Q1 2021 Arrow Electronics Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Arrow Electronics first quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and the answer session to ask a question during the session on the depressed.
One of your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to turn the call over to people, Brian Vice President of Investor Relations. Please go ahead.
Thanks Denise.
Good day and welcome to the Arrow will occur in the first quarter 2021 on the earnings conference call on the call today are Michael long, Chairman, President and Chief Executive Officer, Sean Kerins, Chief Operating Officer, and Chris Stansbury, Senior Vice President and Chief Financial Officer. During this call we will make forward looking statements, including the.
It's about our business outlook strategy and future financial results, which are based on our predictions and expectations as of today, our actual results could differ materially due to net 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 today on the call are non-GAAP, we have reconciled those to the most directly comparable GAAP financial metrics 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 Day at Arrow Dot Com, along with the CFO commentary the non-GAAP earnings reconciliation and a replay of this call. We will begin with a few minutes of prepared remarks, which will then be followed by a question and answer period I will now hand, the call to our chairman President.
<unk> and CEO, Michael Thanks, Dave Thanks for all of you for joining us today.
Let me begin by saying strength and stability are and have been the hallmark of our business.
We've had the opportunity to prove this under both strong and weak demand conditions over the last 12 months.
During the first quarter, our dedicated team did their utmost to help customers manage their supply chain and get the components. They need I am pleased to report that our flexible business model can respond as well to the current challenge of demand outstripping supply as it did to the pandemic and before the.
That the electronic components market correction this flexibility of what's enabled us to deliver first quarter results across the P&L statement.
Last quarter, I said that we were seeing customers ramping production levels across many industries.
So said we were optimistic that the post pandemic rebound we have seen in Asia could extend to the Americas and Europe. So that both of those regions could return to growth clearly our global components business capitalized on strong demand in all regions this quarter with sales up 42% year over year.
We saw strong demand from key industries, such as transportation Communications consumer electronics and industrial as a result global components sales reached six 4 billion, which is an all time record in the company's history.
Turning to enterprise computing solutions sales were in line with our expectations.
And importantly, we delivered the operational average leverage that we expect our investors.
To have.
Operating income from global components increased by more than 70% year over year. The significant improvement was due to greater operating expense leverage from higher sales volume and from favorable pricing in all regions.
We expect to further grow our operating income as the Americas and Europe regions continued to recover and as our revenue mix across our regions shifts towards the greater proportion of our higher value component of sales.
We've been saying for years that the semiconductor industry remains vibrant the increasing amount of electronic content and everything for us of a tailwind for us.
Our business and has also led us to have healthy platform diversification.
We experienced strong demand from nearly all key track verticals.
Stepping back when I look at the reasons why pads semi cycles of ended badly.
<unk> optimistic that the smoother landing could happen this time on.
The visibility is better than ever.
<unk> additions the Fabs are currently limited. So there is no supply of <unk> coming there is no longer just one product is driving all demand like phones and Pcs in the past and we don't see shortage is causing complimentary products the stockpile and lastly.
We in cooperation with our suppliers have been proactively managing orders and customers expectations.
Turning to enterprise computing solution sales were in line with our expectation and billings increased at a solid rate year over year.
We experienced growth in infrastructure software across the portfolio and the demand for computing drove the service sales.
Operating income, which is the truest measure of our performance for enterprise computing solution. We're pleased to once again deliver operating income growth year over year in the first quarter and we expect that growth again in the second quarter.
While we are pleased with our enterprise computing solutions performance, we see strong potential for further improvements in the second half of 2021.
Rules and restrictions related to on site work continued to change and our variable across regions, especially in Europe. The good news is that even in Europe, we're seeing signs that spending priorities are shifting towards the more complex transformational projects the tend to be better aligned.
With our value added focus.
In closing I am pleased to report that Arrow electronics has overcome many challenges both recently and over the company's decades of being in business. We're currently experiencing tremendous demand, which is the first class problem. Our team continues to innovate. So we can deliver the best possible solutions for our customers.
