that the answer is no. We don't see a trend at all in terms of more suppliers going direct. If I just talk about what the business has done over its history. We have ebbs and flows in this business. We have suppliers that are joining us every day that want to do more distribution through us. We also have suppliers that, for their own unique reasons, will want to go more direct. That's not a new phenomenon. That's always been happening in our business, and we don't see that as a trend at all in our business. You know, so we're not really thinking about that. We're not quite, you know, that concerned about it, and we think that our long-term prospects for growth continue to be very strong. If you look at our capabilities, which is global distribution, we do it in 90 different countries around the world. We have warehousing and distribution space and capabilities all over the world. That's not easy to replicate for any supplier. Suppliers really will think twice or three times before they think about potentially going direct for a part of their business, because you can't just replace that distribution overnight, you've got to make sure your product gets to the customers ultimately. We play a very important, valuable role in that overall distribution process. Yes, I've gotten the same question as you have, and sometimes through you, but sometimes directly. You know, we really feel fine. All of the outlook that we've given, whether it's this year or even into the future, we take all of these things into account, and it's not a significant discussion item inside our company that, is there a supplier movement going direct? It's not really the thing that we think about. Okay, great. The other question that I get, Raj, a lot is on pricing. You know, I think that the distributors have benefited year-over-year when you think about the pricing moves that have happened, part of it because of inflation. You know, suppliers have taken up prices, and so you have been able to take up prices. I'm not saying that this is going to happen today, but at some point, suppliers will reduce their prices. Can you help us understand what happens to your P&L when that happens, and how are you seeing price increases still happening from suppliers? When the downturn or when the reduction happens, how do you think that's going to impact Arrow? Yeah, it's First of all, I'd say that the pricing environment today seems to be quite stable. We no longer see the significant increases in pricing in our supply chain, and that was not unexpected, and so we're at a stable place. I also don't see prices turning in the negative direction in any significant way as we look at our business. You know, as you said, there's a lot of inflationary pressures that have come into the space, so it costs more to build these parts. It costs more to get them out to customers. These are not for free, and so there are reasons why you could see that some of the pricing that's taken place in the last couple of years will stick for the foreseeable future. I can't tell you that prices won't come down ever, you know, as things get more efficient in the space, but we really don't see that. Generally, as pricing has come into the space, that has benefited our margins, amongst other things, but that's not the only factor. You know, I just sort of think about the value-added services that we've been able to add over the years and that we're continuing to push in, you know, whether it's demand creation and activities or sophisticated engineering design or supply chain services. These are other key factors that are helping to drive our margins where they are. Pricing is certainly a factor, but it's not the only factor. The other thing that, you know, investors have to keep in mind when they think about distribution is supply and demand. Obviously, inventory in the channel is a big part of that. We've seen periods where inventory is overshot, and then there's been a correction. Some of the distributors have talked about a correction or over inventory in the supply chain right now. You know, a correction happening. Are you seeing any excess inventory in the channel? What are your thoughts on that? Well, I think there is probably excess inventory in certain parts of the business. You know, we have the benefit of being quite diversified with the end customer segments that we're targeting, you know, whether it's industrial, automotive, transportation, you know, aerospace, defense. We're quite diversified. We've seen some slowdown in the consumer space, and we, you know, have relatively less exposure to the consumer space. You know, there's likely some excess inventory there. You know, I would say that we continue to have a decent backlog of orders. We have the inventory to be able to support those orders. We think we'll be able to sell through it, and, you know, we're in good position. At some point, it will flush out. You know, we're not quite at that place yet, but, you know, we feel good about the level of inventory we have. Ultimately, we want to support the customer demand, which, you know, has been there as we came into this quarter. You know, kind of in this sideways environment, where we're not seeing a big trajectory upward, we're not seeing a big trajectory downward. In that environment, it's harder to predict exactly where inventory levels will go. Okay. Maybe I want to talk now about the core distribution business. How much visibility do you typically have? You know, how many months of visibility do you have? What kind of a forecast do customers give you? Are they, in this environment, are they giving you a longer term forecast? Maybe, you know, touch on the level of the backlog and book-to-bill. Sure. Yeah, I think ultimately it depends on which customer we're talking about. Generally, you know, in a normal environment, we can all debate what normal looks like, we would typically have 1 to 2 quarters of visibility to customer demand. The last 2 or 3 years has been, you know, probably well above that. The backlog has been quite high. Customers have been putting in a lot of orders for future potential demand because they didn't want to get