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Good day, and welcome to the Arrow Electronics Fourth Quarter 2024 Earnings Call. [Operator Instructions]. Today's conference is being recorded. At this time, I would like to turn the conference over to Brad Windbigler, Arrow's Treasurer and Vice President of Investor Relations. Please go ahead.

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 Agrawal, 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, 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. 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 on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. 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.

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. I'll then turn things over to Raj for more detail on our financials as well as our outlook for the first quarter. Reflecting on 2024, it was a year that brought Arrow unique market conditions and challenges, but also opportunity. 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. These include extending our line card and expanding our customer base, 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. 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. 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. Now turning to our results. 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, both surpassing the high end of our guided ranges. Taking a closer look at our global components business. 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 perform in line with or better than typical seasonal patterns. Our overall sales results were better in IP&E relative to our semiconductor business, reflecting the resilience of that segment throughout the cycle. Most notably, we saw sequential improvement in our industrial markets, driven by gains in both Asia in the Americas. And in addition, our value-added offerings and capabilities contributed to gross margin stability during the quarter. 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. In the Americas, our gains in the industrial market were offset by softness throughout the automotive sector. Aerospace and defense along with the medical device markets continue to be more resilient. And finally, EMEA 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. As for the market more broadly, we believe we're in the later innings of the industry's cyclical correction. 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 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. Rescheduling and cancellation rates have fully normalized. Our visibility is steady and our backlog is stabilizing. Lastly, industry-wide data points suggest ecosystem inventory levels continue to decline, albeit slowly. Our Q1 guidance reflects a broader market still bouncing along the bottom. But as we look beyond the first quarter to the balance of the full year, we're cautiously optimistic about an improving trajectory. We think the declining inventory levels will eventually support improved visibility and a modest recovery. 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 IP&E along with growth in value-added services will also contribute to our momentum. Nevertheless, as we've suggested in prior quarters, a broader recovery will be predicated upon improving outlooks across our supplier base. 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 along with improving execution in our North American region. Strength in hybrid cloud solutions, infrastructure software, including cybersecurity, and improving data center activity related to AI adoption drove our results. 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 and operating margin expansion for the business overall. And as we look to the full year, we're encouraged by several factors, including the benefit of our supplier and customer base expansion efforts in 2024, increasing adoption of our ArrowSphere digital platform, a growing backlog of cloud and infrastructure software and the continued expansion of our recurring revenue volumes, all of which indicates our ECS business is poised for a solid year and a growing contribution to Arrow's overall results. In closing, though the industry downturn in our components business has been more prolonged than anticipated, we're confident in the 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. In the meantime, I'd 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. And with that, I'll hand things over to Raj.

Thanks, Sean. Consolidated sales for the fourth quarter were $7.3 billion, above our guidance range and down 7% versus prior year. Global component 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. Enterprise computing solutions sales were $2.5 billion, above our guidance range and 12% higher versus prior year. ECS billings grew 10% in the fourth quarter compared to the same period last year. Moving to other financial metrics for the quarter. 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. Sequentially, our consolidated gross margin was higher by 20 basis points due to the seasonality within the ECS business. Global components gross margin was 11.4% and enterprise computing solutions was 12.4%, both on a non-GAAP basis. Our fourth quarter non-GAAP operating expenses grew $12 million sequentially to $580 million, reflecting seasonal growth in our enterprise computing systems segment. 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. In the fourth quarter, we generated non-GAAP operating income of $274 million, which was 3.8% of sales, with global components operating margin at 3.6% and enterprise computing solutions at 6.5%, both on a non-GAAP basis. Interest and other expense was $60 million in the fourth quarter and our non-GAAP effective tax rate was 24.9%. And finally, non-GAAP diluted EPS for the fourth quarter was $2.97, which was above our guided range due to favorable revenue levels. Turning to working capital. 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. This represents a $1.1 billion reduction from our peak inventory levels 5 quarters prior. Our cash conversion cycle modestly declined in the fourth quarter to 77 days. Our cash flow from operations was $326 million in the fourth quarter and $1.1 billion for the full year. This was the sixth consecutive quarter of positive cash flow generation. Gross balance sheet debt at the end of the fourth quarter was $3.1 billion. We repurchased $50 million of shares in the fourth quarter and our remaining repurchase authorization stands at approximately $325 million. For the full year, we repurchased $250 million of our stock. In the short term, we are continuing to balance the capital priorities with managing our debt ratios. Now turning to Q1 guidance. We expect sales for the first quarter to be between $5.98 billion and $6.58 billion. We expect global component sales to be between $4.35 billion and $4.75 billion, which, at the midpoint, is down approximately 5.5% from prior quarter. In enterprise computing solutions, we expect sales to be between $1.63 billion and $1.83 billion, which is approximately unchanged at the midpoint year-on-year. 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. And our non-GAAP diluted earnings per share is expected to be between $1.30 and $1.50. 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, decreasing reported sales by approximately 200 basis points or $140 million compared to the first quarter of 2024. The details of the foreign currency impact can be found in our earnings release. With that, Sean and I are now ready to take your questions. Operator, please open the line.