And drive enhanced value for our shareholders.
We're optimistic about the future and look forward to capitalizing on the positive tailwind.
And to build our extraordinary momentum in it for food and improve our performance even further.
With that I'll now hand, the call over to Chris to provide more details of our first quarter results and our expectations for the second quarter.
Thanks, Mike first quarter sales increased 27% year over year on a non-GAAP basis the.
The average Euro dollar exchange rate for the quarter, where the dollar in 2000 for one euro compared to the rate of $1 23.
We have used for forecasting the slightly weaker euro meant that foreign exchange made of smaller contribution to growth than we anticipated.
The effective tax rate was below our expectation due to timing of certain discrete items as well as our regional profit mix for.
For the full year 2021, we now expect our effective tax rate to be at the low end of our long term range of 23% to 25%.
Beyond 2021, our ability to maintain this lower effective rate will depend on whether to our corporate tax from changes in the U S.
Turning to the balance sheet and cash flow first quarter operating cash flow is normally our lowest quarter and is often negative.
First quarter cash burn was approximately $5 million due to substantially stronger demand than we anticipated our cash cycle of approximately 46 day improved 10 days compared to last year. This improvement significantly aided cash flow performance in the face of working capital demand.
During the first quarter, we paid off the remaining $131 million of maturing five of 100% notes our liquidity position is the best in the history of our company and continue to improve during the quarter, we expanded our U S asset securitization program by $50 million.
The 125 billion and extended into 2024.
Leverage as measured by debt to EBITDA is the lowest level in over five years.
We returned approximately of $150 million to shareholders during the first quarter through our share repurchase plan.
The remaining authorization under our existing plan of approximately $313 million.
We remain confident the share repurchases on the best use of excess cash as measured by our return on invested capital and return on working capital both of which are significantly improving.
Please keep in mind that the information on share. During this call is of high level summary of our financial results for more detail regarding the business segment results. Please refer to the CFO commentary published on our website. This morning.
Now turning to guidance.
<unk> sales and EPS guidance would be all time second quarter record our forecast implies the second quarter sales and profit will be slightly above the first quarter. Our bottoms up forecast does not show of the usual level of positive second quarter seasonality due principally to the first quarter strength, which was above our expectations supply can.
Strength and lastly, the longer and later close for the first quarter. Our guidance reflects continued strong profit leverage for global components and continued operating income growth from global enterprise computing solutions on a year over year basis.
Finally, as we discussed last quarter. Please note. The CFO commentary includes information on our fiscal calendar closing dates for 2021 and 2021 for the fourth quarter starts on October three unlike in 2020 when it started on September 27th of this makes the fourth quarter shorter than prior year fourth quarters, we believe the year over.
The year comparisons for the second and third quarters are not affected and our fiscal year end on December 31st as always.
With that I'll turn the call over to the operator for Q&A.
Good day, ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment of how the Q&A roster.
Your first question comes from the William.
From true Securities. Your line is open.
Great. Thanks for taking my question and congrats on the good quarter and outlook.
First maybe about inventories.
Given the tight supply environment your inventory I think.
Shrink on the days basis.
Semi suppliers of it pretty open about prioritizing direct versus channel.
In terms of where they are delivering I wonder if you have line of sight.
Inventory replenishing and we think that happens in Q2 or is it for the half of the future.
Yes. Thanks.
Well I think that.
Should see it improve as the year goes on I think you are saying.
Our second Florida quarter forecast, we just came out with is tempered a little because of supply.
Our second quarter forecast of not temporary because of the demand on one.
On to make sure.
I made that point of the book to bills are still strong still across the industries and we're still seeing a fair amount of demand. The visibility is better because we are seeing customers live within the lead times, meaning they are giving us orders that coincide with the lead times that are going but yes, we're very clear on the inventory.
Tori levels were very clear, where we think the second quarter is going to come in.
At this point in time any upside that would come in would go right out the door.
One follow up if I can Mike you had a very interesting comment about.