caught short, so to speak. We also built up, you know, good levels of inventory to support that demand. You know, it really just depends on, you know, what demand each individual customer has. Typically, we'll have good visibility. We know, as we've said before, our book-to-bill ratios have, you know, been below one now, for a couple of quarters. You know, the good news is that they're relatively stable. They're not getting worse. Our backlog, even though it's lower than it has been, the last few quarters, it's still at elevated levels. That, that environment still is there. Lead times are still a bit extended, even though they have come in. We are seeing the signs of normalization. I don't think we're quite there yet. I wanna talk about segment operating margin. I think for the core business, your long-term target is 5.5%-6%. Mm-hmm. If we look at the last six quarters, I mean, you've actually reported much higher margins. The question I have for you is: do you think margins can sustain at this point? How much was that pricing benefit that you got year-on-year? What are if we were just to rank order or just quantify or just even qualitatively, if you talk about the drivers for that margin, what is sustainable and what can go away? Yeah. Yeah, the global components margin, as you said, the longer-term target that we've put out there is 5.5%-6%, which is materially above where it has historically been. Historically, the global components margin has been at 4% or below 4%. We believe there are specific reasons why the margin can be sustained at 5.5%-6% on a, in a more normalized environment. I mentioned them briefly, but let me just go through them again. It's the demand creation activities we have in our business, and that continues to be a higher portion of our revenue base in the component side. We have sophisticated engineering services that we do for various customers. The one example I'd give you is that we've designed an EV charging station for a customer, so we can go to that level of sophisticated engineering design in our business. Third, we have supply chain services that we're doing more of today, that gained a lot more traction in the last couple of years during the supply chain constraints, because large OEMs found themselves short of getting products and not being able to build their ultimate products. That supply chain service that we provide is really a fee for service. It's not getting more margin on components we're delivering. It's getting paid a fee for our supply chain capabilities, which we have significant capabilities. The last piece is really around the pricing environment that we're in, which we talked about briefly. You know, right now, the pricing environment seems to be stable. We've given a range of margin of 5.5%-6%, we're trying to build in some variability on these factors because they will not all stay consistent all at the same time. That's why we've said 5.5%-6% seems like a good range based on some of the work that we've done internally on global components margins. You know, we knew coming into this year, Ruplu, that the shortage market business was gonna normalize, and it has, in fact, normalized. We'll see it largely at normal levels in the second quarter. It started in the first quarter. We'll see it at normal levels in the second quarter, and that's not gonna be a drag. As you look at it sequentially, that's not gonna be the item that drags the margins. If we're already normalizing for that, and you know in the first half of the year, we're roughly at the higher end of the global components margin, you know, target that we have, you know, those are some of the factors that we think about with the longer-term margin target that we've put out there. Got it. You talked about demand creation. I mean, how do you see that trending over the next couple of years? I mean, how do you grow that business? I mean, how do you get to know these opportunities? I mean, just talk to us about, you know, how do you come upon these things? Yeah, it's with brute force to some degree. We have a number of Field Application Engineers, FAEs, in the field. In total, in our business, we have thousands of engineers, you know, between our eInfo chips business and our Field Application Engineers. The Field Application Engineers are the ones that are gonna go proactively look for opportunities to design components into boards and other things that customers may be designing in terms of their end products. That, you know, the more engineers we have on the street, the more opportunities we will identify and the more momentum we will get behind demand creation, and it just sort of feeds on itself. Suppliers find this to be extremely valuable because it's sticky business for them, it's good for the customer, it's good for us, and it's sort of a win-win-win proposition. I see the demand creation revenue becoming a bigger and bigger piece of our business over the next few years, and it's really about putting more resources behind that activity. You know, we've been really successful at it. We know how to do it, and we're gonna continue to drive that in our business. Okay. Maybe I want to switch gears now to the ECS segment, which is really more IT distribution than component distribution. One thing that I think most of the investor base doesn't understand properly is: Is there a recurring revenue stream in what you're selling? Maybe just talk to us about what is it that you sell, and is there a recurring revenue part of that you can talk about? Yeah, absolutely. I... Sorry, Anthony, I don't mean to take the entire stage, but you can please feel free to jump in anywhere. You know, we do have a recurring revenue stream on the ECS side. As we shift more towards IT as a service and providing cloud services or software as a service, we will have more opportunities with things that go around these sales to have more recurring revenue streams. We do have a good portion of our revenue that's recurring in nature. We have not quantified it externally, you know, but that certainly, as we shift to more IT as a service, that will continue to be a bigger and bigger part of our overall