[Operator Instructions]. Your first question comes from the line of Melissa Fairbanks with Raymond James & Associates. Please go ahead.

Thanks so, much. Great quarter, great results. Good to see continued progress on the inventory front. I had one question for you, maybe for Raj. Wondering if you guys happen to see any pull-ins 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 cited something, at least some benefit in the December quarter.

Yes.

Yes. Melissa, thanks for joining. We did not see anything, we did not see anything material due to any of those factors in our Q4 sales numbers.

Okay. Great. And then just -- 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. Wondering if you're also seeing that? If that just flows through in terms of your -- just the inventory that you have? You're pricing it and passing that along?

Well, I think this will help. I mean as you know, our gross margins were stable from Q3 to Q4 in our global components segment. Our best data tells us that transactional margins in our core markets have held up for the most part this year and we kind of assume the same for Q1 in our Q1 outlook as well.

Your next question comes from the line of Joe Quatrochi, Wells Fargo. Please go ahead.

Thanks for taking my question. Curious, as we think about just the -- you're talking about your bookings visibility maybe improving. I guess how do we think about just the intra-quarter turns demand that drove upside in 4Q? And what's your assumption in 1Q for that?

You mean it's something different than our guide?

Just trying to understand the dynamic...

Can you say more about the question?

Yes. Just trying to understand that the intra-quarter turns kind of demand that you saw from your customers are just like just-in-time demand you saw in 4Q and that being a driver of upside in the fourth quarter on the component side? And then just how do we think about that dynamic in the first quarter? Are you expecting that to kind of maybe normalize as bookings are starting to improve?

Got it. Thank you. Well, the first thing I think we'd say is that we are seeing some mixed trends across regions and verticals. So, we're not surprised by some ebb and flow from one quarter to the next. I would say that our turns business, as you characterize it, was relatively stable from Q3 to Q4, and we think it will be relatively stable again in Q1. Obviously, the big wildcard is the mass market overall and when that fully recovers. We think that as inventories gradually continue to decline, that will be a stimulus for basically better visibility, more normal ordering patterns and then a backlog, which will improve. But it's a little difficult to call beyond, say, 90 days at a time.

Okay. Fair enough. And then can you help us -- Raj, help us understand the OpEx dynamics embedded in the 1Q guide, given the -- I think your comment was relatively stable gross margins. And then how do we kind of flow in the cost savings and some of the restructuring that you're doing?

Yes, absolutely. The way I think about it, 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 $650 million to $670 million. And since then, we've taken at least $200 million of cost, annual cost out of the business. So that implies that we're down $50 million quarterly or $600 million as an OpEx number. And that's probably a better starting point as you look at the first quarter. And then as we announced in the fourth quarter of last year, we also plan to get an additional $90 million to $100 million of savings, of which we should get about 1/3 this year. So, there's further opportunity from that number. And then we're certainly investing back in the business as well beyond that. So hopefully, that helps a little bit.

Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead.

Thanks, for taking my question. Sean, I think you said in the prepared remarks that we're in the late innings of inventory correction. What is giving you confidence that this is almost over? Or is that what you meant? And which parts are still in excess in the supply chain?

Well, Ruplu, I'd like to think that it's almost over. I think we believe it's later innings because we have seen inventory levels slowly decline more broadly. You can imagine, we triangulate a variety of data points each quarter to get a good read on where we think inventory levels are, 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 it returns at more scale. But we think that we've got a good handle on the first quarter. We think, given where our book-to-bill ratio sit and given what we see in our current visibility and backlog patterns that we are at the bottom. And there is a path to improvement across the course of the full year. It's partly market dependent. But it's also a function of what I just described as inventories do come down, if they come down at the rate that we expect. And then we've also been really busy on the business development front. We've taken some matters into our own hands, and we believe there's some wins, both on the supplier and customer base front that will roll into the business throughout the course of the year. And that will help, too. Again, the wildcard is the broader market overall. That one, we can't call and we can't control. But we think there's some improving factors within our mix and within our longer-term outlook.