Youre hopeful view that in the cycle, we could have the soft landing nowhere in the very tight.
Supply demand condition, we know that.
You can try to.
Identify every case and fight every case of double ordering but this is just human nature right. So we can be current shore of customers are trying to do it and the things usually don't and gracefully.
Wonder if maybe you could just provide some comparison to prior cycles in terms of the both the supply conditions of the demand conditions. Maybe there are several cycles, we've experienced over the last $25 30 years.
No. If there is one that the fields most like are most unlikely.
Characterization of along those lines would be really helpful. Thank you.
Well first off thanks for acknowledging my age.
On the mindset.
For you.
The highway.
Secondly, I think there are several things in the past what's happened is.
The cycles of the supply demand of hit and then the manufacturers have been.
<unk> been able to gear up the production because they were they were generated off of their own fabs.
So there is a difference today than what you see right now more semiconductors had their own fabs and do today. So the ability to just come in and start really increasing production.
Is it as easy as it was say 10 years ago, 15, 20 years ago.
So that's number one number two is yes im sure.
The manufacturing of our re prioritizing towards automotive, but theres still a lead time to build those products.
Like they had all of this inventory that they decided not to ship in the first quarter and so now it's on the shelf and they're going to ship in the second quarter. They had to build some of this so the prioritization as already been really going on if you consider how how fabs work and how things.
For manufactured so.
We're seeing that a little bit and you'll see.
<unk> back there, we're not getting any indications at this point that.
We're going to get less product as the result of that but we're not getting an indication we're going to get more products, which is why our guide is where it is.
And if you consider stopping all of this into the current fab the ability for everybody to catch up in a very short period of time and ship that backlog is.
Not likely at least this year. So I would go into that and say I don't I don't see anything improving for this year, but I will also tell you now to combat double ordering and things like debt from customers. There's a lot more teeth on those orders.
So even if a customer is double ordering they are going to take the product.
On that.
That's a major change from what we had seen in the past because.
When the ability to manufacturers of constraining.
Better take rates, you're ordering and that's really what's happening is the customers right now and that is helping the control of ordering there's somebody out there kind of take their inventories up to 12 weeks in their factory I'm sure there are.
But the.
It's a little different than.
Seeing the companies that we're dealing with also having record earnings also producing everything thats being manufactured in their factories right now.
I think it is in.
This is an economic thing.
Just.
Shortening the supply chain.
Issue right now is that help you.
Yes, thanks for the color Michael I appreciate it.
Your next question comes from Joe Quattrochi with Wells Fargo. Your line is open.
Yes, thanks for taking the question, maybe maybe to build on that Mike you've always had great insight into the industry I was curious.
By way of narrative out there that maybe the structural change in inventory practices coming in maybe a holding a little bit more on inventory going forward I was curious on your thoughts on whether this is something that's real and youre talking about with the customers and planning for <unk>.
Maybe the industry is going to have still a short memory and something they always kind of get kicked on an up cycle like this.
Well I'll tell you the.
Let's just take something out of the automotive manufacturers in general as a as the comment here the last step.
February there were the ones that call to everybody and shut their orders down and said they didn't want any day.
That they were closing their factories shut their factories down because they couldnt get supply they are setting their factories down because of the total.
So.
And then all of the sudden they wanted to start back up but theres no buffer inventory for them to be able us to the star.
Our back up.
That's a good function of distribution that's a good reflection on some of the supply chain. That's a good the use of corporate dollars there needs to be sort of.
Risk protection for manufacturing and when you get into that type of just in time and then all of the sudden the rest of the market takes off year now you're now a slave to the.
Based on a time it takes to build the products. So lead times extending your now stock. So the automotive guys are being pressed by that lead time right now.
We're actually seeing as more companies coming to us now and attempting to work through that so as far as we go Arrow goes.
This is going to be of longer term benefit because of our services are now starting to matter to some of the biggest companies on the world that want a little more flexibility. They may have had on the path.
