Q4 2024 Arrow Electronics Inc Earnings Call
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Good day and welcome to the Arrow Electronics fourth quarter 2024 earnings call.
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Brad: At this time I would like to turn the conference over to Brad wouldn't burglar arrows Treasurer, and Vice President of Investor Relations. Please go ahead.
Brad Wurnitsch: Thank you operator, I'd like to welcome everyone to the Arrow Electronics fourth quarter 2024 earnings Conference call. Joining me on the call today is our president and Chief Executive Officer, Sean Kerins, Our Chief Financial Officer Raj Agarwal, our president of global components, Rick Marrano, and our President of Global Enterprise Computing solutions, Eric Novak during this.
Brad Wurnitsch: Call will make forward looking statements, including statements about our business outlook strategies plans and 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 due to the risk factors and other factors described in this quarter's associated earnings release, and our most recent filings with the SEC.
Brad Wurnitsch: We undertake no obligation to update publicly or revise any of the forward looking statements as a result of new information or future events.
Brad Wurnitsch: As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results.
Brad Wurnitsch: We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release you.
Brad Wurnitsch: You can access our earnings release at Investor Arrow Dot Com, along with a replay of this call.
Brad Wurnitsch: We've also posted a slide presentation to accompany our prepared remarks and encourage you to reference these slides during this webcast.
During our prepared remarks today, Shawn and Raj will be available to take your questions.
Speaker Change: Now I'll hand, the call over to our president and CEO Sean guarantee.
Speaker Change: Thank you Brad and thank you all for joining us today I'd like to share a few thoughts on 2024 as a whole then I'll comment on our fourth quarter performance reflect on the markets in which we compete and share our thinking as to how things are shaping up as we look to 2025.
Speaker Change: I'll, then turn things over to Raj for more detail on our financials as well as our outlook for the first quarter.
Speaker Change: Reflecting on 2024, it was a year that brought arrow unique market conditions and challenges, but also opportunity.
Speaker Change: Given the ongoing correction in the broader semiconductor industry I think we effectively navigated a challenging year, while taking several steps to strengthen and position our global components business with the anticipated improvement in conditions ahead.
Speaker Change: These include extending our line card and expanding our customer base.
Speaker Change: Continuing our commitment to the offerings and capabilities that differentiate us with suppliers and customers, namely supply chain management demand creation, and engineering services and realigning our business for global consistency and scale.
Speaker Change: In our enterprise computing solutions business, we fully aligned our go to market strategy across both regions and are laser focused on the markets and demand trends for which we're best suited namely the adoption of hybrid cloud and AI related solutions, especially in the mid market.
Speaker Change: As a result suppliers and channel partners are taking notice we exited the year on a healthy trajectory and have growing confidence for the performance of this business in 2025.
Speaker Change: Now turning to our results.
Speaker Change: In the fourth quarter, we executed well relative to our original expectations generating $7 3 billion in total sales and achieving non-GAAP earnings per share of $2 97.
Speaker Change: Both surpassing the high end of our guided ranges.
Speaker Change: Taking a closer look at our global components business.
Speaker Change: We closed out the year with solid results despite challenging market conditions on a global basis. Despite continued softness across a number of verticals. We saw all three regions performed in line with or better than typical seasonal patterns. Our overall sales results were better in IPD relative to our semiconductor business.
Speaker Change: <unk> the resilience of that segment throughout the cycle.
Speaker Change: Most notably we saw a sequential improvement in our industrial markets driven by gains in both Asia and the Americas and in addition, our value added offerings and capabilities contributed to gross margin stability during the quarter.
Speaker Change: On a regional basis results were quite mixed in Asia stability in transportation and growth in industrial were offset by softness in consumer compute and communications segments.
Speaker Change: In the Americas, our gains in the industrial market were offset by softness throughout the automotive sector.
Speaker Change: Aerospace and defense along with the medical device markets continue to be more resilient.
