Q1 2024 Arrow Electronics Inc Earnings Call
Good day and welcome to the Arrow Electronics first quarter 2024 earnings call.
Operator: Good day, and welcome to the Arrow Electronics first quarter 2024 earnings call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Raj Agrawal, Senior Vice President and Chief Financial Officer.
Rajesh K. Agrawal: Today's conference is being recorded.
Rajesh K. Agrawal: And at this time I would like to turn the conference over to Raj I grew up senior Vice President and Chief Financial Officer.
Rajesh K. Agrawal: Please go ahead.
Rajesh K. Agrawal: Thank you operator, and Hello, everyone before we begin likely to boost our new Vice President of Investor Relations Brad.
Rajesh K. Agrawal: Thank you, operator. And hello, everyone.
Rajesh K. Agrawal: Brad as our current treasurer and joined the era of last year. We're excited to have Bradley Arrow's Investor relations and with that I will turn it over to him to get started.
Rajesh K. Agrawal: Before we begin, I'd like to introduce our new Vice President of Investor Relations, Brad Windenberg. Brad is our current treasurer and joined Arrow in May of last year. We're excited to have Brad lead Arrow's Investor Relations. And with that, I'll turn it over to him to get us started today.
Brad Windenberg: Thank you, Raj. It's a pleasure to be here.
Brad Windenberg: Thank you Raj, it's a pleasure to be here.
Brad Windenberg: I'd like to welcome everyone to the Arrow Electronics first quarter 2024 earnings conference call. In addition to Raj Agrawal, Arrow's Chief Financial Officer, joining me today on the call is our President and Chief Executive Officer, Sean Kerins, our President of Global Components, Rick Marano, and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, and future financial results, which are based on our predictions and expectations as of today.
Brad Windenberg: I'd like to welcome everyone to the Arrow Electronics first quarter 2024 earnings conference call.
Brad Windenberg: In addition to Raj Agarwal Arrows, Chief Financial Officer, joining me today on the call is our president and Chief Executive Officer, Sean Kerins President.
Brad Windenberg: Our president for global components, Rick Marianna, and our President of Global Enterprise Computing solutions, Eric Novak.
Brad Windenberg: During this call, we'll make forward looking statements, including statements about our business outlook strategies future financial results, which are based on our predictions and expectations as of today, our actual results could differ materially due to a number of risks and uncertainties, including the risk factors described in our most recent filings with the SEC, we undertake no obligation to.
Brad Windenberg: Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors described in our most recent filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss today on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results.
Brad Windenberg: Update publicly or revise any of the forward looking statements as a result of new information or future events.
Brad Windenberg: As a reminder, some of the figures we will discuss today on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We reconcile these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release, our Form 10-Q.
Brad Windenberg: We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's Associated Earnings Release, Reform 10-Q. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Sean and Raj will be available to take your questions. I'll now hand the call over to our President and CEO, Sean Kerins.
Sean J. Kerins: You can access our earnings release at Investor Dot Arrow Dot com.
Brad Windenberg: Along with a replay of this call. We've also posted a slide presentation to accompany our prepared remarks and encourage you to reference these slides during this webcast.
Brad Windenberg: Following our prepared remarks today, Shannon Raj will be available to take your questions I'll now hand, the call over to our president and CEO Sean Kerins.
Sean J. Kerins: Thanks, Brad, and thank you all for joining us. Today, I'd like to discuss our first quarter performance, provide some color on the overall market environment, and then close with our focal points and priorities as we look to the balance of the year. I'll then turn things over to Raj for more detail on our financials, as well as our outlook for the second quarter. In the first quarter, we continue to execute well in a challenging market environment as we work through the inventory correction that has impacted the global technology supply chain over the past few quarters.
Sean J. Kerins: Thanks, Brad and thank you all for joining us today I'd like to discuss our first quarter performance provide some color on the overall market environment, and then close with our focal points and priorities as we look through the balance of the year I will then turn things over to Raj for more detail on our financials as well as our outlook for the second quarter.
Sean J. Kerins: In the first quarter, we continued to execute well in a challenging market environment. As we worked through the inventory correction that has impacted the global technology supply chain over the past few quarters we.
Sean J. Kerins: We delivered total sales of $6.9 billion, which was in line with our expectations and generated non-GAAP earnings per share of $2.41, which was above the high end of our guided range. As we take a closer look at global components,
Raj: We delivered total sales of $6 9 billion.
Raj: Which was in line with our expectations.
Sean J. Kerins: <unk> non-GAAP earnings per share of $2 41.
Sean J. Kerins: Which was above the high end of our.
Raj: Guided range.
Sean J. Kerins: As we take a closer look at global components.
Sean J. Kerins: The cyclical nature of this business is a reality, and we're navigating through a prolonged correction as customers destock surplus inventory levels, which accumulated in response to the severe shortages that marked the industry supply chain disruptions of the pandemic era. We continue to witness the knockout impact on the demand environment with softness across many of the markets we serve. While we still see relative strength in pockets, the broader industrial market, a meaningful portion of our overall mix, remains in decline.
Sean J. Kerins: The cyclical nature of this business is a reality and we're navigating through a prolonged correction as customers destock surplus inventory levels, which accumulated in response to the severe shortages.
Sean J. Kerins: The industry's supply chain disruptions of the pandemic era.
Sean J. Kerins: We continued to witness the knock on impact to the demand environment with softness across many of the markets we serve.
Sean J. Kerins: While we still see relative strength in pockets the broader industrial market a meaningful portion of our overall mix.
Sean J. Kerins: <unk> decline.