That's very helpful and then.
On the.
Our quarter guide just on.
The puts and takes on gross margin can you talk about any pricing of what we should think about that I assume that most of that is kind of pass through with little benefit to arrow.
No I would say that I think.
Youre going to the North America, and Europe picked up a little more.
We're already seeing the demand starting to come through that with our risked youre going to continue to see.
And the growth margin and yes, there is.
Some I wouldn't call it pass through pricing.
Most of the deals the requiring added of services like carrying inventory.
Being able to make sure you can balance of the production for some of the company.
It is not a commodity price market. There is what I would say is we're in the value price market right. Now so we fully expect our growth margin to continue to go up over the year here.
Super helpful. Thank you.
Your next question comes from David Williams of Loop capital. Your line is open.
Hey, Thanks for taking the question.
And congrats on the quarter just wanted to see maybe if you could talk a little bit about the velocity of orders that you saw through the quarter and then maybe how thats trending through the first part of of the second quarter.
Well you saw the result of the trading velocity on the per quarter.
The ability to grow like that and to make the business go I will tell you.
The first quarter be proud of is.
Not fit in with the surprise.
But you know everybody needed their inventory because it was truly a long.
All of the economics manufacturers, we're shifting more of a product.
So we were working over time in our facilities to make sure that any product that hit.
The Doc could get out.
For our customers.
We are better prepared for that in the second quarter as of now we are seeing the orders come in at more of the steady state, but I will also tell you of the orders are still elevated I mean, we saw improvement.
In March booking.
April and so far in May.
On the bookings have continued to accelerate and they continued to accelerate.
Around more industry, but one of the large reasons they've accelerated is that we're now seeing more orders in North America and in Europe, and I would say that Asia is the kind of added spot right now so the.
The growth in Asia, slowing a little but the growth in North America, and Europe picking up.
So we're seeing more broad based on our economic recovery than we did in the first quarter hopefully that answers your question.
Yes that was very helpful for and I appreciate it and then the among the last one real quick just on on your inventory levels. What do you think is an appropriate level to be at as we as we begin to normalize here at 50 days kind of a place where you've been on the past or how do you think about maybe your inventory levels as we move forward here in terms of ideal.
About more of a lot more.
The seriously.
I think.
What youll see.
Is the possibility that inventory turns over time here can improve from what they were historically because of lead times of better visibility.
So as more visibility comes at the customer as the lead times of extended we're going to get orders further out, but we will be able to work with the manufacturers and a more just in time way for our customers then basically they could or if it was on the direct.
The relationship with the suppliers.
Well I would say you could you could operate.
The better terms I mean, I don't think the entire inventory is going to operate where Asia.
Has been over the years of debt tend to 10 to 12 turn because now even Asia is operating in the supply chain era, where the prices are going up and the turns are coming down it all depends what the customers are willing to pay for but I'm going to guess given.
The sort of market correction.
That customers are run on one and are now going to remember that they need a little less risk in their inventories at the factory and they need a little more service and the need that service to be provided so this is actually a structural change for the industry.
I think we're going to be dealing with customers that we hadn't dealt with before and I think customers that sort of forgot what it was like to keep inventory or have their inventory protected are going to re up and pay for that service. So I think it's a good thing for the industry.
Thanks, so much.
Your next question comes from group.
On the chart with Bank of America. Your line is open hi, Thanks for taking my questions.
For the first one I wanted.
Ask you about component shortages in the supply challenges that youre seeing.
Most companies we've heard from so far they have been talking about component shortages.
Lending into the end of the year, maybe even into 2022, but I will.
Looking at the sentence in the press release, which says that Youre seeing current supply challenges as transitory and expect more balance with demand in the coming quarters.
So are you seeing anything different.
Do you think debt.
This is immediate near term are you seeing like better.
The supply then than the competitors. So just wanted to ask you on your thoughts of massive.
We're hearing from others.
No.
Thank you.
That was coming quarters. So there was the NAV on that.