Speaker Change: And finally, EMEA, a sequential revenue decline aligned with seasonal norms potentially an encouraging trend given the region's later passage through the cycle and despite a challenging macro environment, we're executing well in that region.
Speaker Change: As for the market more broadly we believe we're in the later innings of the industry cyclical correction.
Speaker Change: The precise timing and pace of a broader market recovery are still difficult to predict but we do continue to see incremental improvement in the key leading indicators for our business our.
Speaker Change: Our book to Bill ratio is now just shy of parity on a global basis with two of our three operating regions exiting Q4 at or near one to one <unk>.
Speaker Change: Rescheduling and cancellation rates are fully normalized our visibility is steady and our backlog is stabilizing.
Speaker Change: Lastly industry wide data points suggest ecosystem inventory levels continued to decline.
Speaker Change: Albeit slowly.
Speaker Change: Our Q1 guidance reflects a broader market still bouncing along the bottom.
Speaker Change: But as we look beyond the first quarter to the balance of the full year, we're cautiously optimistic about an improving trajectory.
Speaker Change: We think the declining inventory levels will eventually support improve visibility and a modest recovery.
Speaker Change: We expect to see incremental volume related to our supplier and customer base expansion efforts and we believe our actions to further penetrate the market for IPD along with growth in value added services will also contribute to our momentum.
Speaker Change: Nevertheless.
Speaker Change: As we've suggested in prior quarters, a broader recovery will be predicated upon improving outlooks across our supplier base.
Speaker Change: Now turning to our global ECS business in the fourth quarter, we delivered year over year growth in billings gross profit and operating income underscoring our alignment to the higher growth demand trends across enterprise it.
Speaker Change: Along with improving execution in our North American region.
Speaker Change: <unk> and hybrid cloud solutions infrastructure.
Speaker Change: Software, including cyber security and improving data center activity related to AI adoption.
Speaker Change: Drove our results.
Speaker Change: Our first quarter outlook anticipates, similar trends and as such we expect to see year over year gross profit dollar growth in the first quarter from both regions in operating margin expansion for the business overall.
Speaker Change: And as we look to the full year, we are encouraged by several factors, including the benefit of our supplier and customer base expansion efforts in 2024.
Speaker Change: Increasing adoption of our aerospace our digital platform are.
Speaker Change: Our growing backlog of cloud and infrastructure software and the continued expansion of our recurring revenue volumes.
Speaker Change: All of which indicates our ECS business is poised for a solid year and a growing contribution to <unk> overall results.
Speaker Change: In closing.
Though the industry downturn and our components business has been more prolonged than anticipated we're confident in our longer term outlook for the semiconductor industry and our business as a whole we remain committed to our strategic priorities and continue to take healthy steps to position the business for the growth opportunities that lie ahead.
Speaker Change: In the meantime.
Speaker Change: Like to thank all of our employees around the world for their dedication to arrow throughout 2024, I'm grateful for their commitment to our suppliers, our customers and especially each other.
Speaker Change: And with that.
Raj: I'll hand things over to Raj.
Raj: Thanks, Sean consolidated sales for the fourth quarter were $7 3 billion above our.
Raj: Guidance range and down 7% versus prior year.
Raj: Global components sales were $4 8 billion above the midpoint of our guidance and down 3% versus prior quarter changes in foreign exchange rates reduced reported revenue by approximately 100 basis points compared to the prior quarter.
Raj: Enterprise computing solutions sales were $2 5 billion.
Raj: Above our guidance range and 12% higher versus prior year.
Raj: Vcs billings grew 10% in the fourth quarter compared to the same period last year.
Raj: Moving to other financial metrics for the quarter.
Raj: Fourth quarter consolidated non-GAAP gross margin of 11, 7% was down approximately 90 basis points versus prior year, driven primarily by overall mix in global components.
Raj: Sequentially, our consolidated gross margin was higher by 20 basis points due to the seasonality within the ECS business.
