Q2 2019 Earnings Call
At this time I would like to welcome everyone to the second quarter 2019 Arrow Electronics earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key. Thank you Mr., Steve O'brien you May begin your conference.
Thanks, Rob with us on the call today are Mike long, Chairman, President and Chief Executive Officer, Chris Stansbury, Senior Vice President and Chief Financial Officer, Andy King President Global components, and Sean Kerins, President Global Enterprise Computing solutions.
As a reminder, some of the figures discussed on today's call are non gap you can access our earnings release at Investor Dod Arrow Dot com, along with the CFO commentary the non-GAAP earnings reconciliation and a webcast of this call will begin with a few minutes of prepared remarks, which will then be followed by a question and answer period.
I'll now hand, the call to our chairman President and CEO , Mike long.
Thank you, Steve and thanks to all of you for taking the time to join us today.
We appreciate you joining us for the July 15 for a business update call, where we discuss the expected results for the second quarter at a high level as well as our proactive responses to the current market conditions.
As you saw in our earnings release, our results were in line with the expectations that we outlined on our business update call.
So rather than cover the same ground, let me begin by updating you on longer term strategic positioning of our business.
I will then share some additional observations on the current market conditions and now that we've had time to conduct a more detailed review of our second quarter data.
We continue to advance toward our goals of scaling engineering services and leading the convergence of information technology with operational technology.
Our value proposition is clear, we build solutions for industry specific goals.
Our customers benefit from arrows unique ability to deliver complete end to end solutions and arrows. The only company with the ability to integrate the hardware and software to enable upstream data integration. This means our customers get a unified set of solutions that are ready to go and repeatable.
That repeatability is a key part of achieving our goal to expand and leverage engineering services.
To reiterate what I said on July 15, we are taking important steps to best position the company to achieve this through our 130 million cost optimization program. We have established a clear plan to enhance efficiency rest assured we will not be cutting back on engineering.
Or in our demand demand and design creation efforts looking at the savings in more detail approximately half come from the upgrade and completion of internal systems, most notably our global ERP system for global components that we completed last year.
Our commitment to automated automation is delivering significant back office savings in areas like IP accounting order processing and shipping just to name a few the foundation of our business has never been more sounds.
We are currently experiencing weaker demand in key verticals like industrial transportation, including automotive however, based on the math of electronic content growth. We have forecasted for these industries, we're confident that growth will return in the not too distant future.
In fact, the wind down of our PC and mobility device. The physician business will allow us to further accelerate implementation of the next generation technologies, such as artificial intelligence industrial automation smart cities and vehicle.
We believe these technologies will not only enhance our business and returns to shareholders, but also improve people's lives.
Taking a step back I wanted to discuss the near term market conditions, we're facing as we work to deliver on our long term goals.
Well forward indicators are mixed we're encouraged that our design activity is held up well and is consistent with last year's levels.
This suggests that customers are continuing to design next generation products.
Despite the difficult market conditions.
So far this correction has been contained to a lower number of new orders in some push outs. Both factors suggest we'll see a quick recovery when conditions improve.
Our indicators are consistent with past market correction.
Backlog decline from the first quarter and declined year over year.
Lead times contracted this quarter more impressive semiconductors, then for passive electromechanical parts.
The overall book to Bill was below parity at 0.95 exiting the second quarter and it was below parity in all regions.
Our Americas customer sentiment survey results for its similar to what we heard last quarter with a large portion of the customers, saying they had too much inventory and a very small portion reporting that they did not have enough.
The ratios here are similar to those we've seen during past market downturns.
Looking more closely at global components margins. The decline in margins is been driven mostly by customer mix and secondly by regional mix in other words the merger present margin pressure, we're experiencing from customer mix is a function of the fact that sales to our larger better capitalized customers, who rely less on designs and engineering are holding up far better than sales to the smaller customers who rely more on our services.
Most importantly, we expect our business mix to normalize quickly when conditions improve.
Turning to our enterprise computing solutions business, the demand environment for the business in the quarter was consistent with our expectations.
