Good day, ladies and gentlemen, and welcome to the Arrow Electronics Inc Second Quarter 2016 Earnings Conference Call. My name is Leslie and I'll be your operator for today. At this time all participants are in listen only mode. Later we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to your host for today, Mr. Steven O'Brien. Please proceed.

Thanks, Whitney. Good day and welcome to Arrow Electronics second quarter 2016 conference call. 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, you can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation, and a webcast 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 will 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. To be successful Arrow is required to be more than just a provider of today's technology. We need to rely on our broad reach and our deep understanding so we can anticipate market changes. Our company's history of adaptation has served as well in recent quarters as we've positioned Arrow to capture opportunities presented by the Internet of Things, Digital and the Cloud. We constantly monitor where global markets are headed and that has both the information and the infrastructure to capitalize on the existing markets and capture new wins as they're emerging. This is a point of competitive advantage and different temptation for Arrow that has become increasingly more acute. Going forward our company will continue to transform and meet the realities of the markets we serve. I'm pleased to report second quarter sales of 6 billion, gross profit of 800 million and earnings per share of $1.65. All records for our business. Our business is continuing to grow and our backlog is very healthy. In the second quarter both our global components and our global enterprise computing solutions delivered strong results. Both businesses grew sales and expanded operating margin year-over-year. Our steady performance is attributable to the investments we made 30 years ago in key areas. Had we not been willing to change our business we would be far more impacted by the ups and downs of the markets we serve. Second quarter global components sales advanced 4% year-over-year. Europe delivered sales growth for the 13th consecutive quarter adjusted for acquisitions and changes in foreign currency. Our American business is flat year-over-year; Asia sales grew 5% year-over-year and growth from our core SMB manufacturing customers in both the America's and Asia…

Thanks, Mike. Second quarter sales of $5.97 billion grew 2% year-over-year. Sales adjusted for acquisitions were flat year-over-year and approximated the midpoint of our prior guidance range. Global components sales of $3.83 billion grew 4% year-over-year and when adjusted for acquisitions grew 1% year-over-year. Sales for our digital platform exceeded our expectations and sales growth from our core small to medium size manufacturing customers was very good in all three regions. In Europe sales grew 7% year-over-year. Sales adjusted for acquisitions and changes in foreign currencies increased 3% year-over-year. We saw growth across key verticals, including lighting, aerospace and defense and transportation. Our Europe components did not experience a noticeable impact from Brexit as our business is far more aligned to the manufacturing countries of the region. In the America sales were flat year-over-year. Sales in Asia grew 5% year-over-year; and when adjusted for acquisitions and changes in foreign currencies, were flat year-over-year. We experienced healthy growth from our core SMB customers in both the Americas and Asia. Global components second quarter book-to-bill was 1.03, which is slightly above 1.02 in the second quarter of 2015 and is roughly averaged for the second quarter. Our lead times and cancellation rates continue to track within normal ranges. Through the first four weeks of the third quarter, our book-to-bill was above parity and slightly above last year's level. Second quarter global components operating income grew 6% year-over-year and operating margin expanded 10 basis points demonstrating healthy leverage on our sales growth. Second quarter enterprise computing solutions sales were $2.14 billion and were flat year-over-year. Our top line was understated by a greater mix of software. In the Americas, sales were down 2% year-over-year. In Europe, sales advanced 6% year-over-year. Our billings grew in the second quarter and grew at a high single…

Thank you, Chris. Whitney, could you please open up the call to questions at this time.

[Operator Instructions] Our first question comes from the line of Brian Alexander with Raymond James. Please proceed.

Just on the guidance, the EPS revenue guidance looks to be above historical seasonality at minus 5% sequentially if I use the midpoint. So has seasonality changed at all given some of the acquisitions that you’ve made like immix last year perhaps helping Q3 more than historical seasonality would suggest, or are you more optimistic about the demand environment within computing?

Brian, this is Sean. I think we’re generally feeling pretty good about the second half in most markets. We have had the immix Group under our belt for over a year now, they’re fully integrated. There is some good momentum at their back and we feel pretty optimistic about the federal sector close. So I think that will help us offset any differences in seasonality in Q3.

Can you just clarify? Has seasonality changed for the third quarter and for the back half in general relative to what we used to see?

Brian I think we've stopped the practice of updating seasonality on a frequent basis. We had a look at this business as you know over a longer horizon. So, I can't quite give you that data but we do feel pretty good about the size and shape of our federal business and the contribution from immix now a full year onboard.