Which would suggest longer I don't see anything improving that dramatically before the end of the year I believe we're into next year as things improving.
Means the cycle.
It might extend a little longer than others because of what I said before the inability for people to build the fabs as fast as they would lead to a need to increase production. So thats why everybody is trying to think of them and take any.
Any sort of cash.
The capacity restrictions they had on Fabs and have the throughput the faster than they can it is going to slow.
Going to like three millimeter wafers or something like that I don't think youre going to see a lot of fab turnover right now other than just running them for as much production as they can get out of them and they might tweak the more out but I think we are in the next year or two and the.
I've never really been of Fortune teller with you guys, but it really does look like the first half of next year is still going to be true.
<unk> time, so I would put that in we're looking at the year out here easy.
Okay. Okay. Thanks for the clarification on that Mike.
And maybe Chris I'd like to ask you about the.
The operating margins so of components saw strong 60 basis points growth sequentially.
I guess youre guiding wireless for flat revenues from the segment, but given you're seeing Asia remains strong in and could we see a pullback in margin somewhat in the in the June quarter, and if you can also talk a little bit about the ECS margins that wireless was in line with the expectations.
How do you see the progression over the year and when can you get back to the 5% operating margin level for any any color on that would be appreciated. Thank you. So much.
Yes, so if you.
If you look at the quarter on quarter margins in components, I think we're expecting relatively flattish year over year youre going to continue to see great operating leverage.
But given the fact that we're sequentially reported relatively flat sales, you're not going to see sequentially.
A lot of margin movement and components.
As time moves on to Mike's point earlier, I think we'll continue to see the west strengthened so I would say that.
That's kind of the next leg in margin expansion as we move forward, but that's that's obviously slower to come and on the EPS side I think we will see some small margin increases again as we continue to.
The selling more of the complex and of our solutions.
And that really is going to be dependent on on our ability to get back on prem.
And obviously the broader supply environment there.
As it relates to 5% and when I'm not going to not going to predict that I would tell you that we feel really good about.
The the amount of improvement we were able to show in Q1 year over year and again in Q2, and obviously the returns that driving but.
The 5% of the goal we will stay focused on it.
I think we continue to do the right thing.
Okay. Thanks for all of the details of appreciate it. Thank you.
Your next question comes from Matt Sheerin with Stifel. Your line is open.
Yes Hello.
After the.
A question regarding your EPS guidance.
It looks like we're seeing just gradual improvements there and certainly not the snapback that you've seen on the component side.
We're hearing from some of your reseller customers as well as the vendors that there is a slow gradual improvement.
On Prem could you just give us more color in terms of what youre seeing in terms of booking trends.
On the outlook there as we get through the year.
Yes, I'll take the first swing at it and then I'll give it the sun.
Matt I think we're seeing the business move as we're seeing our own people come back to work.
No.
Coming back to where it has been I think a little slower than most of us thought.
We're seeing more projects come in here now as people are going back to work.
I know here, we're investing less ad.
At home.
<unk> products right now than we were state of the first quarter of last year. When we spent 20000 people on them.
And got them up the speed, but I do believe that thats going to be gradual as you get into the third and the fourth quarter I still think we're going to have.
Great fourth quarter like we typically do around here in that business.
Just to what extent of its going to be pent up demand that I don't know Sean do you want to.
Yes, Matt I think Michael nailed it I would just add if you look at our.
First quarter we.
I'd still benefit from some of the the work and learn from home trends, but at a slower rate than we enjoyed last year.
At the same time, we did see some.
Some evidence that the traditional data center environment is starting to perk up a little bit or our hardware business grew.
Year on year of both Intel server proprietary server.
And certainly storage that's a good sign but I would say the the traditional application environments are still somewhat subdued.
Im optimistic.
Domestic the.
Throughout the year as things open up the people get more access to the data centers, you're going to see that traditional piece of our business normalizing that does offer us.
Opportunity for better growth.
On operating leverage as well.
Okay great.