Billings grew at a low single digit rate year over year led by infrastructure software and security.
IP hard where demand, particularly in the areas of stories and proprietary servers decline. We believe this means customers are utilizing the IP hardware product purchase during the recent refresh cycle and are increasingly cautious towards major new investments based on an uncertain economic climate.
Although this is challenged our efforts to improve our profit performance. We do expect enterprise computing solutions operating income to increase year over year in the third quarter.
In closing we are proactively addressing items within our control I believe you have delta diverse and resilient business.
We have a clear plan in place to preserve and improve our profit capitalize on the incredible opportunities available to us and leverage our existing engineering capabilities.
130 million dollar cost optimization program combined with the wind down of the personal computer and mobility asset disposition business will enable us to fully focused on longer term strategy and to enable next generation technologies.
I look forward to updating you on our performance and our progress in the coming quarters ill now hand, the call over to Chris.
To provide more details on our second quarter results and our expectations for the third quarter.
Thanks, Mike.
Second quarter sales were $7.27 billion, excluding the PC and mobility assets as physician business.
Sales increased 2% year over year adjusted for the wind down and changes in foreign currencies. The actual exchange rate for the quarter was $1.12 cents to one euro in line with the rate we had previously used for our forecast.
Global components sales of $5.19 billion, excluding the PC and mobile mobility asset disposition business.
Increased 2% year over year adjusted for the wind down and changes in foreign currencies.
In Europe sales increased 4% year over year as adjusted Europe sales have increased year over year for 25 straight quarters adjusted for acquisitions and changes in foreign currencies in the Americas sales decreased 3% year over year.
Asia sales increased 4% year over year and achieved a record second quarter level.
The sales contribution percentage from Asia was also an all time record for any quarter.
Well this is a near term headwind to margins there will be a regional variances overtime and we do not anticipate that regional mix will be a headwind to return.
Global components operating income decreased 21% year over year and decreased 19% adjusted for dispositions and changes in foreign currency.
Operating margin was 4%.
We expect to make progress towards returning to the 5% operating margin level, we achieved in 2018.
First through our cost optimization program and then from a return to more optimal product and regional mix when demand conditions improve.
Enterprise computing solutions sales of $2.07 billion increased 1% year over year as adjusted.
Sales decreased 2% year over year as reported and were within our previous expected range.
Billings increased at a low single digit rate year over year adjusted for changes in foreign currencies and increase in both regions growth was driven by infrastructure software security and industry standard servers.
Enterprise Computing Solutions America sales were flat year over year adjusted for changes in foreign currencies.
Sales declined 1% year over year as reported and in Europe sales increased 5% year over year as adjusted sales decreased 3% year over year as reported.
Enterprise computing solutions operating income decreased 8% year over year adjusted for changes in foreign currencies and dispositions.
Operating income decreased 10% year over year as reported.
Returning to consolidated results for the quarter total company operating expenses were flat year over year as adjusted.
Consolidated operating income decreased 21% year over year adjusted for the wind down last quarter's disposition and changes in foreign currencies.
Interest expense was $52 million below the guidance, we provided on our Q1 earnings call due to lower borrowings during the quarter and slightly lower interest rates on floating rate debt.
The effective tax rate for the second quarter was 27.5% above the high end of our 23.5% to 25.5% target range and our prior second quarter expectation of 25.5%.
A large or relative profit contribution from higher tax jurisdictions caused a higher effective tax rate. We now expect our third quarter and full year 2019 effective tax rate to be at the high end of our target range beyond 2019, we continue to believe our 23.5% to 25.5% target range is valid.
Net income was $137 million down 28% year over year as adjusted.
Earnings per share were one dollar and 60 cents on a diluted basis down 25% year over year as adjusted.
We estimate the stronger dollar negatively impacted earnings per share by approximately six cents and negatively impacted earnings per share growth by approximately two percentage points compared to the second quarter of 2018.
Operating cash flow was $405 million the strong operating cash flow was driven by a greater ability to convert EBITDA into cash flow in the current weak demand environment and by a reduction in working capital including inventory.