Sean J. Kerins: Having said that, our customer base is stable, our design-related activity is healthy, and the leading indicators that point to the shape and duration of the cycle are definitely improving. Our book-to-bill ratios have improved steadily since late Q3 of last year across all three operating regions and are now approaching parity. Our backlog, which grew substantially during the shortage market environment, continues to trend downward, consistent with shorter lead times, although it does remain above pre-pandemic levels.
Sean J. Kerins: Having said that our customer base is stable our design related activity is healthy.
Sean J. Kerins: And the leading indicators that point to the shape and duration of the cycle are definitely improving.
Sean J. Kerins: Our book to Bill ratios have improved steadily since late Q3 of last year across all three operating regions.
Sean J. Kerins: Now are approaching parity.
Sean J. Kerins: Our backlog, which grew substantially during the shortage marketing environment continues to trend downward consistent with shorter lead times, although it does for me.
Sean J. Kerins: Pre pandemic levels.
Sean J. Kerins: Also, cancellation activity has normalized, and our visibility is improving. Broad-based market data suggests customer inventory levels at OEMs and EMS providers are declining both sequentially and year-on-year, a necessary step in the right direction. Lastly, we continue to effectively manage our own inventory in keeping with our improving visibility to changing production schedules, achieving a $390 million reduction during the first quarter.
Sean J. Kerins: Also cancellation activity has normalized.
Sean J. Kerins: Our visibility is improving.
Sean J. Kerins: Broad based market data suggests customer inventory levels at Oems and EMS providers are declining both sequentially and year on year.
Sean J. Kerins: Necessary step in the right direction.
Sean J. Kerins: Lastly, we continued to effectively manage our own inventory and keeping with our improving visibility to changing production schedules, achieving a $390 million reduction during the first quarter.
Sean J. Kerins: So, while it's difficult to precisely predict when the demand environment will accelerate, the industry fundamentals haven't changed, and we're confident in its long-standing cyclical nature for a return to growth in the near term. Now, from a regional perspective, in the West, we were encouraged by design wind counts that grew sequentially as customers broadly pivot from efforts to sustain existing products toward new product design and introduction activity. We also enjoyed relative strength in transportation in the Americas and in Aerospace and Defense in India.
Sean J. Kerins: So while it's difficult to precisely predict when the demand environment will accelerate the industry fundamentals haven't changed and we are confident in its long standing cyclical nature for a return to growth in the near term.
Sean J. Kerins: From a regional perspective in the West we were encouraged by design win count grew sequentially as customers broadly pivot from efforts to sustain existing products towards new product design and introduction activity.
Sean J. Kerins: We also enjoyed relative strength in transportation in the Americas.
Sean J. Kerins: In aerospace and defense in EMEA.
Sean J. Kerins: And in Asia, exiting the late-quarter Chinese New Year, we did see an uptick in activity related to consumer verticals and expect better sequential performance in the second quarter. For the global components business overall, as we look forward to the second quarter, we expect similar sequential sales trends compared to those we saw in Q1. However, we also expect leading indicators to continue to trend positively. Now turning to global ECS.
Sean J. Kerins: And in Asia.
Sean J. Kerins: Our late quarter Chinese new year, we did see an uptick in activity related to consumer verticals.
Sean J. Kerins: I expect better sequential performance in the second quarter.
Sean J. Kerins: What are the global components business overall, as we look forward to the second quarter, we expect similar sequential sales trends compared to those we saw in Q1.
Sean J. Kerins: We also expect leading indicators to continue to trend positively.
Sean J. Kerins: Now turning to global ECS.
Sean J. Kerins: In the first quarter, infrastructure software, cloud-related solutions, and AI-enabled compute drove our overall results, with softness related to large enterprise storage, networking, and cyber security. Globally, our billings were nearly flat year on year, and yet our recurring revenue base grew once again, as we continue to see customers shift their spending patterns to offerings enabled through IT as a service. This signals an encouraging trend because it will lead to improved visibility, stickier relationships, and higher contribution margins over time.
Sean J. Kerins: In the first quarter.
Sean J. Kerins: Infrastructure software cloud related solutions and AI enabled confused drove our overall results with softness related to large enterprise storage networking and cyber security.
Sean J. Kerins: Globally, our billings were nearly flat year on year and yet our recurring revenue base grew once again as we continue to see customers shift their spending patterns to offerings enabled through it as a service.
Sean J. Kerins: Signals, an encouraging trend because it will lead to improve visibility stickier relationships and higher contribution margins over time.
Sean J. Kerins: On a regional basis in EMEA, we again achieved year over year billings and gross profit dollar growth in the quarter.
Sean J. Kerins: On a regional basis, in EMEA, we again achieved year-over-year billings and gross profit dollar growth in the quarter, driven by healthy cloud adoption and compute refresh activity in North America. Our first quarter results reflect a mixed large enterprise IT spending environment. We continue to position our business in this region for greater mid-market scale and more infrastructure software and cloud adoption. During the quarter, we were pleased to announce significant enhancements to our digital go-to-market platform, Aerosphere.
Sean J. Kerins: Driven by healthy cloud adoption and compute refresh activity.
Sean J. Kerins: And in North America, our first quarter results reflect a mixed large enterprise it spending environment, we continue to position our business in this region for greater mid market scale and more infrastructure software and cloud adoption.
Sean J. Kerins: During the quarter, we were pleased to announce significant enhancements to our digital go to market platform <unk>.
Sean J. Kerins: It plays a key role in helping our suppliers and channel partners manage their journey to the markets for IT as a service and Solutions Selling and is key to the acceleration of our line card customer base expansion initiatives. Given the annual nature of our global ECS business, you might recall Q1 is typically the slowest of the year.