I had a question on the components business relative to the market share gains you saw particularly with your largest supplier of Ti and I think the issues in the first quarter.
Has that.
<unk>.
I'm, just wondering whether or not youre seeing.
Some positive impact in terms of attracting new customers and adding to the bill of materials since since the.
Those analog projects are key whether youre not youre seeing opportunities to continue to get the gain share because of that relationship.
Yes.
Our design win it's not just that relationship.
Because of the no we don't do design wins for Ti Matt.
On that isn't that isn't part of our our function in the service that we do provide that's really all I'll say about that relationship.
The first widely known.
They manage their companies on our overall designs in the corporation were up in the March quarter.
We saw year over year of growth and designs of <unk>.
Volume, 10%, which is good.
That does bode well for months out in terms of mix of products that we're shipping. So we do see those new designs, we're actually seeing the design activity increase.
Increased at a more dramatic rate than we saw at the beginning of COVID-19.
So.
All in all.
I think what we're looking at is what's looking like a healthy industry for some time and.
I don't know.
The pullback but.
You guys can see it I mean, most companies are exceeding earnings right now even the manufacturers that are out there.
So there is there is something going on on people are definitely buying the products, but I do think there is a shift and what type of products consumers are going to buy as they go back to work again and I can't predict what that is.
But it looks like a lot here.
Okay fair enough. Thanks, so much Michael.
Your next question comes from Steven Fox with Fox Advisors. Your line is open.
Thanks, Good afternoon, two questions if I could first Mike you touched on services of couple of times just curious in this environment, if there's a way to sort of.
Maybe controlling your own destiny with your services mix and design mix.
Prioritize those companies where the customers are the engagements of higher is there any any thing that drive that and maybe helps margin more than previous cycles, and then I had a follow up.
Yes, well design wins design registrations by nature of the band.
The design and then they start to schedule into production.
<unk>.
The order there is plenty of time with the current lead times on products to get them.
And as they come so anything that's being designed right now is probably not going to go into production and sales.
The fourth quarter.
So that seems to be fine.
Seeing.
And our semiconductor database.
On this we're seeing an uptick there we're seeing a lot more customers that are using that to work on their own designs and expect that business to continue to grow.
The on line.
Digital businesses is doing great.
In general almost.
Every ancillary business that we have our ancillary service that we have is in our high end mode growth rate, maybe not as much of the semiconductor growth was this quarter, but I don't think we have anything in here the growing under half of that.
So it's.
The really good story.
Great that's helpful.
And then Chris just a couple of quarters ago, you talked about continuing to.
Reduced free cash flows even in the high growth environment I'm not sure. If this was the high growth in volume that you had in mind, but like any any further help on how free cash flow might play out for the year in this environment. Thanks.
Yes.
You're right I, certainly wouldn't have predicted the kind of growth.
The 42% in Q1.
Our performance in Q1 of the strong indicator of that typically we'd be a lot more negative.
I think to Mike's comment earlier of the reality is we would like more inventory and at some point.
<unk> will start to narrow the gap the demand and you will see us take inventory up a bit in the near term.
Again, as Mike said empty inventory of that comes in is going right back out so that gives us the opportunity near term to the generating cash flow.
But.
I do think as we.
The getting treated at some point inventory will go up but for the.
The comments earlier I think there's lots of reasons to believe that that might look different than it has in the past.
In terms of its magnitude so.
Right now we feel good the balance sheet.
In great shape and it gives us the ammo, we need to be able to react when that day comes.
Great that's really helpful. Thank you.
Your next question comes from Jim Suva with Citigroup investments your line is open.
Thank you very much and great execution to you on your full team.
Lot of the commentary was focused on components, which rightfully. So if I could just ask the question on the ECS side of the business as society gets back to coming to the office at some point in the future or.
Variation of that Youre early indications what are the one of the customers, mostly ordering and putting in at this point you mentioned that there is a little bit of the stabilization of the growth there and some changes of behavior. Just curious about what are the the typical things that youre seeing the most rex for on the ECS side. Thank you.