We expect to further reduce working capital in the second half of 2019.
We repurchased approximately 2 million shares of our stock during the quarter for $150 million.
We repurchased approximately $361 million over the last 12 months and have reduced shares outstanding by approximately 4%.
Over the same 12 months, we have also reduced borrowings by approximately $369 million.
Our near term priorities for cash continue to be both share repurchases and debt reduction.
Please keep in mind that the information I have shared during this call as a high level summary of our financial results for more detail regarding the business segment results. Please refer to the CFO commentary published this morning.
Now guidance turning to our outlook for providing guidance, excluding the PC and mobility asset disposition business. However, the contribution from this business will be included in our reported income statement for the third quarter as we did this quarter in our press release, we will provide all the reconciling items to exclude this business from our ongoing results.
We believe that total third quarter sales will be between $6.85 billion and $7.25 billion with global components sales between $4.925 billion and $5.125 billion and global Enterprise computing computing solutions sales between $1.925 billion and $2.125 billion.
We expect interest expense to be approximately $54 million.
Our guidance assumes an average non-GAAP tax rate at the high end of the target range of 23.5% to 25.5%.
We expect average diluted shares outstanding of $85 million.
And as a result, we expect earnings per share on diluted basis, excluding any charges to be in the range of one dollar and 62 cents to $1.74 cents.
The average us dollar to Euro exchange rate, we are using for forecasting purposes is $1.12 cents to one year ago. This was the average for the month of July we estimate changes in foreign currencies will have negative impacts on growth of approximately $90 million or 1% on sales and five cents or 2% on earnings per share compared to the third quarter of 2018.
Thank you Chris Rob would you. Please open the call to questions at this time.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Adam Tindle from Raymond James Your line is open.
Okay. Thanks, and good afternoon I just wanted to maybe start on a near term question and ask a bigger question bigger picture question.
Near term Q3 revenue.
Is declining sequentially, but operating profit dollars, that's actually fairly stable sequentially. So just hoping you can maybe talk to the moving parts, there and particularly the timing of that 130 million annualized cost savings how much of that is reflected in the Q3 guidance.
So Adam we don't expect to be at.
Full.
Run rate on savings until the end of the fourth quarter, so going into next year.
So we don't have a full quarter in for.
For Q3, particularly given the timing.
You think approximately half that and then we'll ramp between there and the end of the year.
Okay. That's helpful and maybe big picture question for Mike with the disposition business write off now getting into the rearview mirror you could maybe just take a step back because this was once a promising part of the value proposition for full lifecycle distribution model and you made heavy investments there could you maybe just reflect on the learnings from that experience any internal changes to the strategic planning process as a result, and why the current investments and things like info chips, and Aiotv should look differently than than the asset disposition business.
Yes, so the yes that asset disposition business. If you remember when we got it it was a business that.
Really.
Benefitted customers to get rid of their old assets, and we could refurbish and resell those and other other marketplaces.
And how it used to work is there was a profit share program with those customers what it's evolved to his customers, having a warehouse full of of products.
And wanting one cash check for them and basically over a 10 year period that we had this business.
Of those retail.
Sort of prices that you would charge for it became readily available on the internet. So it became harder and harder to.
Make a profit from the buy to sell.
We.
Really did see those coming had put some things.
Into place to help that but a beeping came very clear.
That is the value proposition for the customers with less interesting to them than when it started and.
We did see the benefits going forward in our strategy and in fact.
What we saw with input chips, our investments in design engineering generating much higher.
Income and also directly driving the sales of our products and really.
Getting to a point that.
We didnt want to have a non ancillary business around that wasn't really driving the strategy and driving the future growth and while it was a nice to have hard to complete the entire lifecycle of product.
I view it is totally unnecessary because we can now partner with different people in different marketplaces and have exactly.
The same effect.
Okay. Thanks, Mike.
And your next question comes from the line of Shawn Harrison from Longbow Research. Your line is open.
Hi, first question is for Chris Chris where do you think you can get operating cash flow now for the year and also maybe a target for you.