ECS segment. Can you talk to us about what trends you're seeing in demand for servers and storage and networking, and maybe even demand by region? Yeah. You know, the demand, you know, if I look at it by region, we have a couple different businesses. You know, we have a European ECS business and a North American one, and they have slightly different dynamics behind them. In the ECS European business, we've seen good demand across most technology categories. We also have a good customer mix in that part of the business. We've got a good focus on middle market as well as larger enterprise customers, and we're a little bit further along in the IT as a service journey or cloud journey that we're on. North America, we have, unfortunately, the backdrop of enterprise IT spending is a little bit pressured, and we are more focused on the enterprise side customers in the North America business. We are migrating, though, and we want to shift to have even more middle-market customers in the North American business, which hasn't had as much concentration in. You know, that will help us to move further along in the cloud journey as well. That will have different dynamics around revenue and margins ultimately, that's sort of where we are from a regional standpoint. I don't know, Anthony, if there's anything else you want to add to that? That's fine, but I guess in the beginning, part of the question was, what's the trend there? In the past, you know, a customer, an end customer may have installed a server in their, you know, on-premise server closet, whereas going forward, at some point, they decide, "I don't wanna house this server anymore. I'd rather kind of pay a fee as I go." We have, for example, a software platform that we use to onboard our end customers through our VARs to either cloud or to sell software licenses, and onboard them and provision them, and then deal with kind of ongoing billing and what have you. That's, that's a bit of what drives that recurring revenue stream. All right. No, that's helpful. Let's talk about margins in this space. I don't think this segment has a long-term target that you've put out, I mean, how should we think about the drivers for margins in the ECS? We have not put out a long-term margin target here. The business has historically, if you look at it on an annualized basis, it's been operating at around 5% operating margins. You know, I think what we're really focused on is driving better dollar profits in the business, and that's gonna happen over time, 'cause obviously there's some dynamics between revenue and margins as we shift to IT as a service. The opportunity for us is to, you know, make the North American business look a little bit closer to what our European business looks like in the ECS side, that is what we think will continue to drive good profitability in this business. That's really where our focus is. Okay. Another topic of discussion that always comes up is free cash flow, and related to that is your own inventory levels, working capital requirements, and CapEx. Maybe just give us your thoughts on all of these things. Yeah, we're very focused. You know, first out, I'd say that we still look at our business as being countercyclical in nature. To the extent that there's a protracted slowdown or recessionary environment, we will generate cash. We will flush out the inventory. The model will work as it has historically worked in that environment. We happen to be in a more sideways environment right now, where, as you know, we gave an outlook for the second quarter that was flat quarter-over-quarter or flattish quarter-over-quarter. In this environment, it's harder to predict exactly when that inventory cycle will start to correct itself. We haven't seen it, yet, you know, but certainly, if there was a protracted slowdown, we would start to see that flush out very quickly, and that would obviously generate free cash flow. Then we'd do various things with that free cash flow. If we stay in a sideways environment or if we start to tick upward or if there's a softer landing in the second half of the year, I think all bets are off. It's gonna not necessarily generate as much cash as we might expect. A lot of these things, we need to just see how the cycle plays out, you know, nothing has really changed in the model to change it from past years. Obviously, we've gone through a tremendous amount of growth the last couple of years in a, in an environment that most of us had not experienced before, so we'll see how things ultimately play out. There are mixed signals, I would say, for the second half of the year, you know, anywhere from a deep recession to something that's more of a soft landing, and it changes every single day, right? We'll see how it ultimately plays out. Another thing that every investor thinks about is your capital allocation priorities. Talk to us about, you know, I don't think you've had a lot of M&A, you know, in prior years, but, you know, what's the thought on buybacks versus debt reduction or taking on more debt and doing buybacks? Yeah. You know, from a capital priority standpoint, our first priority will be to keep investing in the business, as you might hear most companies say, and that's through working capital, it's CapEx, other investments that we might wanna make in the value-added services part of our business. Second, we do, even though we've not done any material M&A in the last few years, it is still a high focus for us to find the right assets at the right price that can help to propel our strategy forward, the one that I described. Lastly, we'll use our excess cash or excess capacity for stock buyback. We do this all within an investment grade credit rating framework, because that is important to us. That's how we think about the overall capital allocation and how it might fit within what we're trying to do. Maybe just remind us of, why is it important for you guys to have investment grade rating? It's a cyclical business, ultimately, we want to be able to maintain flexibility for the things that are gonna come up, and there are large swings in cash, as you know, and inventory and working capital that happen