Sean J. Kerins: Plays a key role in helping our suppliers and channel partners manage their journey to the markets for <unk>. It is the service.
Sean J. Kerins: And solution selling and is key to the acceleration of our line card customer base expansion initiatives.
Sean J. Kerins: Given the annual nature of our global ECS business you might recall Q1 is typically the slowest of the year.
Sean J. Kerins: Our second quarter outlook does call for modest improvement and operating income dollar growth year-on-year. In closing, as we continue to navigate a challenging market environment, we remain focused on the factors and variables within our control. These would include prudent management of our cost structure to keep our expense ratios in line. This will protect our selling, engineering, and customer experience capacity for future growth and effective working capital management while still striving to meet the needs of our customers and suppliers.
Sean J. Kerins: Our second quarter outlook does call for modest improvement.
Sean J. Kerins: And operating income dollar growth year on year.
Sean J. Kerins: In closing as we continue to navigate a challenging market environment, we remain focused on the factors and variables within our control.
Sean J. Kerins: This would include prudent management of our cost structure to keep our expense ratios in line.
Sean J. Kerins: This will protect our selling engineering and customer experience capacity for future growth.
Sean J. Kerins: And effective working capital management, while still striving to meet the needs of our customers and suppliers. This discipline again contributed to strong cash flow during the quarter, providing us the flexibility to pursue our capital allocation priorities.
Sean J. Kerins: This discipline again contributed to strong cash flow during the quarter, providing us the flexibility to pursue our capital allocation priorities. And in the meantime, we remain invested in the growth priorities I highlighted last quarter while staying close to our suppliers and customers around the world. Those relationships, fostered through the dedication of our global team, give me great confidence in our ability to successfully navigate this environment and capitalize on a promising future. With that, I'll hand things over to Raj. Thanks, Sean.
Raj: And in the meantime, we remain invested in the growth priorities I highlighted last quarter, while staying close to our suppliers and customers around the world.
Raj: Those relationships fostered through the dedication of our global team give me great confidence in our ability to successfully navigate this environment and capitalized on our promising future.
Sean J. Kerins: With that I'll hand things over to Raj.
Raj: Thanks, Sean.
Rajesh K. Agrawal: Consolidated sales for the first quarter were $6.9 billion, within our guidance range and down 21% versus prior year. Global component sales were $5.2 billion, down 8% versus prior quarter or 24% versus prior year due to the ongoing semiconductor inventory correction. Enterprise Computing Solutions sales were $1.7 billion, down 8% versus prior year. This was partly a function of product rents and partly a function of lower discretionary IP spending in North America.
Raj: Consolidated sales for the first quarter was $6 9 billion within our guidance range and down 21% versus prior year.
Rajesh K. Agrawal: Global components sales were $5 2 billion down 8% versus prior quarter or 24% versus prior year due to the ongoing semiconductor inventory correction.
Rajesh K. Agrawal: Apprise competing solutions sales were $1 7 billion down 8% versus prior year.
Rajesh K. Agrawal: This was partly a function of product cracks and partly a function of lower discretionary spending in North America.
Rajesh K. Agrawal: With each other financial metrics for the quarter.
Rajesh K. Agrawal: We've each other financial metrics for the quarter. First quarter consolidated gross margin of 12.5% was down approximately 20 basis points versus the prior year, driven primarily by the overall mix of the components. sequentially, our gross margin was lowered by approximately 10 basis points due to the seasonality within the ECS business, partially offset by favorable regional mix within the Global Components business. Our Q1 GAAP expenses included $57 million related to operating expense reduction initiatives and the winding down of a business. These actions will produce operating expense savings as we progress through 2024.
Rajesh K. Agrawal: First quarter consolidated gross margin of 12, 5% was down approximately 20 basis points versus prior year, driven primarily by the overall mix.
Rajesh K. Agrawal: Sequentially, our gross margin was lower by approximately 10 basis points due to the seasonality with the ECS business, partially offset by favorable regional banks within the global components business.
Rajesh K. Agrawal: Our Q1 GAAP expenses included $57 million related to operating expense reduction initiatives and the winding data protection. These.
Rajesh K. Agrawal: These actions will reduce operating expense savings as we progress through 2024.
Rajesh K. Agrawal: Non-GAAP operating expenses declined sequentially to $618 million, resulting from a decline in variable expenses and our continued efforts to control spending. We generated non-GAAP operating income of $251 million in Q1, which was 3.6% of sales, with global components operating margin coming in at 4.7% and enterprise computing solutions coming in at 4.2%. Both are on a non-GAAP basis. Interest and other expense was $80 million in the first quarter. Our non-gas effective tax rate was 22.6%, which benefited from a favorable geographic income tax.
Rajesh K. Agrawal: non-GAAP operating expenses declined sequentially to $618 million, resulting from a decline in variable expenses and our continued efforts Charles Patrick.
Rajesh K. Agrawal: We generated non-GAAP operating income of about $251 million in Q1, which was three 6% of sales with global components operating margin coming in at four 7%.
Rajesh K. Agrawal: Enterprise computing solutions turning.
Rajesh K. Agrawal: 2%.
Rajesh K. Agrawal: On a non-GAAP basis.
Rajesh K. Agrawal: Interest and other expense was $80 million first quarter.
Rajesh K. Agrawal: Our non-GAAP effective tax rate was 22, 6%, which benefited from favorable geographic income mix.
Rajesh K. Agrawal: And finally non-GAAP diluted EPS for the first quarter was $2 41, which was above the high end of our guidance range.