How much inventory can come out in the back half and cash cycle number if I may.
Yes.
So.
We obviously had a pedigree Q2 in part that was I think driven by recovering from from Q1, which wasn't great.
So as we look at Q3 I don't I don't think we'll be at Q2 levels I'd like to see us in the $2 million to $250 million range and we know that Q4 sequentially is usually stronger than in Q3, So I'm not going to give you a number for the year, but thats, how we see it in total.
The way, we're going to get there you'll continue to see inventory come down a bit.
We've also really tightened down on our collection efforts and so I think you'll see improvement in both of those areas.
And ultimately the goal is to get cash conversion down.
From where we've been and we did show improvement in in Q2, and we will continue to drive that forward.
Thanks, as a follow up Mike just on the CS business. Two part question given some of the slowing you're seeing in the hardware environment.
What does that mean for year end seasonality and how does it affect the goal of I think you said operating profit dollars would be above third quarter levels of last year, but can you continue to grow operating profit dollars year over year into the end of the year for part of the business is smiling.
Yes, I think we can because typically.
The fourth quarter, there will still be a refresh those will be the government refresh that takes place and that will improve the situation from where it is and where our forecast is for the third quarter. So if you look at the.
Third quarter forecast, we expect that.
We will improve profitability year over year for that which is good news that comes in right. When we started told you. It was ironically and believe me we didnt.
Do anything to do that other than to stick with our plan.
And we believe it will continue what we're seeing there right now honestly as a low growth scenario.
And if there is a low growth scenario, we would expect the same thing in Q4, we very rarely seen the same kind of sort of tend to back in the computer business.
That we've seen in the components business through several downturns.
Typically this business has has slowed but not stopped.
And I think the position we're in right now is pretty good and one we can continue to climb out of.
Thank you.
Your next question comes from the line of Joe contraction from Wells Fargo. Your line is open.
Yes, thanks for taking the question.
First I just wanted to try to understand the market dynamics, a little bit better and I understand that your business typically lag lags some of the.
Semiconductor suppliers and so I'm, just trying to better understand.
Look at the Threeq guidance.
When you calling for a sequential decline in the components business relative to some of the semi conductor suppliers guiding for revenue to be up.
Just kind of it.
Any color you can give on the disconnect there.
Well actually its interesting because we've combined the vast majority of the semiconductor suppliers as well as pimco suppliers.
And we're showing year over year decline of that data of around 7% were showing about a 6% decline in our data.
For where our forecast is right now so we believe we're right in the market.
If we take a look at it from a practical point of view I I think there was a little bit.
I don't know if you've got some of the corrections of the reverse logistics business is coming out, but I think there was a little bit of noise in that if you.
You look back but overall, we believe we're right in the market.
And I'm going to say I don't expect the loss of market share and I don't expect too much of a gain in market share during this timeframe.
So we're going to do it marked it doesn't I guess it would be great news. If there was another percent in there for us, but we'll let us see how it plays out.
Okay. That's helpful. And then just kind of quickly all in the guidance when we look at what's embedded for gross margin I know that gross margin typically kind of down sequentially. In Q3, Q4 were kind of already.
More lower level than normal. So can you help me kind of understand what's what's embedded in the guidance.
Well, we do expect that we are balancing on the bottom right now so our belief is we are seeing.
Some of the worst of it at that point.
Pending big declines in an economy in one region or another that we don't see I mean, if you had a huge decline in the economy in China. Obviously gross margin is going to go up volume is going to go down and.
We had a huge disaster in Europe , you would you would have a little bit of the opposite effect, but.
If you take a look at past downturns.
Some of the past downturns down and on Ivig margins went down about 300.
Basis points and.
This time, we're sitting there are a lot less than that we actually believe the snap back will be quicker.
For the reasons I said in my opening remarks that Weve been limited to incoming orders and mix of customer so as soon as those customers turned back on.
We expect benefit we have not seen any structural changes by suppliers and don't expect any I don't think thats in any of the conversations that we have had.