Maybe I can help you with that, we have some old products as you know rotating storage, those types of things that are being overtaken by solid state. And what we have been seeing is the decline of -- storage has been faster than what solid state could make up and while you look at our solid state storage growing I don't know a 125% year-over-year, the dollars haven’t been big enough to have a cross over point which would be driving the business and that's what we're sort of dealing with inside. We do expect over the next few quarters for that crossover point to come and then we believe we back -- be back from more of the seasonal type activity that you're looking at. But what we're dealing with and you know that's an issue for the company because it's in 40% and thank goodness we started on this years ago so we have the suppliers to grow our way out of it, but that’s just one of the headwinds that we've been working through. I hope that clarifies a little more for you.

It does. And just to follow-up on the components business, you mentioned declines at large supply chain customers in North America and Asia that impacted revenue. I guess the first part of the question is that a trend or an anomaly, particularly in North America? I haven't heard that before.

The think is it's a constant -- Brian and as we've seen and you actually saw some of the end user customers, in their guidance were out. I would fully expect that to start to abate in the third quarter, in the fourth quarter especially as we start to get to the Christmas build for some of the big supply chain guys who are building for some of the bigger customers but that is where we thought, there's not a change in the direction of the business or anything like that. But that's just a note, that we saw and we were pretty fortunate there because we started out with the express sales and engineering over the last year, year and a half, and those customers actually grew into it. So, we're going to be in much better state as that customer base comes back for us.

Okay, yes, I just wanted to clarify that there wasn't a change in strategy. Thank you.

Yes, no change in strategy. No change in the buying habits of those customers. Just sort of a quarter where I think everybody new coming into it is going to be interesting and everybody has been waiting to see what was going to happen.

Your next question comes from the line of Matt Sheerin. Please proceed.

Just following up on Brian's question regarding Q3 and the Brexit impact, you said you saw, I think, $40 million or so in some push-outs. Are those deals getting done this quarter, and are you seeing signs that you're back to seasonal demand trends in the UK or does that continue to be cautious?

What we saw, Matt with the Brexit thing, was that we actually had a push out that went out, that we'll build this quarter that’s not what we’re worried about. I don’t know if what we will see will that sort of -- those push outs of those customers maintain or will they pull back in and we’ll be back on track with them. But totally expect that it is more of a market hiccup and a reaction to a time frame, sort of time plates of utility things coming all together, but it was note that we did have an actual push out that started to equate to that kind of money and that’s why we exposed this and we really don’t see anything lasting with that right now.

Got it, okay. And then on the semiconductor side of the component business, you talked about the semiconductor supplier consolidation that we've been seeing, and the impact on your business. You've seen some line card changes. But net-net, are you seeing a positive in terms of your revenue and margin impact from all of this, or how does it shake out?

Right now we’ve actually seen and are seeing I should say, a benefit because our book to bill even if you think about are above parity from where they were last year. What’s also notable is our backlog is at the highest level we have ever had. So, we’re not only booking orders now for the future, but we are at the highest backlog levels we’ve seen, which would indicate over the next quarter or two we will see another jump in our components business. It doesn’t look like it was related to any one incident of business switching or anything like that because it's long-term and the booking rates are continuing at the same pace, in fact a little better than what they were a year ago. Andy do you have anything to add to that?

Nothing, it wasn’t particularly driven by one event. We’ve been in that order backlog gaining mode for some time now and it just continued to build momentum.

And the design activity, you talked about high single-digit growth there. Does that play into this or is that sort of separate where there's a big lag of several quarters between the design wins and actual production, so that's something you should see next year on top of the backlog strength that you are seeing?

You got it right. I mean typically we see the design industries proceed to bookings one, so one leads into the other which is why we’re track it so carefully and you know we remain positive about the outlook.

Matt it’s interesting because we had I think in the second quarter of last year around 69,000 design wins. We’re about 75,000 this quarter this year, so that’s up about -- what is that -- 8% or 9% something like that, and some regions more and some regions a little less. So, that always bodes well for us and that’s what we’ve been seeing. And frankly I don’t care what part of the world it's going to go to as long as it goes and it goes through us.

Your next question comes from the line of Mark Delaney of Goldman Sachs. Please proceed.

The first question is a follow-up on the semiconductor consolidation. I think the Company you talked about a $2 billion revenue gain opportunity from some of the semi consolidation or semi companies picking to go with more of an exclusive relationship through distribution. Now that we've had some of the news come out with Avago, Microsemi, maybe you could update us on where you stand with your efforts to win that additional business and what do you think that pipeline opportunity goes to now that we have the linear and ADI news?