Rajesh K. Agrawal: And finally, non-GAAP derivative EPS for the first quarter was $2.41, which was above the high end of our guide, drawing our attention to working capital. We reduced net working capital in the first quarter by over $400 million from Q4, ending the quarter at $6.9 billion. In fact, Q1 represents the third consecutive quarter of lower net working capital. Accounts receivable and accounts payable both decreased in the first quarter with a nearly offsetting impact.
Rajesh K. Agrawal: Our attention towards capital, we reduced net working capital in the first quarter by over $400 million from Q4, ending the quarter at $6 $9 billion.
Rajesh K. Agrawal: Q1 represents the third consecutive quarter of lower network capital.
Rajesh K. Agrawal: Accounts receivable and accounts payable decreased in the first quarter with nearly offsetting impact.
Rajesh K. Agrawal: Inventory at the end of the first quarter was $4 $8 billion decreasing $390 million for Q4 over.
Rajesh K. Agrawal: Inventory at the end of the first quarter was $4.8 billion, decreasing $390 million for Q4. In the past two quarters, we've reduced inventory levels by more than $1 billion. Our cash conversion cycle grew in the first quarter due to seasonality in our ECF system. Our cash flow from operations was $403 million in the first quarter. That debt at the end of the first quarter was lower compared to Q4 at $3.3 million. We repurchased $100 million of shares in the first quarter, and our remaining stock repurchase authorization stands at approximately $475 million.
Rajesh K. Agrawal: Over the past few quarters, we've reduced inventory levels more than $1 billion.
Rajesh K. Agrawal: Our cash conversion cycle through in the first quarter due to seasonality in our ECS business.
Rajesh K. Agrawal: Our cash flow from operations was $403 million for the first quarter.
Rajesh K. Agrawal: Debt at the end of the first quarter was lower compared to Q4 at $3 3 billion, we repurchased $100 million of shares in the first quarter and our remaining stock repurchase authorization stands at approximately $475 million.
Rajesh K. Agrawal: Now turning to Q2 guidance, we expect sales for the second quarter to be between $6.2 billion and $6.8 billion. We expect global component sales to be between $4.6 and $5 billion, which at the midpoint is down approximately 8% from the prior quarter. We expect Enterprise Computing Solutions sales to be between $1.6 and $1.8 billion, which at the midpoint represents a 7% decrease in year-end revenue. We're assuming a tax rate in the range of approximately 23 to 25 percent and interest expense of approximately $75 million, and our non-gap deleted earnings per share is expected to be between $2.05 and $2.25.
Speaker Change: Now turning to Q2 guidance.
Rajesh K. Agrawal: We expect sales for the second quarter to be between $6 2 billion and $6 8 billion.
Rajesh K. Agrawal: We expect global components sales to be between $4 5 billion.
Rajesh K. Agrawal: Which at the midpoint is down approximately 8% from prior quarter.
Rajesh K. Agrawal: We expect enterprise computing solutions sales to be between one and.
Rajesh K. Agrawal: And $1 $8 billion, which at the midpoint represents a 7% decrease.
Rajesh K. Agrawal: We're assuming a tax rate in the range of approximately 23% to 25% and interest expense of approximately $75 million.
Rajesh K. Agrawal: And our non-GAAP diluted earnings per share is expected to be between $2 five and $2 25.
Rajesh K. Agrawal: And finally, we are showing changes in foreign currencies to have an immaterial effect on our Q2 guide. The details of the foreign currency impact can be found in our Freshers' List. With that, Sean and I are now ready to take your questions. Operator, please open the line.
Rajesh K. Agrawal: And finally, we estimate changes in foreign currencies to have an immaterial effect on <unk>.
Rajesh K. Agrawal: Our Q2 guide.
Rajesh K. Agrawal: The details of the foreign currency impact can be found in our press release.
Speaker Change: With that Sean and I are now ready to take your questions.
Rajesh K. Agrawal: Operator, please open the line.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Operator: Ladies and gentlemen, we will now begin the question and answer session. In order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of William Stein.
Operator: In order to ask a question press Star then the number one on your telephone keypad.
Operator: Your first question comes from the line of William Stein with <unk> Securities. Please go ahead.
William Stein: Great, thanks for taking my questions. Hey guys, I'm hoping you could linger for a second on the business exit and inventory write down that's sort of unusual for you guys, or maybe I'm Maybe it's less so, but I, you know, it's, I don't recall having seen anything like this in the past. Maybe you could just dig into that for a minute. What are you actually doing?
William Stein: Thanks for taking my questions Hey, guys.
William Stein: I'm, hoping you could linger for a second on the business exit an inventory write down that sort of unusual for you guys.
William Stein: Maybe it's less so.
William Stein: Okay.
William Stein: I don't recall, having seen anything like this in the past maybe you could just dig into that for a minute what are you actually seeing.
William Stein: Any export yes it was.
Unknown Executive: It was a small business for us, Will, and it was unprofitable in nature. And it did have some inventory on the balance sheet that we wrote down as a result. So it's not a material impact from a P&L standpoint, but we did have some inventory on hand that we wrote down. And it's sort of part of our Outback Savings Initiative that we're always looking for. And so that, you know, that should help us as we move through the course of the rest of this year as well.
William Stein: There was a small business for us will and it was unprofitable in nature and it did have some inventory on the balance sheet that we wrote down as a result, so it's not a material impact from a P&L standpoint, but it did have some inventory.
Unknown Executive: That we wrote down.
Unknown Executive: And it's sort of part of our Opex savings initiatives that we're always looking for.
Unknown Executive: And so that should help us as we move through the course of the rest of this year as well.
Unknown Executive: Okay.