in this business. We need to be able to move up and down with those cycles. You know, we're very comfortable operating where we are. There are times, I mean, today we're rated a BBB-, which is where many of the companies in this space operate, but there are times where you could easily be 3 or 4 notches above that based on where the credit ratios would be. There are times when you wanna be able to have that flexibility to be able to add the debt or add the working capital that you need to be able to grow the business and or M&A. That's how we think about it and maintaining the rating that we're at. It gives us enough flexibility to do the things that we wanna do. Question I get from clients is: Do you ever take on inventory risk? For example, let's say you have certain pieces of inventory and stock that were purchased at a certain price, but if the supplier lowers their price, if we go into a deflationary period. Yeah. How would you react to that? I mean, would you lose money on this or how? No, is the short answer. You know, we would typically will have some recourse in a scenario like that. There is also a lot of discussion and negotiation that happens in this space. The supplier is not in it to stuff Arrow Electronics with, overpriced inventory, because that's not good for the long-term relationship. We also wanna make sure that it's gonna work out for the supplier. We will get to the right solution, and we're not sitting on a lot of risk in terms of inventory being priced out of market, right? You know, we're not too concerned about that aspect of things, and we certainly work through it. If there's not a contractual way of getting rid of that inventory at the right price, then we will certainly work through it with the, with the supplier. That's not a big concern of ours. Talk to us about CapEx. Like, what are you spending on? Do you need to build more warehouses, or are you spending more on ArrowSphere? I mean, what are the areas of spend here? Yeah, it's all the above. I mean, I would say we're not a capital. From a CapEx standpoint, we're not a capital-heavy business. We spend probably less than $100 million of CapEx in a particular year. We obviously treat it very preciously. Yes, you know, whether it's our supply chain services or other capabilities that we are building for, we will build the right capacity from a warehouse standpoint. We can charge that. We can charge for that, right, on an ongoing basis, so we will build the right capacity. ArrowSphere is certainly an area that we have continued to invest in, you know, because we know that that is the way the ECS business will look longer term. It's really an, you know, a means to the end that we're really working towards there. It's not a capital or CapEx intense type of business. you know, very generally speaking, it's much more about working capital than other investments. In the time left, I've got a couple of questions that I wanna get in. You know, how important is market share to management? You know, we've always talked about you and your largest competitor in the U.S., and clients keep asking, like, who's gaining share? Is it, you know, one or the other? I mean, when you think about, you know, the importance of that, I mean, what's your focus? I mean, when you think about pricing, when you think about, you know, growing in different regions, what is your primary focus? Is it to gain share or is it something else? Well, our primary focus is to grow revenue and profits for the company, right? It has to be balanced with getting the right market share as well, because market share will stick with you longer term in nature. The answer is, both are important to us, and I believe that we've done a good job in both areas. The last few years, we have gained market share. We have also driven revenue and good profitability in the business, and we look at it, you know, both areas are important to us. We're not gonna just go after market share for the sake of going after market share. We wanna, along with the growth in the business, we wanna drive good market share growth. It's really both things, and I think we've been quite successful at that over the years. Is there an opportunity to take more cost out of the system? you know, if we go into a protracted downturn, how would you react to that? There's certainly things that you can do in the short term. The way we think about it inside of Arrow is that we have a cost discipline that we look at and think about every single day. It's not a short-term activity. We want to continue to optimize the business costs. It could be simple things like moving people to lower-cost locations wherever it makes sense. That takes time to do. It's not an overnight exercise. It could be closing facilities. We're always looking for how do we optimize the business model, regardless of which cycle we're in, because we can't manage to the cycles here. It's difficult to move costs out all of a sudden. It's really an ongoing discipline that we think about in the business. Maybe the very last question I'm gonna ask you is, you know, what are investors missing about the Arrow story, and why should investors invest in Arrow Electronics right now? You probably hear this from every company, but we think we're undervalued, so. Investors should decide that for themselves. I can't be an investment advisor for anyone. Look, I think the underappreciated things are things that we will talk about more over time, which are the value-added services part of the business, the areas that are demand generation, demand creation, engineering services, the thousands of engineers that we have in our business, and the supply chain services, which will become a more important part of our business over time. You know, margin accretive. All these things are margin accretive, and so I think, you know, those are valuable assets inside the company that we will give more visibility to over time. Great. I think we've covered a lot of different topics. Raj, Anthony, thank you so much for coming today, and thanks for all the details. I'm wishing you great success. Thanks, Ruplu. I really appreciate it. Thank you. Thank you.