Raj: Global components gross margin was 11, 4% and enterprise computing solutions was 12, 4% also on a non-GAAP basis.
Raj: Our fourth quarter non-GAAP operating expenses grew $12 million sequentially to $580 million, reflecting seasonal growth in our enterprise computing systems segment.
Raj: Expense levels continued to decline year over year with the fourth quarter, approximately $45 million lower compared to the same period last year, demonstrating the results of recent initiatives and our continuing focus on expense efficiency.
Raj: In the fourth quarter, we generated non-GAAP operating income of $274 million, which was three 8% of sales for the global components operating margin at three 6% and enterprise computing solutions at six 5% both on a non-GAAP basis.
Raj: Interest and other expense was $60 million during the fourth quarter and our non-GAAP effective tax rate was 24, 9%.
Raj: And finally non-GAAP diluted EPS for the fourth quarter was $2 97 insurance, which was above our guided range due to favorable revenue levels.
Raj: Turning to working capital.
Raj: Net working capital declined sequentially in the fourth quarter by approximately $170 million ending the quarter at $6 7 billion inventory at the end of the fourth quarter was $4 7 billion.
Raj: This represents a $1 1 billion a reduction from our peak inventory levels five quarters prior.
Raj: Our cash conversion cycle modestly declined in the fourth quarter to 77 days.
Raj: Our cash flow from operations was $326 million in the fourth quarter and $1 1 billion for the four years. This was the sixth consecutive quarter of positive cash flow generation.
Raj: <unk> balance sheet debt at the end of the fourth quarter was $3 1 billion.
Raj: We repurchased $50 million of shares in the fourth quarter and our remaining repurchase authorization stands at approximately $325 million.
Raj: For the full year, we repurchased $250 million of our stock.
Raj: In the short term, we are continuing to balance the capital priorities with managing our debt ratios.
Raj: Now turning to Q1 guidance.
Raj: We expect sales for the first quarter to be between $5 98 billion and $6 five 8 billion.
Raj: You expect global component sales to be between $4 35 billion and $4 $75 billion rich at the midpoint is down approximately five 5% from prior quarter.
Raj: In enterprise computing solutions, we expect sales to be between $1 63 billion and $1 83 billion, which is approximately.
Raj: Approximately friend changed at the midpoint year on year.
Raj: For the company overall, we expect relatively stable gross margin sequentially.
We're also assuming a tax rate in the range of approximately 23% to 25% and interest expense of approximately $60 million to $65 million.
Raj: And our non-GAAP diluted earnings per share is expected to be between $1 30, and $1 15.
Raj: And finally, given the strength in the U S dollar, particularly relative to the Euro we estimate changes in foreign currencies to be a headwind in the first quarter decreased reported sales by approximately 200 basis points or $140 million compared to the first quarter of 2024 at.
Raj: The details of the foreign currency impact can be found in our earnings release.
Speaker Change: With that Sean and I are now ready to take your questions.
Speaker Change: Operator, please open the line.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: The floor is now open for questions. If you have dialed in and we would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.
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Speaker Change: And your first question comes from the line of Melissa Fairbanks with Raymond James and Associates. Please go ahead.
Melissa Fairbanks: Hey, guys. Thanks, so much great quarter, great results good to see.
Speaker Change: Continued progress on the inventory front.
Speaker Change: I had one question for you maybe maybe for Raj I'm wondering if you guys happen to see any pull in in the December quarter, either ahead of potential tariff activity annual price increases or some end of life activity on some of the higher end devices I think one of your peers last week.
Speaker Change: Cited something at least some benefit in the December quarter.
Speaker Change: Yes.
Melissa Fairbanks: Yeah, Hi, Melissa Thanks for joining us we did not see anything we did not see anything material.
Melissa Fairbanks: Due to any of those factors in our Q4 sales numbers.
Melissa Fairbanks: Okay great.
Melissa Fairbanks: And then just.