I don't see the marketplace generating a ton of data activity out there and all in all so far this downturn is acting better than others as far as coming out of it.
You know I think it's great news that we're seeing some suppliers starting to see signs of life because in that means that.
Sort of forecasted within a few months range here that.
That will see us start to come back to so thats all positive news for me.
And.
No I'm not.
Im not expecting a further reduction at this time.
Thank you.
Yes.
Your next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
Yes, good afternoon, and thanks very much for taking the questions.
First question was about the market opportunity within component and trying to understand all the cyclical pressures and customer mix issues that you outlined but one of the opportunities for the company had been with with newer customers at Arrowhead, Ted Ted brought on over the last 12 to 18 months that those came on at fulfillment margins or is there opportunity to sell.
The full value of arrow and turn those into demand creation type margins and improve that way, maybe just talk about some of those companies specific efforts I know, maybe it's a lost in some of the cyclical dynamics underway at the moment, but.
But how far along are you with those and what could that mean for margins and maybe for components overall, how many basis points, maybe that would add if you're successful with with that effort.
Yes, I think that the.
Structurally that brings us back to sort of.
Of where we were in the past.
We typically operated I think with about 35% of our.
Our business that was in the design creation mode, which operated at.
About 300 basis points.
Better than than sort of core margin for the work that gets done.
Hi, Hi, I'm going from memory now, but I believe it was.
22% to 25% after we got.
Some fulfillment orders and that our design win margin had dropped down to we're working hard to get it back up.
To that 35% to 40% range of our total sales so yes.
Those were new sales, which we would expect those to be in the future, which is a great place for us to be with growth.
Then then that would give you.
Basically 300 basis points on 10% to 15% of our current business, which I think is.
Easily will get us back.
To even higher profit levels after after all the recovery.
Got it Thats very helpful color and for my follow up Im hoping you can help us to contextualize on the cyclical dynamics.
Between book to Bill and revenue timing and so I know, sometimes the bookings are not for the current quarter, but they can extend for a few quarters and so.
I imagine with with book to Bill being sub one it's not necessarily all felt and the piano in the September quarter, but but maybe that there are some sort of delay in terms of when we see the full year over year decline in your here.
Global components business, maybe you can help us understand.
What that delay may be and when when if orders are starting to bounce along the bottom as you described it.
What do you think you see the full year over year and if it doesn't mean that the Max of the decline. Thanks.
Yes, what we what we what we've seen obviously I think we were down to about 2.95 in the second quarter that that we announced.
Our book to Bill that.
We have seen an improvement.
But it is early in the quarter.
Were slower to start claiming victory when we get back to that 1.1.
Range.
That will will give us some consistency in that that.
Things are really omnicom.
And anything I would say right now between that 0.95, and one range. Just tells US things are sort of sitting where they are so.
We do expect to see that when I think we can effectively start to sail. Okay. We are coming off the bottom.
Right now we think we are.
Yes, along the bottom and we're going to do the things that we need to do to preserve and grow profit during that time and then as the market changes are expected profit range, we hope to be able to raise but we'll save that one for another day.
Thank you.
Your next question comes from the line of Matt Sheerin from Stifel. Your line is open.
Yes. Thank you.
Just a question regarding the inventories you had some nice reduction.
Quarterly quarter on quarter and year on year.
As we look forward and given that lead times have come in and then given your own weaker order book, what should we be thinking about inventories and then free cash flow as you get through the year.
I'll answer inventory Christian.
Go back to the cash flow answer.
The.
I.
Really believe with balancing on the bottom there is still some more efficiency that we can get out of the inventory.
So.
We still expect the inventory to come down going into the third quarter fourth quarter is just too hard to see right now Matt because the bookings are going to tell that that tail.
Product, they're sitting there at 12 weeks and the booking came back tomorrow.
Then that would immediately make a lighter of me that's not it but we actually.
Our expecting some better numbers in the fourth quarter, but I would say you see still a third quarter.
Decline in inventory, Chris So, yes, so just to build on that Matt as I mentioned earlier.
I think reasonably in Q3, we could expect.