Thank you Tim.
Can talk a little bit more about what we saw in Q1.
One of the other things that continues to remain very healthy for us when we look at our pipelines as are our security related solutions portfolio.
You think about what the companies are having to do to harden their new working environments that have been set up over the past 12 months and we expect that to continue the strong.
For the balance of this year. The other thing that's really encouraging is the arc.
Cloud business is accelerating at even faster rates than it did last.
The last year and even the year before so that's the piece of our business is growing nicely both through our digital platform and beyond and when you step back and look at the recurring revenue subset of that that we derive from it.
Thats growing as the EBIT faster clip yet so we feel good about what that means for our contribution margins in the future. We still have more work to do to build it out but we're appointing our efforts at business development that will add to our our software and cloud volume card as well as expand our customer base. So I think there is enough.
Positive signals Jim in the market.
And again as we said earlier until the the.
The broader and more traditional data center environment fully opens up that's when you'll start to see more hardware and more on Prem in software as well it may not all come back given the.
The pace of cloud adoption, but like I said I feel good that we also have a strong play on that piece of the the market as well.
Jim This is Mike just to add to that.
One of the things, we did see sort of globally this quarter with a huge increase in proprietary server sales.
So typically you've seen industry standard servers.
Come in which would be an indication.
Of further.
I think continuing under the same path, but that proprietary server increase I think shows that things are coming back in house, we are seeing data center activity go.
That was a huge percentage increase for the quarter.
And I expect that to probably continue for the balance of the year.
Great and thank you and congratulations to you and all of your team members.
Thanks.
Our next question comes from Adam Tindle with Raymond James Your line is open.
Thanks, Good afternoon, Mike you talked about favorable pricing across all regions in the it's a little bit hard to see because total company gross margin is still on the decline, but I know, there's some regional mix reasons for that so maybe if you could touch on the impact on the like for like regional basis gross margin up in all regions and how much of the favorable pricing <unk>.
Shifting to that margin improvement.
Yes gross margins are up in every region I won't go on to the exact amount of that for obvious reasons, but.
We've seen every region show improvement.
<unk>.
Not only every region every country with in every region.
This is really.
The board sort of the strengthening of of what we saw on the past.
And let's just go back and sort of reiterate how much of the Asia grew first.
And the total for us and we're just starting to see the growth in on.
North America, and Europe, albeit Europe was up something like 20% in North America up 10.
As those continue to grow at those rates.
I mean, just to take the mix that gives you. Some idea of when you go into the air model of what's going to happen to the overall company.
And do you think your size and scale of this time around allows you to maybe keep more of that for longer versus the favorable pricing being more transitory. How does this play out over time.
Oh I think that.
Yes.
Part of what we're seeing and the increase is customers want more protection.
And with that protection.
On the cost.
And will that continue that will be yet, but but my suspicions are that this is kind of continue.
Going into the next year as as more and more customers are coming to us our customer count of new activity is going way up.
And.
That's that's as I said good for the industry good for distribution in general.
And people aren't coming to us for commodity pricing problems right now they are coming to us for a complex supply chain problems and we're helping them solve those.
So that's what we're seeing with our supply chain services I know there was the question earlier about the services I guess I'd, just neglected to say that our our supply chain businesses.
Probably the fastest growing business, we have in house right now.
Okay.
And maybe just the last one for me Chris covered Hill Leverages at the lowest level on over five years, you decided that share repurchases best right now.
But I just wanted to ask the sizable M&A going on in the ECS world at lower multiples could be significantly accretive I know, it's the high class problem to have not Tom suggesting of disagree, but I just wanted to maybe press on assuming you. The evaluated those potential options why you decided against that because im not stretching to get over 3 billion.
Dollars of liquidity without even factoring in target EBITDA on synergies. So you could do something big there.
Well.
You said it first at the very high class problem and that we can do anything we want to do right now.
There is nothing that's stopping our share repurchases right at this moment, but yet we're evaluating all kinds of things.