Melissa Fairbanks: Not to keep referencing other people's results, but one of your larger suppliers earlier. This week had noted that while pricing was pretty benign for the past couple of years. They do expect to return to kind of a more normalized pricing environment with low single digit annual price concessions wonder.
Melissa Fairbanks: If you're also seeing that is that just flows through in terms of your just the inventory that you have your pricing and passing that along.
Melissa Fairbanks: Well I think this will help I mean as you know our gross margins were stable from Q3 to Q4 and.
Melissa Fairbanks: In our global components segment.
Melissa Fairbanks: Our best data tells us that.
Melissa Fairbanks: Transactional margins in our core markets have held up for the most part this year and we kind of assume the same <unk>.
Melissa Fairbanks: For Q1, and our Q1 outlook as well.
Speaker Change: Okay, Great. That's it for me for now.
Melissa Fairbanks: Thanks, Melissa Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Joe <unk> with Wells Fargo. Please go ahead.
Joe: Yes, thanks for taking my questions I'm curious as you.
Speaker Change: We think about just the you're talking about bookings visibility may be improving I guess, how do we think about just the inter quarter turns demand that drove upside in <unk> and what's your assumption in <unk> for that.
Speaker Change: You mean is something different than our guide.
Speaker Change: Just trying to understand more about the question.
Speaker Change: Yeah, just trying to understand that the inter quarter turns kind of demand that you saw from your customers or just like just in time demand you saw in <unk> and that being a driver of upside in the fourth quarter on the components side and then just how do we think about that dynamic in the first quarter are you expecting that to kind of maybe normalizes bookings are starting to improve.
Speaker Change: Got it. Thank you well the first thing I think we'd say is that we are seeing.
Speaker Change: So mixed trends across regions and verticals. So we're not surprised by some ebb and flow from from one quarter to the next.
Speaker Change: I would say that our our turns business as you characterize it was relatively stable from Q3 to Q4, and we think it'll be.
Speaker Change: Relatively stable again.
Speaker Change: In Q1.
Speaker Change: Obviously, the big wildcard is the mass market overall and when that fully recovers, we think that as inventories grew.
Speaker Change: Gradually continued to decline that will be a stimulus for.
Speaker Change: Basically better visibility more normal ordering patterns and then a backlog.
Speaker Change: Which will improve.
Speaker Change: But it's a little difficult to call beyond say 90 days at a time.
Speaker Change: Yeah.
Speaker Change: Okay fair enough.
Speaker Change: And then can you help us just Raj helps us understand the Opex dynamics embedded in the <unk> guide given.
Speaker Change: I think your comment was relatively stable gross margins.
Speaker Change: And then how do we kind of flow and cost savings or some of the restructuring that youre doing.
Speaker Change: Yes, absolutely the way I think about our Joe is that if you look back 18 months in the middle of 2023, when we began some of the larger cost efficiency programs. We were running at a quarterly expense rate of $6 50 to 60 70, and since then we've taken at least $200 million of costs.
Speaker Change: Annual cost out of the business, so that implies that we're down $50 million quarterly or $600 million as an opex number that's probably a better starting point as you look at the first quarter.
Speaker Change: Alright, and then as we announced in the fourth quarter of last year.
Speaker Change: We also plan to get an additional $90 million to $100 million of savings of which we should get about a third this year. So there is further opportunity from that number and then we're certainly investing back into the business as well beyond that so hopefully that helps a little bit.
Speaker Change: Perfect. Thank you.
Speaker Change: Your next question comes from the line of <unk> Bhattacharya with Bank of America. Please go ahead.
Speaker Change: Hi, Thank you for taking my questions. Sean I think you said in the prepared remarks that we are in the late innings of inventory correction.
Speaker Change: What is giving you confidence that.
Speaker Change: This is almost over or is that what you meant and which parts are still in excess in the supply chain.
Speaker Change: Well <unk> I would like to think that it's almost over.
Speaker Change: I think we believe it's later innings, because we have seen.