Two maybe 250 million.
Operating cash flow typically we say that our cash flow overtime.
Tracks to about 75% of GAAP net income obviously in a softer environment, it's higher than that and that's where I'd expect to be.
In the back half with Q4 being stronger than Q3.
Okay great.
And then back to the components and the gross margin you talked about the puts and takes and why its down.
Mostly on mix you did also talk about some pricing pressure last quarter and I guess, one theory is that pricing is not that tough right now because customers are just living hand to mouth and in some cases, they are pushing out or canceling orders.
But when volumes come back, we'll see more pricing pressure, what's your thoughts on there on that and how do you weigh taking opportunistic deals versus protecting your margins.
Yes, there is.
There's a whole lot packed in there but.
I don't think you're going to see a traditional market change when the volumes come back because the supply chains.
Are becoming narrower in the people that can do the full boat of supply chain services for customers those companies are becoming more narrow.
Plus I think Eric.
We're certainly in a situation where.
We're not going to lose money or we're not going to lose returns on certain orders. So.
It's also been our history is that.
You can follow the money on these deals, but it takes money to put inventory and for customers and if.
Somebody does do something crazy, usually you end up giving it away down the road because you just can't afford to continue doing it.
I don't see that right now I think there is.
The margins are where.
They are going to be.
Prior to coming into the.
The quarters, so I don't see too much price deterioration what happened Matt when there is an immediate drop off obviously or.
Salespeople are used to a certain volume you're used to a certain volume everything happens and people do some scrambling.
So we did see that on supply chain, but these days of supply chain portion of our business and the design win portion of our business are separated we know exactly what our costs are we know what we can and can't take.
And obviously the mix of that but we're not going to stop taking supply chain deals.
We have.
If design slow, but there'll be higher returns there than probably what you've seen in the past. So hopefully that answers. The question, but I don't think this is a pricing issue, Matt I think it's a mix issue, we're seeing the resales holes.
To where they have largely been and that's normally when you see him go down when everybody is trying to unload inventory, but if you looked at the inventory efficiency going into this.
We don't have to.
Fire sale the inventory like in past downturns.
And we're not.
Okay fair enough. Thanks, a lot.
Your next question comes from the line of Steven Fox from Cross Research. Your line is open.
Thank you good afternoon.
Hi, guys listen carefully to all all of what you just said about the end markets and I'm just.
I'm still struggling with the idea that you think growth is going to return.
Not in the not too distant future.
You know you got surprised in the month of June pretty quickly.
A lot of your suppliers are talking about inventories that will burn off to the end of the year and your own SCS business is seeing some capital spending pressures.
Let alone some of the macro thats going on in Germany.
Other parts of the world So what what it might hanging my hat on if I want to buy into the idea that this is the bottom when things are going to start to improve like what would be the first two or three things I should think of strongly first off I think I said I think we're bouncing along the bottom.
And I think the return.
Is.
At the start of a receiver and I don't think it's an end of the return I mean my.
Personal opinion is we're into next year and that's.
What I do see I think there is some cautious out there first off our surprise was exactly as you said it was in the month of June .
And.
It was a immediate.
Change, which is something different than before we did see it coming we just didnt see it starting at the magnitude it's started.
For us.
Going forward I'd still be concerned with Germany.
His Germany going to maintain where it is today or is that economy going to get worse. I don't know you guys are more of an expert on that than I am. So I do see caution there I do see that as you know.
China is still struggling although our position in China is pretty good, but I do see a struggling and honestly, what's going to happen with the tariffs in North America and how much business is going to be driven out of here is driven back in right now we're not seeing business come back in so I don't know what all the who lives about all the great manufacturing is going to return in North America because of a does that the party for us, but I don't see that coming so I think we're still being cautious I do believe we're kind of where we are now given the book to bills that we have given the backlog given what the customers are are taking and sending but if there is another you know Steve there is another decline in the economy I can only react to that I can't control that.
I appreciate that color that's really helpful. And then just as a quick follow up.
Is there any.
When you set guidance for the September quarter is it similar linearity than what you would normally see is that your assumption.