Well I think the Linear in ADI will -- specifically will play out, while we don't predict what those do. We have great relationships with both of them. We have good sales with both of them. We frankly don't see anything, any change of any magnitude. If you go back to the other two, we've had a big impact with one supplier coming over to us and net-net if you look at it our sales were up. I don't think -- I think what you're going to see is exclusive relationships being just that. They're going to be exclusive and they're going to be done very lightly and it's going to depend on the technology sort of the Altera and Xilinx type activity. But anybody that is broad line that needs to get to a big customer base is not likely to reduce their channel all that much and that's something to keep in mind. It doesn't do any good and most of these suppliers don't have the resources to get to a 100,000 customers like we can and that's really what they're looking for access for. That and the engineering capability to their products. So that underline benefit to the suppliers that has not gone away and in fact it becomes more pronounced as they have to come up with synergies for the acquisitions. They're going to push us even through more and become more responsive and even be more important to them in terms of size. So, I see it as an overall win for the channel not just for Arrow but for channel in total.

That's helpful. And for a follow-up question, for the overall consolidated business, when we think about EPS guidance for September quarter, it seems like EBIT margins are implied up something in the range of 10 BPS, year-on-year and maybe not quite as much of a growth that we saw year-on-year in the June quarter. Is that just maybe more normalization and mix, because it sounded like mix was particularly good in June, or any color you can provide there will be helpful.

Really from our standpoint we expect the margin improvements to continue which we mentioned earlier to your point, I think there's a little bit of mix going on in the numbers, but overall that continued focus on margin and margin growth remains and we feel good about where we're headed.

Your next question comes from the line of William Stein with SunTrust. Please proceed.

The first question relates to a competitive issue. Your nearest competitor has had some ERP implementation issues recently, and I'm hoping you can let us know if, in the quarter, there was any benefit to your business from customers needing to switch [indiscernible] and then if you anticipate any ongoing benefits from that?

First I think that while I’m not over there don't know the situation, I think what I did know is there's about a six day hang up, a customer is not going to switch for six days. I think they'll figure out whatever their issues are and they'll fix them. So, that's not really what we attempt to do and I think that we're growing our business sort of the old fashion way going to customers, give them better service and that's what helping us, we're bringing in more products. We’re going to continue playing the same game that we’ve been playing. We’re changing our business and these issues may be good for a week here or there, but it never build to lasting customers. So that’s really not our focus.

I appreciate that. Thanks Mike. One follow-up if I can regarding the supplier consolidation. I just want to make sure I understood the earlier response correctly. In some of these cases, you've seen sort of a broadening out [ph] of the supply base, not only more in aggregate through distribution but sort of evening out what goes through partners. In other cases, you've seen a narrowing of the supplier base. It may be more business and distribution, but for example I think, in Broadcom's case, perhaps more through distribution, but a narrowing of the supply partner list. Which of those two do you anticipate the more likely or more frequent outcome going forward, understanding that you think it means more distribution? The narrowing or broadening [Multiple speakers].

Take the Avago Broadcom we really didn’t have the line in the U.S. and Europe. And what we did have was relatively small, so there wasn’t relationship. Where we did have the relationship was in China, that remains intact and Korea that remains intact. So, while they did what they did, that didn’t really have an impact on us and we have other competitive lines that we actually sell and do well with. If you take Microsemi on the other hand a huge winner in the transition of that and the new products that they have just down, we believe that’s going to bring big upsides and big upsides for us. Overall I don’t think this is anything you guys should be losing any sleep over because it’s really not anything we’re losing sleep over at this point. And I think we could speculate all day long. But the bottom line is whether you like it or now, Avnet's got a set number of accounts out there, we’ve got a set number of accounts out there and suppliers want all of them, they don’t really want a portion of them. So I don’t see a huge change.

Your next question comes from the line of Shawn Harrison with Longbow Research. Please proceed.

Chris, I guess the free cash flow number for the first half of the year was a little bit lighter than comparative years. It was still a good number. But how do you expect free cash flow to ramp or even cash flow from operations to ramp in the second half? Do you have a full-year target you can give me?

We don’t obviously put out full year targets, but I would say that just the fact that we’re delivering 110% of GAAP net income versus our target of 70%. It speaks to the fact that really I think we’re on trend and there is going to be slight movement around that average. But overall we don’t expect to see any significant change in that trend line.

And then as a follow-up Mike, a big picture question. Early in the presentation, you highlighted your IoT exposure, your online and publication investments recently. I guess considering that maybe you could let us know what that IoT number was a couple years ago? And second, Avnet recently looking to buy Premier Farnell stepping up their online and to an extent IoT presence, how would you compare and contrast where you're at right now versus where you want to be in kind of I guess both the online and IoT landscape considering it's going to be changing a bit if Avnet acquires Premier?