Speaker Change: Inventory levels slowly decline were broadly you can imagine we triangulate.
Speaker Change: A variety of data points each quarter to get a good read on where we think inventory levels are.
Speaker Change: Not to mention our own having said that obviously the broader market and the return of the mass market is still a question as to when that returns at more scale.
Speaker Change: But we think that we've got a good handle on the first quarter.
Speaker Change: We think given where our book to bill ratio sit.
Speaker Change: Given what we see in our current visibility.
Speaker Change: And backlog patterns that.
Speaker Change: That we are at the bottom end.
Speaker Change: There is a path to it.
Speaker Change: Improvement across the course of the full year is partly market dependent.
But it's also.
Speaker Change: A function of what I, just described as inventories do come down if they come down.
At the rate that we expect.
Speaker Change: And then we've also been really busy on the business development front, we've taken some some matters into our own hands and we believe theres some wins, both on the supplier or customer base front.
Speaker Change: That will roll into the business throughout the course of the year.
Speaker Change: That will help to again the wildcard is the broader market overall.
Speaker Change: When we can't call and we can't control, but we think there is some.
Speaker Change: Some improving factors within our mix and within our longer term outlook.
Speaker Change: And the second part of my question was was there are there specific parts that are still excess are there specific type of components that are in excess in the inventory.
Speaker Change: Nothing material in any one particular component type Roop Lou.
Speaker Change: As Raj mentioned, we brought down our total inventories by over $1 billion from.
Speaker Change: There are peak and I think Q3 of 'twenty three.
Speaker Change: I think our turns were up.
Speaker Change: Year on year in Q4.
Speaker Change: And our units were down.
Speaker Change: Both quarter to quarter and year on year as well. So I think I think we're doing a pretty good job.
Speaker Change: Aging inventory that doesn't mean.
Speaker Change: We still don't have pockets of excess here and there, but we're not too concerned about the quality of our inventory overall, we certainly don't see any.
Speaker Change: Long term obsolescence challenges that we havent adequately reserved for.
Speaker Change: Okay. Thanks for the details there if I can ask one question too right for <unk>.
Speaker Change: Both of the segments the global components and for ECS can you help us think about or how should we think about the margin progression between <unk> I mean.
Speaker Change: How do you see the mix of geographies in global components, how is that going to impact margins and how do you see the mix impacting margins in ECS. So any any color. If you can give us on how you see the sequential change in operating margins in <unk> for both of the segments. Thank you yeah as I mentioned briefly in my comments for both segments.
I see gross margins being relatively stable from Q4 to Q1 <unk>.
Speaker Change: We did have some mix related impacts in the fourth quarter from Q3 back. If you just think about ECS has its biggest quarter seasonal quarter in the fourth quarter and its lowest quarter in the first quarter and so there is some step down just from a seasonality standpoint, but I think gross margins will hold relatively well and it's real.
Speaker Change: A question of negative leverage from the components business that steps down operating margins going into Q1.
Speaker Change: Yes, <unk> I would just add the biggest driver of the step down for EPS overall is the sharp seasonality in our ECS business as Raj correctly mentioned Q1 is the smallest of the year for that business. So it has an impact on the corporation overall.
Speaker Change: But I would also say that the best way to look at the ECS business is really on a year over year basis as we've talked.
Speaker Change: The vs and components, we tend to look at things on.
Speaker Change: On a sequential basis for all the right reasons, but we will see year on year.
Speaker Change: Operating margin expansion in that business for sure.
Speaker Change: Okay, and sorry, just the.
Speaker Change: On the component segment do you see any change in the geographic mix.
Speaker Change: Europe still remains weak in <unk> and Asia is strong or how should we think about this relative mix of regions impacting margins.
Speaker Change: Yes, I think you I think you are on the right track we see.
Speaker Change: Fairly seasonal patterns for us in Asia and the Americans.
Speaker Change: But our outlook.