William Stein: Okay, maybe as my follow-up question, I could ask about inventory trends. Inventory days are still running about 20 plus days above sort of the historical norm. But payables are also, you know, pretty inflated; they sort of offset each other. So it's not a big deal from the cash conversion perspective. But what should we anticipate for the next few quarters and maybe long-term targets in terms of sort of working capital targets that'd be helpful for truing up my model? Thanks so much.
Speaker Change: Maybe as my follow up I could ask about inventory trends inventory days are still running about 20, plus days above sort of the historical norm, but payables are also pretty inflated they sort of offset each other so it's not a big deal from the cash conversion perspective, but what should we anticipate.
William Stein: Dissipate for the next few quarters, and maybe long term targets in terms of sort of working capital targets that would be helpful. For Truing up my model. Thanks, So much.
Speaker Change: You bet well thanks for joining us so maybe just a few remarks about.
Sean J. Kerins: You bet, Will. Thanks for joining us. So maybe just a few remarks about, you know, what we're doing to manage inventory in this environment in general, and then I'll let Raj speak about how we're thinking about working capital in total. As you saw, we were able to manage a step down in inventory. Once again, this quarter, I think it's been pretty substantial. Over the past couple of weeks, we're obviously very focused on backlog conversion.
Sean J. Kerins: What we're doing to manage inventory in this environment in general and then I'll, let Raj speak to.
Raj: How we're thinking about working capital in total.
Sean J. Kerins: You saw we were able to manage a step down in inventory once again this quarter I think its been pretty substantial over the past couple.
Sean J. Kerins: We're obviously very focused on backlog conversion.
Sean J. Kerins: We do still see better sell through in the mass market and given our mass market focus that's been helpful.
Sean J. Kerins: We do still see better sell-through in the mass market. And given our mass market focus, you know, that's been helpful. We obviously still carry some excess, but we think that's largely a function of some of the longer-term supply agreements that came to prominence during the peak of the shortage market, many of which are now obsolete or winding down. But there are still some remnants of that, both in our shop as well as throughout the ecosystem.
Sean J. Kerins: We obviously still carrying some excess we think thats largely a function of some of the loss.
Sean J. Kerins: Longer term supply agreements that came to prominence during the peak of the shortage market many of which are now.
Sean J. Kerins: The leader winding down, but there is still some remnants of that.
Sean J. Kerins: Both in our shop as well as throughout the ecosystem.
Sean J. Kerins: But in general, we're pretty confident in the quality of our inventory as it relates to customer demand, given the visibility we do have. We tend to look at our inventory through the lens of terms. We are seeing our terms normalized both for semiconductors and IP&E. We think that's a good sign. It's another of the positive leading indicators that we want to see as we manage through the cycle. Ultimately, we do want to maintain inventories that best serve customer needs, especially in areas related to demand creation and solution selling, both of which are pretty important to our suppliers because it is all about getting back to growth.
Sean J. Kerins: But in general we're pretty confident in the quality of our inventory as it relates to.
Sean J. Kerins: Customer demand given the visibility we do have we tend to look at.
Sean J. Kerins: Our inventory through the lens of turns we.
Sean J. Kerins: We are seeing our turns normalized both for semiconductor.
Sean J. Kerins: In IPD.
Sean J. Kerins: We think thats a good sign as to another.
Sean J. Kerins: The positive leading indicators that we want to see as we.
Sean J. Kerins: Manage through the cycle.
Sean J. Kerins: Ultimately, we do want to maintain inventories that best serve customer needs, especially in areas related to demand creation and solution selling.
Sean J. Kerins: Both of which are pretty important to our suppliers because it is all about getting back to growth.
Sean J. Kerins: So we may not see the same step down in Q2 as we saw in Q1 and Q4, but we are managing this effectively, and we are getting to terms that we think are in line with historical patterns. And ultimately, once we get to the right level, that'll be a good sign in terms of the correction overall.
Sean J. Kerins: So we may not see the same step down in Q2 as we saw in Q1 and Q4, but we are we are managing this effectively and we are getting to terms that we think are in line with historical patterns and ultimately.
Sean J. Kerins: Once we get to the right level that'll be a good sign in terms of the correction overall.
William Stein: Yeah, well, let me just pause for a second and see if that answers your question, if you have something more there.
Speaker Change: Yes, let me just pause for a second and see if that answers. Your question, if we have something more there.
William Stein: Well... I understand, I think you just said that the sequential burn from a dollar's perspective may not be as big, but I wonder if we have longer-term targets to sort of anchor our model towards over time for either of these two metrics.
William Stein: Well.
unknown: [inaudible]
William Stein: I understand I think you just said that the <unk>.
unknown: Sequential burn from a dollars perspective may not be as big but I wonder if we have longer term targets that we can sort of anchor our model towards over time for either of these two metrics.
Rajesh K. Agrawal: On inventory, what I would say, just to add to Sean's comments, you know, it's the lowest level it's been in a couple of years. And so we really want to position ourselves to support our customers. You know, a billion dollar reduction in the last two quarters is quite significant, as I mentioned. And so we certainly want to be positioned for the upturn when that comes. And that's really important to us.
unknown: Okay.
Rajesh K. Agrawal: On the inventory.
Speaker Change: Just to add to Charlie's comments.
Rajesh K. Agrawal: Lowest level, it's been in a couple of years.
Rajesh K. Agrawal: We really want to position ourselves to support our customers.
Rajesh K. Agrawal: $1 billion reduction in last two quarters were quite significant as I mentioned.
Rajesh K. Agrawal: So we certainly want to be positioned for the upturn when that terms and that's really important to us overall.
