Arrow Electronics, Inc.

Good day and thank you for standing by. Welcome to the Arrow Electronics second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, press star 0. I would now like to hand the conference over to your speaker today, Steve O'Brien. Thank you. Please go ahead.

thanks stephanie and welcome once again to aero electronics second quarter 2021 earnings conference call with us on the call today are mike long chairman president and chief executive officer sean karens chief operating officer and chris stansbury senior vice president and chief financial officer During this call, we will make forward-looking statements, including statements about our business outlook, strategies, and future financial results, which are based on predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and 10-Q filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements. As a reminder, some of the figures we will discuss on today's call are non-GAAP. We have reconciled those to the most recent directly comparable GAAP financial measures in our earnings relief. These non-GAAP measures are not intended to be a substitute for our GAAP results. You can access our earnings release at investor.aero.com, along with a CFO commentary, the non-GAAP earnings reconciliation, and a replay of this call. We will begin with a few minutes of prepared remarks, which will then be followed by a question and answer period. I'll now hand the call to our Chairman, President, and CEO, Mike Long. Thanks, Steve, and thanks to all of you for joining us today. Over the last few quarterly reports, I've shared with you the growing momentum behind our business. Even as we navigated the pandemic, we maintained staffing. We continued to identify efficiencies to fund greater investments in design, engineering, and supply chain services. I'm pleased to report that this momentum is yielding results. We achieved all-time record sales, gross profit, and earnings per share, not just for the second quarter, but for any quarter in Arrow's history. In our industry, maintaining a leadership position requires constant evolution. At Arrow, we strive to be our customers' trusted source for solutions to their manufacturing and information technology challenges. We always seek new ways to help their businesses be more successful. To do so, we must consistently expand and enhance our service offerings in the areas of engineering, design for manufacturing, supply chain management, and secure workload management. And we've made great progress on these fronts. Arrow is now operating from a position of strength. The opportunity for our business has never been greater. In the current environment, it's rare to find a company or industry that's not facing challenges from a supply chain perspective. We're ideally positioned to help customers address those challenges by leveraging our unmatched databases of design, electronic components information from our media properties. Beyond information, we see that companies around the globe are rethinking their approaches to component procurement. Just-in-time deliveries have become a high-risk, low-return strategy. Customers are seeking reliability, and we can work with them to create a more stable and a more secure stream of parts that benefits our suppliers as well. As a result, we've expanded our customer base and are engaging with new companies who are in the past had not considered Aero Services. We're providing solutions tailored to their specific challenges to achieve success. The trajectory of our global components business was very positive during the second quarter. Our global components business capitalized and continued strong demand in all regions, with sales up 40% year over year. Sales were above the high end of our expectations, for the fifth quarter in a row, the upside largely attributable to our ability to secure additional inventory to meet the strong demand. We saw robust demand from key industries such as transportation, industrial, communications, consumer electronics, and data networking. We also saw growth in the aerospace and defense sector on a year-over-year basis as the commercial aviation industry continues to recover. As a result, global component sales reached $6.6 billion, which is an all-time record in the company's history. Again, this quarter, we achieved significant growth along with exceptional profit leverage on sales. operating income from global components increased more than two times the rate of sales growth. We continue to provide customers with valuable supply chain services that utilize our global ERP capabilities and distinguishes our level of inventory insight from many of our competitors in this area. Our digital platform is also helping customers manage component supply and safeguard their manufacturing. The sales contribution from design and engineering activities, which were remarkably resilient through the pandemic, is keeping pace with the market growth. Stepping back to a multi-year view of our industry, we see several key indicators of a smooth transition to normalized demand. First, Based on our current orders and backlog, even with a heavy level of caution and skepticism, we see the urgent need for electronic components for production extending well into 2022. Second, we believe customers want to keep their places in line with lead times extending. Lastly, and this isn't changing, the increasing electronic content and everything around us is a tailwind for the business. Turning to enterprise computing solutions, sales were in line with our expectations and billings increased at a solid rate year over year. We experienced growth in storage and networking, which was helped by businesses and their workers returning to their offices. While the corner turned out largely as we expected, in the short run, lower spending on work and learn from home is an offset to growth. We saw supply chain issues limit our ability to capitalize on stronger demand. While we're pleased with our enterprise computing solutions performance, we see strong potential for even better results. IT spending priorities are shifting towards more complex transformational projects that tend to be better aligned with our value-added focus. The growing threat of landscape and return to on-site business have greatly increased activities for our business. Increases in cyber threats such as ransomware attacks continue to shine a light on the importance of being proactive towards security protocols. Arrow has proven itself to be an expert in this area and continues to be the trusted partner for VARs, MSPs, and their end customers. Finally, I'm happy to report that we increased our share repurchase authorization by an additional $600 million. This comes approximately one year after our last $600 million authorization and shows our continued commitment to returning cash to the shareholders at unmatched levels in our industry. As our metrics show, we have never in our history been better positioned to balance working capital demand with robust growth. This makes increasing cash returns an easier decision. With that, I'll now hand the call over to Chris to provide more details on our second quarter results and expectations for the third quarter. Thanks, Mike. Second quarter sales increased 25% year-over-year on a non-GAAP basis. The average Euro-dollar exchange rate for the quarter was $1.21 to 1 Euro, compared to the rate of $1.18 we've used for forecasting. The slightly stronger euro benefited sales growth by approximately $69 million more than we anticipated. Interest expense was slightly lower than we expected, but a slightly higher than expected effective tax rate offset any impacts to the bottom line. For the full year 2021, we continue to expect our effective tax rate to be near the low end of our long-term range of 23% to 25%. Turning to the balance sheet and cash flow, second quarter operating cash flow was $281 million despite substantial inventory demands to fund growth. Over the last five, 10, and 15-year periods, cash flow from operations has consistently averaged 90% of non-GAAP net income. But on a year-to-year basis, cash flow has an inverse relationship to sales growth. Our cash cycle of approximately 50 days improved by six days compared to last year. cash flow performance in the face of working capital demand. Our liquidity position is the best in the history of our company and continues to improve. Leverage, as measured by debt to EBITDA, is the lowest level in nearly 10 years. We returned approximately $250 million to shareholders during the second quarter through our share repurchase plan, and this was the largest single quarter of share repurchases in our history, and it was enabled by our strong profits and proactive working capital management. We remain committed to returning cash to shareholders and recently expanded the operation by $600 million. The total authorization under our plan is approximately $663 million, and we're confident that we're purchasing shares below their intrinsic value based on the increasing return on invested capital and return on working capital that we're showing in the business. Please keep in mind that the information I've shared during this call is a high-level summary of our financial results. For more detail regarding the business segment results, please refer to the CFO commentary published on our website this morning. Now turning to guidance. Midpoint sales and EPS guidance would be an all-time third quarter risk. Our forecast implies that third quarter profits would be slightly above the second quarter despite slightly lower sales. Both businesses continue to face supply constraints that are limiting our ability to make the most of strong customer demand. Our guidance reflects continued strong profit leverage for global components on a year-over-year basis and for global enterprise computing solutions profitability to remain consistent with last quarter and last year. Finally, as we discussed last quarter, please note the CFO commentary includes information on our fiscal calendar closing dates for 2021. In 2021, the fourth quarter starts on October 3rd, unlike in 2020 when it started on September 27th. This makes the fourth quarter shorter than prior year fourth quarters, but year-over-year comparisons for the second and third quarters are not affected, and our fiscal year ends on December 31st as always. With that, I'll turn the call over to the operator for Q&A.

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