Speaker Change: Europe is sub seasonal.
Given all the macro challenges we face in that market.
Speaker Change: Thank you for taking my questions I appreciate it.
Speaker Change: Thanks for your question.
Speaker Change: Again, if you would like to ask a question. Please press star one to join the queue.
William Stein: And your next question comes from the line of William Stein with True Securities. Please go ahead.
William Stein: Great. Thanks for taking my question. Another one on inventories I received some messages from investors who were a bit surprised.
William Stein: Inventory ticked up there.
William Stein: Yes.
William Stein: Q4.
William Stein: And I guess, a little bit surprised given.
William Stein: I want to acknowledge there's been good progress from the inventory peak, but I still think this is sort of above what you would target. So maybe first you could help me understand.
William Stein: Is there a target level that you'd like to talk to us about about where you'd like to take inventories and the long term and then shorter term.
Speaker Change: Is this just a matter of some stuff in your inventory.
William Stein: It's not moving as quickly so that the.
Speaker Change: The number that we looked at on your balance sheet may.
Speaker Change: You may not really represent sort of the turns activity that youre doing because some of it's sort of stock and other stuffs moving much faster.
Speaker Change: Help around that would be great. Thank you.
Speaker Change: Sure thing will yes.
Speaker Change: Let me come back at that again, I think similar to <unk> question, there aren't any any significant pockets of excess are slow moving.
Speaker Change: In the overall mix.
Speaker Change: That stand out in a way that we're overly concerned.
Speaker Change: Yes, I think I mentioned, we believe we've got a lot of good inventory, it's just taking longer to sell.
Speaker Change: That's really what we're up against but.
Speaker Change: If you asked us about the <unk>.
Speaker Change: Target levels, we typically focus it turns it is a key metric for us and we're starting to approach.
Speaker Change: Historical turn rates similar to what we saw pre pandemic and pre severe shortage of environment and the other is really working capital as a percent of sales and I think the way that gets better.
Speaker Change: It is more about the denominator.
Speaker Change: Then the numerator and as the mass market returns.
Speaker Change: I think we're going to like where that metric heads as well. So I don't know that thats completely satisfying for you will but we don't have any any big material.
Speaker Change: No one timers in our mix that we're overly concerned about.
Speaker Change: That's helpful. Maybe one more if I can.
It sounds like based on your earlier comments about feeling.
Speaker Change: Feeling like Youre in the latter innings of this dynamic.
Speaker Change: You must have a view to customer inventories being either.
Speaker Change: <unk> bottomed or approaching that any commentary on that please.
Speaker Change: Yes, we think that broadly again this is a broad statement and you can only sort of triangulate. So many data points at once but we think broadly.
Speaker Change: Our core markets inventories.
Speaker Change: Our creeping down.
Speaker Change: We'd love to see them come down more quickly but.
Speaker Change: That's ultimately a function of the broader economic and demand environment, we can't control that.
Speaker Change: But we do see them creeping down and we do know that eventually that means order patterns will normalize and our visibility will improve in our backlog will grow.
Speaker Change: Again, we think those things are steady now for us versus in decline, but we obviously need them to grow too.
Speaker Change: Signal a broader recovery.
Speaker Change: Into look keep in mind that we're always conscious of.
Speaker Change: The changing dynamics of our customers and their production schedules and we've got thousands and thousands of customers. So you know.
We do want to be leaning in when the market recovers so that we can best support them.
And so we're not we're not too far under heels here at the same time, we're careful not to lean too forward.
Speaker Change: On our toes either at the same time, we're managing that balance I think very carefully.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: There are no further questions at this time I will now turn the call back over to Brad when biegler for closing remarks.
Brad Wurnitsch: Thank you all for joining today's call. We look forward to meeting with you at upcoming Investor events and have a good day.
Speaker Change: This concludes today's call you may now disconnect.
Brad Wurnitsch: Yeah.
Brad Wurnitsch: Okay.