Rajesh K. Agrawal: Overall, we've generated, let me answer it this way, we've generated about $900 million of cash flow in the last 12 months. And so we're doing a really good job of managing the overall working capital. We're going to continue to generate cash flow in the second quarter, you know, and a healthy amount of cash flow. But we also want to manage working capital to the needs of the business.
Speaker Change: We generated near me answer it this way we've generated about $900 million of cash flow in the last 12 months and so we're doing a really good job of managing the overall working capital.
Rajesh K. Agrawal: We're going to continue to generate cash flow in the second quarter and healthy amount of cash flow, but we also want to manage working capital to the needs of the business.
Rajesh K. Agrawal: Your next question comes from the line of Joe <unk> with Wells Fargo.
Operator: Your next question comes from the line of Joe Quatrochi with Wells Fargo.
Joseph Michael Quatrochi: Please go ahead.
Joseph Michael Quatrochi: Yes, thanks for taking the question.
Joseph Michael Quatrochi: Yeah, thanks for taking the question. Um, I wanted to follow up on the OPEX savings that you mentioned in your prepared remarks in the last question. Can you just kind of help us quantify, maybe like, how to think about the OPEX savings on a net basis as we move through to 2024 and modeling that?
Joseph Michael Quatrochi: Wanted to follow up on the Opex savings that you mentioned in the prepared remarks and then the last question can you just help us quantify maybe like how to think about the opex savings on a net basis as we move through to 2024 and modeling that.
Speaker Change: Sure Joe Let me just kind of frame up the way, we're thinking about cost in this environment and then Raj can you give us some some color maybe.
Sean J. Kerins: Sure, Joe, let me just kind of frame up the way we're thinking about cost in this environment, and then Raj can give you some, some color to maybe help you think about, you know, the magnitude. As you'd expect, we're taking appropriate actions in this environment to navigate the correction. I think we said last quarter, and it's still true, that you can expect to see our absolute operating expense dollars trend downward, you know, throughout the course of the year.
Sean J. Kerins: Help you think about the the magnitude.
Sean J. Kerins: As you'd expect we're taking appropriate actions in this environment to navigate.
Sean J. Kerins: The correction I think we said last quarter and it's still true that you can expect to see our absolute operating expense dollars trend downward.
Sean J. Kerins: Throughout the course of the year.
Sean J. Kerins: However, we do see this as ultimately short-term in nature, even though this cycle has taken longer than those in the past to play out. So ultimately, we do want to protect our growth priorities and all the associated selling, engineering, and customer experience capacity for the long haul. We've always taken a posture that, you know, leads us to concentrate on structural costs so that we can repurpose them over time in favor of what we're trying to do, you know, grow, and that's exactly what we're up to now. And we think the, you know, the expense ratios that we're managing, too, are really consistent with, you know, the last time we had to navigate a correction.
Sean J. Kerins: However, we do see this as ultimately short term in nature.
Sean J. Kerins: Even though this cycles taking longer than.
Sean J. Kerins: Those in the past to play out so ultimately we do want to protect our growth priorities and all the associated selling and engineering and customer experience capacity for the long haul.
Sean J. Kerins: We've always taken a posture that lease.
Sean J. Kerins: Leads us to concentrate on structural costs. So that we can repurpose it over time in favor of what we're trying to do to grow and that's exactly what we're up to now.
Speaker Change: Thank you.
Sean J. Kerins: Expense ratios that were managing to are really consistent with the last time, we had to navigate a correction.
Rajesh K. Agrawal: Yeah, Joe, just to add to that, you know, we did incur some expenses in the first quarter, as I've mentioned in my comments. This is, I would first of all, just say this is part of our ongoing OPEX reduction initiatives. But, you know, specifically, we would expect these charges to pay back within the next 12 to 15 months. So that's the way I would look at it in the P&L.
Speaker Change: Yes, Joe just to add to that.
Rajesh K. Agrawal: We did take some expenses in the first quarter as I've mentioned in my comments.
Rajesh K. Agrawal: This is first of all I can say this is part of our ongoing opex reduction initiatives, but specifically we would expect these.
Rajesh K. Agrawal: These charges to pay back within the next 12 to 15 months. So that's the way I would look at it in the P&L.
Rajesh K. Agrawal: Okay.
Joseph Michael Quatrochi: Okay, so I guess, maybe after a different way, I mean, what's the right kind of OpEx trajectory that we think about the 24? Just giving those comments.
Speaker Change: I guess, maybe asked a different way I mean, whats the right kind of Opex trajectory that we think about the 24.
Joseph Michael Quatrochi: Just given those comments.
Unknown Executive: I mean, obviously, it depends on the overall revenue trajectory, but putting that aside for a moment, we would see OPEX trending downward for the various things that we've talked about.
Speaker Change: I mean, obviously it depends on the overall revenue trajectory, but putting that aside for a moment, if we would see opex trending downward for the various things that we've talked about.
Speaker Change: Okay, maybe shifting gears a little bit.
Joseph Michael Quatrochi: Okay, maybe shifting gears a little bit, you know, I just kind of want to think about that, you know, the component side. I think if you look at the guidance for the June quarter, this would be potentially where things shake out the fourth quarter in a row that your largest US competitor is actually larger from a revenue perspective. I know there are a lot of inventory dynamics that are going on right now. But just how do we think about your market share and just the sustainability of that as we look forward to a market recovery? So, Joe, we don't really think that there's anything here.
Joseph Michael Quatrochi: Just kind of want to think about the on the components side.