Yeah, we.
As you know, Steve we really have gotten away from.
The seasonality game, because there's just so much volatility from quarter to quarter I would tell you that back to Mikes point, we really do think we're bouncing along the bottom.
We're looking at current demand trends as well as current margin trends combined with our our cost actions on where we think we'll be and that's really how we got where we got.
Understood. Thank you.
Your next question comes from the line of Tim Yang from Citi. Your line is open.
Hi, Thanks for taking the question a follow up question hockey inventories from industrial automotive component vendors mentioned, there are seeing distribution channel inventory correction and that said the correction normally takes four to six miles.
I think that's a reasonable estimate on that the rate duration of this correction was the current enrollment.
A follow up thanks.
Well June July August here in three months now so no I don't think it's four months because that would mean the next month, it's going to return it is going to be over and I don't believe that.
You know as I said I believe we're sort of in a in the belly of the Beast here and were 11 everyday on the book to bills, we have and what we're seeing.
But I'm not projecting anything major before the end of the year.
And.
We'll know more when we get toward the end of this quarter to see how the entire quarter X. I'm.
Frankly more interested in September quarter, or the September month of September than I am of what's going on in July because.
July August for US August was obviously big European vacations, and there's typically a decline in Europe during that.
Period, and September things start to get back to normalize so.
No I don't think they are four months is the answer.
Got it. Thanks, and then you mentioned the cancellation rate increase in your slides can you talk about how much do you think is related to double ordering from the pay attention versus the real demand slowdown. Thanks.
I Didnt mention the cancellation rate went up by said new orders.
Coming in.
We are declining, but we have seen no change in cancelled orders I believe.
Let me see if I can give you an exact number yes.
Yes, I think you're probably referring to the CFO commentary, where there was a versus the last quarter. There was the increase in cancellation rates, but we didn't say it was outside the norm.
Yeah, that's what I was saying.
I don't I don't think there's anything abnormal about that piece of it.
And honestly, it's harder to let me just.
Talk about the double ordering thing because.
It's.
It's an it's an interesting dilemma, but it is much harder.
Or an OEM to double order.
Over a period of time because that is controlled all the way back at the manufacturer level.
And so the same customer for the duplicate orders get picked up and your allocation get caught at the first sign of it looking like its a double order.
So there's protections in there.
Which I believe is one reason.
That we haven't seen the declines that we've seen in past downturns.
Because you don't have as much double ordering or any double ordering but obviously, it's a big marketplace I'm not going to say non.
But you generally don't have that dilemma anymore, because it is controlled at the day of order.
Your next question comes from the line of William Stein from Suntrust. Your line is open.
Great. Thanks for taking my question I wasn't expecting to ask this but suddenly come since us we'll have those 10% tariffs on another 300 billion of Chinese goods. As talks continue does that does this round of tariffs I assume you've done the analysis and advanced as this round influence your business any more or less than the prior rounds of tariffs and then of course have a.
Yeah.
Well you know it's.
It's an interesting one because.
It affects really.
Germany, China and North America.
China.
Germany being.
China's largest.
Or China, being Germany's largest customer and then.
Going back a flip between the us.
The point is that depending on how fast supply chains move.
And we do see supply chains moving around today and as I said, we're not these tariffs were not having a party in North America with all the factories that are coming back here and opening up so I'd really like to know where people think that those factories are going because I'm missing it in with us.
So couple of hundred thousand customers I find it interesting that we would see it because all the politicians are talking about it but.
It's like anything else tariffs are not good they are not good for the business and not good for the manufacturing process. They artificially.
Raised the price of goods and you know and I know that if somebody manufacturing our commodity item and you artificially raised the price they are no longer competitive in the market. So.
If their sales go down somebody else's go up.
And it depends on how much of that.
How much of that ultimately happens, but I just don't believe tariffs are good for anybody.
Yes fair enough.
Let me switch to what I was really planning on asking.
Your sales in Asia were clearly boosted by share gains.