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?

Nothing material in any one particular component type, Ruplu. We -- as Raj mentioned, we brought down our total inventories by over $1 billion from their peak in, I think, Q3 of '23. I think our turns were up year-on-year in Q4. And our units were down both quarter-to-quarter and year-on-year as well. So, I think we're doing a pretty good job of managing inventory. It doesn't mean 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 long-term obsolescence challenges that we haven't adequately reserved for.

Okay. If I can ask one question to Raj. For 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 4Q and 1Q? I mean how do you see the mix of geographies and global components? How is that going to impact margins? And how do you see the mix impacting margins in ECS? So, any color, if you can give us, on how you see the sequential change in operating margins in 1Q for both of the segments?

Yes. I mean as I mentioned briefly in my comments, for both segments, I see gross margins being relatively stable from Q4 to Q1. We did have some mix-related impacts in the fourth quarter from Q3, but 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's some step down, just from a seasonality standpoint, but I think gross margins will hold relatively well. And it's really a question of negative leverage from the components business that steps down operating margins going into Q1.

Yes. Ruplu, 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. 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, versus in components, we tend to look at things on a sequential basis for all the right reasons. But we will see year-on-year operating margin expansion in that business for sure.

Okay. And sorry, just on the component segment. Do you see any change in the geographic mix? I mean do you think Europe still remains weak in 1Q and Asia is strong? Or how should we think about this relative mix of regions impacting margins?

Yes. I think you're on the right track. We see fairly seasonal patterns for us in Asia and the Americas. But our outlook in Europe is sub seasonal, given all the macro challenges we face in that market.

[Operator Instructions]. And your next question comes from the line of William Stein with Truist Securities. Please go ahead.

Great. Thanks for taking my question. Another one on inventories. I received some messages from investors who were a bit surprised that inventory ticked up in dollars in Q4. And I guess -- a little bit surprised given -- 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 can help me understand, is there a target level that you'd like to talk to us about, about where you'd like to take inventories in the long term? And then shorter term, is this just a matter of some stuff in your inventory perhaps not moving as quickly? So, the number that we looked at on your balance sheet may not really represent sort of the turns activity that you're doing because some of it's sort of stuck and other stuff moving much faster. Any help around that would be great.

Sure thing, Will. Let me come back at that again. I think similar to Ruplu's question, there aren't any significant pockets of excess or slow moving in the overall mix that stand out in a way that we're overly concerned. As I think I mentioned, we believe we've got a lot of good inventory. It's just taking longer to sell. That's really what we're up against. But if you ask us about the target levels, we typically focus at turns. It's a key metric for us, and we're starting to approach historical turn rates similar to what we saw pre-pandemic and pre-severe shortage environment. And the other is really working capital as a percent of sales. And I think the way that gets better is more about the denominator than the numerator. And as the mass market returns, we think we're going to like where that metric heads as well. So, I don't know if that's completely satisfying for you, Will, but we don't have any big material one-timers in our mix that we're overly concerned about.

That's helpful. Maybe one more if I can. It sounds like based on your earlier comments about feeling like you're in the latter innings of this dynamic that you must have a view to customer inventories being either bottomed or approaching that. Any commentary on that, please?

Yes. We think that broadly, again, this is a broad statement. You can only sort of triangulate so many data points at once. But we think broadly, in our core markets, inventories are creeping down. We'd love to see them come down more quickly, but that's ultimately a function of the broader economic and demand environment. We can't control that. But we do see them creeping down and we do know that eventually, that means order patterns will normalize and our visibility will improve and our backlog will grow. Again, we think those things are steady now for us versus in decline but we obviously need them to grow to signal a broader recovery. And two, keep in mind that we're always conscious of the changing dynamics of our customers and their production schedules and we've got thousands and thousands of customers. So, we do want to be leaning in when the market recovers so that we can best support them. And so, we're not too far on our heels here. At the same time, we're careful not to lean too forward on our toes either at the same time. We're managing that balance, I think, very carefully.

Thank you.

There are no further questions at this time. I will now turn the call back over to Brad Windbigler for closing remarks.

Thank you all for joining today's call. We look forward to meeting with you at upcoming investor events. Have a good day.