Joseph Michael Quatrochi: I think if you look at the guidance for the June quarter, this would be potentially where things shake out the fourth quarter in a row that your largest U S competitor would actually be larger from a from a revenue perspective, I know theres a lot of inventory dynamics that are going on right now, but just how do we think about your market share and just the sustainability of that as we look forward to a market recovery.
Joseph Michael Quatrochi: Okay.
Joseph Michael Quatrochi: So Joe we don't really think that there is any reason to believe market share dynamics have changed in a meaningful way throughout this cycle.
Sean J. Kerins: So, Joe, we don't really think that there's any reason to believe market share dynamics have changed in a meaningful way throughout this cycle. If we look at our competition more broadly, we all carry a different mix of line cards, some common, some different, and that tends to vary. You know, region by region. So it's not surprising that, you know, quarter to quarter, you're going to see some variability in, you know, our growth rates and others. But again, you know, we're pretty confident that we're holding it back from gaining ground in most of our key supplier relationships.
Sean J. Kerins: If we look at our competition more broadly we all carry.
Sean J. Kerins: Different mix.
Sean J. Kerins: Of line card some comments on different and that tends to vary.
Sean J. Kerins: Region by region, so, it's not surprising that quarter to quarter, you're going to see some variability.
Sean J. Kerins: Our growth rates in others, but again, we're pretty confident that we are holding if not gaining ground in most of our key supplier relationships.
Joe: Perfect. Thank you.
Joe: Thanks, Joe.
Sean J. Kerins: As a reminder, if you would like to ask a question press star followed by the one on your telephone keypad.
Operator: As a reminder, if you would like to ask a question, press star followed by the number on your telephone keypad. Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead.
Ruplu Bhattacharya: Your next question comes from the line of.
Operator: Absolutely.
Ruplu Bhattacharya: How are you.
Ruplu Bhattacharya: With bank of America.
Ruplu Bhattacharya: Please go ahead.
Ruplu Bhattacharya: Hi, thanks for taking my questions. Maybe I'll start with Raj.
Ruplu Bhattacharya: Hi, Thanks for taking my questions.
Ruplu Bhattacharya: Maybe I'll start with <unk>.
Ruplu Bhattacharya: In the ECS segment Raj was there a meaningful contribution from netted down items to gross margins and can you talk about the gross margins in that segment in the Americas versus Europe.
Ruplu Bhattacharya: In the ECS segment, Raj, was there a meaningful contribution from netted down items to gross margins? And can you talk about the gross margins in that segment in Americas versus Europe? Because I think you were trying to focus on the middle market in America. Did that have a meaningful impact in this quarter?
Ruplu Bhattacharya: Because I think you were trying to focus on the middle market in Americas did that have.
Ruplu Bhattacharya: A meaningful impact in this quarter.
Speaker Change: <unk> are you talking about the first quarter or our second quarter guidance.
Ruplu Bhattacharya: Ruplu, are you talking about the first quarter or our second quarter guidance?
Ruplu Bhattacharya: No, I'm just talking about the quarter you reported, the first quarter.
Ruplu Bhattacharya: No I'm just talking about the quarter you reported the first quarter.
Ruplu Bhattacharya: Oh, yes, there is some first of all there is some seasonality from the fourth quarter and the first quarter. So that's playing a part in a lot of the numbers that youre seeing because of the ECS business has its largest quarter as the fourth quarter of the year.
Rajesh K. Agrawal: Oh, yeah, there's some seasonality from the fourth quarter to the first quarter. So that's playing a part in a lot of the numbers that you're seeing because the ECS business has its largest quarter in the fourth quarter of the year.
Rajesh K. Agrawal: So the gross margin step down that you see there is closely related to seasonality.
Rajesh K. Agrawal: The year over year that business state growth gross margins.
Rajesh K. Agrawal: But thats really what youre seeing there in the gross margin profile of the business.
Rajesh K. Agrawal: And so the gross margin step down that you've seen there is mostly related to seasonality. But year over year, that business did grow gross margins. But that's really what you're seeing there in the gross margin profile of the business. And, as has always been the case, Ruplu, the margin dynamics are different between the two regions. In Europe, they're structurally higher, you know, based on the substantial size of our mid-market customer base and the mix of the products we offer. In North America, as is the case for the industry, margins tend to be a little bit lower.
Rajesh K. Agrawal: As has always been the case for <unk>.
Rajesh K. Agrawal: The margin dynamics are different between the two regions.
Rajesh K. Agrawal: They are structurally higher based on the the substantial size of our mid market customer base.
Rajesh K. Agrawal: And the mix of the products we offer.
Rajesh K. Agrawal: In North America as is the case for the industry.
Rajesh K. Agrawal: <unk> tend to be a little bit lower.
Speaker Change: Right and just to follow up on the second part of that question.
Sean J. Kerins: Right. And just to follow up on the second part of that question, Sean, you had said that you're focusing on customer mix and the mid market in the Americas region. What innings are we in on that, and how is that progressing?
Sean J. Kerins: Sean you had said that youre focusing on.
Sean J. Kerins: Customer mix.
Sean J. Kerins: The mid market in the Americas region, what innings are we in in that and how is that progressing.
Sean J. Kerins: So I think look we really like the model that we've established in Europe route Blue.
Sean J. Kerins: So I think, look, we really like the model that we've established in Europe, Ruplu. We think it really reflects our strategy overall, right? You have a substantial mid-market customer base, we have a rich Lion Card of Infrastructure Software and Cloud Solutions, and good efforts through digital adoption. Frankly, we're on the same path in North America, but it is taking longer than maybe we first thought. We're fortunate now to have the gentleman that really helped build and establish our monoliths here in Europe, now leading our global business. I know Eric will be spending quite a bit of time in North America, but it will take some more time as we look forward.