You mentioned that you didn't think share was going to shift around much going forward, but in Q2, it's pretty obvious that you gained share it.
We're.
Vaguely aware of at least one supplier that.
Put more of its distribution business in your hands over it.
I guess sort of a competitor.
How much of the year over year or sequential growth in Asia. However, you want to quantify for us how much of that should we attribute to.
These sort of share gains from other distributors versus.
I don't know if you want to call it organic put a more natural growth rate.
You know the share gains in Asia, where something that.
Actually happened a long time ago. This is just a result of.
Those share gains so.
The interesting thing is it's been integrated into.
Our business already.
I haven't recently broke it out.
That way.
But what I can tell you is that has been a positive impact on us certainly all year.
I think some of that was the.
First quarter, if I went back and.
You are so sort of nervous over the mix of the business.
I don't expect.
Any more to come in right now at this point in time.
I think we're digesting what we have there.
But as far as a percentage of the total I really can't give you that sitting here right now.
Okay. Thank you.
And your next question comes from the line of Param Singh from Merrill Lynch. Your line is open.
Hey, Thanks, guys.
I appreciate you squeezing me in here.
Firstly I wanted to just get a little bit more color on your computer and margins going back to that question.
You had a 5% margin last year, obviously have compressed a lot and thats volume related but how much do you think your margin benefit last year was you just saw the premium pricing in deposit component and what I'm really trying to get at is as the volume comes back as you.
It was opex cuts what level of operating margin can we expect components to get back to you and could you ever get back to that 5% number and then I have a follow up.
Yes, I think we're expecting that our long term rates will go up.
From where they were.
Haven't seen any structural change in the business at this point going forward.
We expect that there will be a bigger portion of our business turned engineering over the next couple of years.
So were not.
We're not concerned about the long term measurement system are those the when you know we have as big a gap as you do depends on the market.
But you do think that 5% number feasible, if and when the volumes come back.
Oh, absolutely we were above 5% before the market started to decline.
So we have the same expectation that will be.
Above 5% when the when the markets rebound and obviously were put in another.
$130 million of efficiency on top of that and that will sort of help make sure that happens.
Actually sooner than we needed to.
The 130 million dollar efficiency of the help.
Our earnings while we're digging out of this and.
As the market returns from there that will be the the next level of elevation. So we expect to go pass by.
Hi.
Thank you.
And then as my follow up.
On the NCS side, obviously, you're seeing a slowdown and hardware but.
I will have transformed itself into more of a solutions business.
And now it seems that they are getting more in line.
With that typical.
Capital deployment cycles.
Has that organization change are you no longer benefit from that advantage that you hadn't selling solutions to end customers, what's really different now.
I don't think there's any difference and.
What we believe before and what we believe now I think there was a mix change I think.
As you know the industry has been struggling with hardware the sorted suppliers have been up and down and sideways and.
That market has been highly interesting a move from proprietary servers to industry standard servers has.
Been an impact I think cloud has been an impact.
But.
I believe those things will sort themselves out you do see some of the suppliers still coming out with new products and new hardware.
And that's just a market our software.
No I mean have you year over year, our software products are all up significantly.
So it's just a matter of that.
So starting to have.
A bigger impact on our business and Sun I'll, let you add to them. So that yes from I would just say don't confuse any hardware headwinds with the change in our strategy. We're still very much focused on the kind of the more complex value space in Mike's right. Our software growth from a billings perspective was.
Well into double digits in Q2, and I think Thats a proof point that we're moving.
Our model to the new demand trends and.
More to come.
Right great. Thank you guys I really appreciate it.
Yep.
There are no further questions at this time I will turn the call back over to Mr., Steve O'brien for some closing remarks.
Thanks in closing I will review Arrow's Safe Harbor statement. Some of the comments made on today's call may include forward looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons and the company undertakes no obligation to update publicly or revise any of the forward looking statements detailed information about these risks is included in Arrow's FCC filing if you have any questions about the information presented today. Please feel free to contact me. Thank you for your interest in Arrow electronics and have a nice day.
This concludes today's conference call you may now disconnect.