That's the beauty of having our balance sheet. There is a lot of room to do whatever we want to do on I'll leave it at that.
Sure.
Thanks.
Yes.
Your last question comes from Nikolay Todorov with Longbow Research. Your line is open.
Yes.
Yeah. Thanks for squeezing me in.
Alright.
Mike can you talk about how wide the.
How widespread is the increase in pricing in components, because last quarter. I believe you mentioned that it was a little bit overstated and the.
Going spin of spreading out.
Bit surprises of why your do you see flow through on the operating line is not improving as I think the March quarter, only partially benefited from higher component prices.
I don't know it was pretty high.
How much was that it was 25 percentage of the total growth in the earnings so it was.
Yes, it was pretty bad.
Our operating margin of four 6% and up 80 basis points year over year Mike.
The answer.
A question or two ago, that's with significant Asia mix.
In that number and so youre seeing that I think.
Impact the overall and as the West comes back to life, you'll see that continue to improve and equity.
Chris has been a little modest for 6% the.
The records of five where we had done but the records were five with Asia being less than 30 per center, 28% of our total and now Asia of 50% of our total.
Ed you're hovering in the same space so.
Are you, saying that I think the.
The price increases that seem to be coming through.
Daddy.
They're not.
Everybody doing it wants and as manufacturers they are evaluating.
What products are crossing them to produce there right now just getting into what I would say the the inflation part of their cost going into this and as they start to learn more about what's going to happen those costs are going to be passed on.
The pricing in the industry isn't as such that almost anybody can absorb anything.
I expect the price increases to continue all year.
Maybe I misstated. The question I will go on asking regarding the second quarter flow through on the operating margin, which you said you expect flattish margins.
On the why Youre not GAAP.
The.
The March quarter benefit of the only from partial price increases thats, what im thinking.
Youre going to see you're going to see more because of North America and Europe picking up the <unk>.
Keith.
I mean, I think you.
We sort of forecasted the EPS, two which showed an increase.
And.
Again, the second quarter that we put out there.
Is not demand the guideline of the business. It is based off of how much of product. We think we're going to get which is why that of flattish.
View of.
The market so don't confuse the second quarter with what we Couldnt ship of product with not constrained. That's the that's the answer I wanted to give you on mix. It isn't the demand issue is purely a supply issue for Q2 does that help you.
Yes, it does the best.
Hey.
And then a question on merits of components.
If I look at on the relative to Europe growth is recovering right and this is Mike the key but it's lagging Europe, a little bit versus having an easier comparisons compared to last year and margin June quarter. I guess is there anything you can give us indication of what is holding growth relative to Europe, because if I think about.
America COVID-19 is.
It's coming up from a little bit better relative Roe in the.
COVID-19 situation versus Europe right now.
The us is last to get in and produce.
Yes, you are.
The policies you tell me I mean, where tariffs good for manufacturing in the U S. I don't know I don't think so I was pretty pretty <unk> about that.
I think a year ago or even longer.
It's all about manufacturing policy, you want people the manufacturer here and make it convenient for them. The manufactured here don't make it for again difficult. So you listen to these companies every day, how kind of nobody is moving production here I could go on a soapbox, but I don't need to you already know that answer so I'll leave it alone.
Okay got it last question just any.
Any impact on component shortages on the ETF business I know you talked about that on the component side.
Yes.
Im going to guess you're already hearing.
On your other calls from manufacturers that are talking about.
Some shortages.
While I do expect that more at the lower end of the.
The product base.
I think the fact that there is some design coming in now on on Prem.
Data centers.
I don't expect thats going to be a huge problem for us going forward, but nonetheless, it is going to be something to pay attention to.
Okay. Thank you.
And I would now like to turn the call back over to Steve O'brien for closing remarks.
Thanks, Denise Thanks for all of you for joining us today and thanks for your interest in Arrow electronics side of the nice day.
This concludes today's conference call you may now disconnect.
Okay.
Sure.
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