Sean J. Kerins: It really reflects our strategy overall right you've got a substantial mid market customer base, we have a rich.
Sean J. Kerins: Line card of infrastructure software and cloud solutions good efforts through digital adoption and frankly, we're on the same path in North America. It is taking longer.
Sean J. Kerins: Then maybe we first thought we're fortunate now to have the two gentlemen that really helped build and establish our model at scale in Europe now, leading our our global business and I know, Eric will be spending quite a bit of time in North America.
Sean J. Kerins: But it will take some more time as we look forward.
Ruplu Bhattacharya: Okay, got it. Sean, from your prepared remarks for the component segment, it sounded like you're seeing some green shoots. I mean, it's still going through inventory correction, but you saw the book to bill was improving, and things sounded a little bit better. But when you look at the guide, right, at the midpoint, at least $4.8 billion, I think it's going to be down 8% sequentially.
Speaker Change: Okay got it if I can ask a quick follow up Sean from your prepared remarks for the components segment.
Ruplu Bhattacharya: It sounded like you're seeing some green shoots I mean, it's still going to inventory correction, but you saw the book to Bill was improving and things sounded a little bit better.
Ruplu Bhattacharya: When you look at the guide right at the midpoint at least $4 8 billion I think it's going to be down 8% sequentially. So just can you give us your thoughts on what you think what youre seeing for the June quarter in terms of regional mix.
Ruplu Bhattacharya: So just can you give us your thoughts on what you think, what you're seeing for the June quarter in terms of regional mix and what is, is anything weaker or stronger? I mean, if you could just give us your thoughts on the June quarter for the component segment. Thank you.
Ruplu Bhattacharya: And what is anything weaker or stronger I mean, if you can just give us.
Ruplu Bhattacharya: Your thoughts on the June quarter for the components segment. Thank you.
Sean J. Kerins: Yeah, sure. I'll try to frame it up a little bit and then maybe ask Rick Barrano, our global president, to talk about, you know, some of the differences from region to region. He's a little bit closer to our regional market activity, but as you know, in Q1, we saw softness across a number of key verticals for us. There was a better market, you know, related to transportation in the West, aerospace and defense in Europe, and consumer-related verticals in Asia.
Speaker Change: Yes sure.
Sean J. Kerins: I'll try and frame it up a little bit and then maybe.
Sean J. Kerins: Rick Bruno our global President to talk about some of the differences from region to region. He is a little bit closer to or a regional market activity, but as you know in.
Sean J. Kerins: In Q1.
Sean J. Kerins: We saw softness across a number of key verticals for us there was.
Sean J. Kerins: A better market related to transportation and the west.
Sean J. Kerins: Aerospace and defense in Europe consumer related verticals in Asia, we saw those as <unk>.
Sean J. Kerins: We saw those as, as you say, green shoots. You know, we think we're approaching the bottom based on all the leading indicators that we pay close attention to. We're probably not quite there yet, but we're sure getting a lot closer. The cycle plays out differently from one region to the next, and it plays out differently over time. So I'll let Rick give you some additional color about that.
Sean J. Kerins: As you say green shoots.
Rick: We think we're approaching the bottom based on all the leading indicators that we pay close attention to what we're probably not quite there yet, but we're sure getting.
Rick: A lot closer.
Rick: And as you know the.
Sean J. Kerins: The cycle plays out differently from one region to the next and it plays out differently over time, So I'll, let Rick give you some additional color about that yeah. Thanks, Ron I think when you look at the markets overall from a regional standpoint, I think they are playing out as we expected them to play out to a certain degree.
Rick Marano: Yeah, thanks, Sean. I think when you look at the markets overall from a regional standpoint, I think they're playing out as we expect them to play out to a certain degree. Some green shoots in the East, in Asia, around certain verticals that we're starting to see some sense of recovery from. To Sean's point, in the West, in the Americas, some green shoots around transportation, destocking continuing to happen, and inventory levels getting to some levels where we're starting to see some build and backlog overall, as we talk about North America.
Rick Marano: Some green shoots in the east and the Asia around certain verticals that we're starting to see some signs of recovery from.
Rick Marano: To Sean's point in the west and the Americas, Some green shoots around transportation Destocking, continuing a happy and inventory levels getting to some levels, where we're starting to see some build in backlog overall as we talked about North America and in EMEA and.
Rick Marano: And in EMEA, and we look at, you know, basically the mill arrow segment of our business, we see some green shoots there. But as we work through the balance of the cycle, as destocking continues to happen, we're confident that we're starting to see the market shape up the way we thought we would based on the regions and the timing within the cycle in those regions as well.
Rick Marano: And we look at basically the 1000 Aero segment of our business, we see some green shoots there, but as we work through the balance of the cycle as Destocking continues to happen. We're confident that we're starting to see the market shape up the way we thought we would based off of the regions and the timing within the cycle in those regions as well.
Rick Marano: those regions as well. Okay.
Ruplu Bhattacharya: Okay, thanks for all the details. I appreciate it.
Speaker Change: Okay. Thanks for all the details appreciate it.
Ruplu Bhattacharya: Sure.
Ruplu Bhattacharya: I will now turn the call back over to Brad when Biegler for closing remarks. Please go ahead.
Brad Windenberg: I will now turn the call back over to Brad Windbigler for his closing remarks. Please go ahead.
Brad Windbigler: Great. Thank you all again for joining today's call. We look forward to meeting you at upcoming Investor events and have a good day.
Brad Windenberg: Great. Thank you all again for joining today's call. We look forward to meeting you at upcoming investment events. Have a good day.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Yeah.