I would say that we don’t see that particular transaction is something to affect us. In fact I think it's something that really shows that there is a delta in strategy between the two companies that we've been talking for a long time. Because we looked at this about a year ago and half of that company is industrial distribution, the other half is electronics and about half of that half goes through a digital presence. And for us that was just too much heavy lifting to go for having about 25% of the business actually be digital. So, it wasn't something that we saw as a threat and/or as a benefit to our business which is why we built our online capabilities the way that we did. We spent time now we are out in publications educating customers, how to do designs in IoT, how to tie the sensors all the way to storage and bring those two worlds together which brings our computer business and our components business together in some cases as a selling motion. We're going to stick to the guns that we have. We have a -- already have a big robust digital business. We're happy with it, we expect it to continue to grow, it's already growing -- very pleased. But for us it's about staying external to market and we just didn't see that as something that we do that; and the other thing is we just have no interest of moving into the industrial distribution space. So, that's a clear differentiator now between the two companies.

Perfect. Just the IoT, where was it a couple of years ago? I think you said it was 10% of components right now or something in that?

It was is nothing, you had something's that you could define as IoT, but it really wasn't something we measured. Today as you know that is something that we measure and I think it's a pretty big surprise that it's growing to that and our business is sort of the rates that it is it shows that, the market is embracing bigger stronger cloud computing and more data transferring from what would be an end customer to a manufacturer for certain possibilities. This is going to be something that's going to continue to grow and I think it'll ultimately drive the market I mean just think of anything IoT when you I mean you can take it as simple as the door locks on your front door or somebody knocks on your door and you got a camera on them and you can talk through your cell phone to tell them you don't want anything and what they're selling send them on their way and have the picture of them. This is our world and this is where it's going and I wouldn't doubt that it wouldn't be 40%, 50% of the business down the road over the next five years.

Your next question comes from the line of Steven Fox with Cross Research. Please proceed.

Just a first question following us on some of those comments, Mike. As you guys build out this digital platform, can you sort of explain without going into too much detail I guess in terms of how it doesn't impact your high touch business. In other words why aren’t you just moving some high touch business over to digital, and would that come at the expense of margins over time? And then secondly if you could just expand on why you're optimistic on the federal IT sector spend into the fall, and if there's any difference between the types of products that they are spending on versus what we would look at across a typical commercial. Thanks.

Actually I'm going to let Andy take the digital piece of that.

From our standpoint we have our customers that are basically trading with both parts of our channel of the market. We have customers that are doing online design activity and as that project becomes more tangible and more real than we’re deploying our traditional sort of hard resources in the field to take that product through to production out of the other site. So rather than be in conflict with each other, we see them as being complementary to the way that we support our customers. They choose how to interface with it, we need to provide them with the necessary capability to do so. So, we’ve continued to see customers trading with us increasing through both channels of market rather than just purely switching from one to the other.

So in essence that’s really been our strategy from the beginning, trying to be as customer focused as we are. We’re not forcing anything down a customers. But when you think about the new inventors that are coming up, things that you’ve seen around crowd funding Indiegogo in specifics that’s a direct tie with our Internet. And then on Indiegogo a lot of the designs that are coming up are basically now Arrow approved designs which just tells people that the product can be built for the price that they say it can and we’ll also say that we validated the engineering and the product should be pretty good. So that’s going to be a good housekeeping label that you’ll see on those products for new start-ups and companies that are going that will be able to use our engineering online to help them sell their products in a crowd funding way. So what we’re really doing is we are going to what used to be the lowest and earliest level of a product conception all the way up to the larger customers out there and finding more efficient ways to deal within their supply chain. That’s our strategy, has been strategy, it's going to continue to be our strategy. Sean you want to answer the third government piece?

Sure Steven as I was telling to Brian, we’ve had immix on board now for over a whole year and in that time we’ve been able to take the best of our ECS core business in North America alongside the best of the capabilities that immix brings to the table and create a one-plus-one equals three. So, we’re helping add to their line card, we’re helping them expanding our customer base. And as you know, September is the end of the U.S. federal budget season. And so there is always a pretty good uptick in Q3 and specifically in September. And the immix acquisition from a line card perspective was very consistent with our overall strategy focused on software based solutions including security. Security is a pretty significant piece of their mix and obviously the market is strong in that area as well.

Your next question comes from the line of Ananda Baruah of Brean Capital. Please proceed.

Two from me if I could. I guess the first is was there anything that manifested during the quarter that was different from your expectation heading into the quarter one way or another that would be notable for us to be aware of? And then I guess along those lines, what -- is there anything specifically, aside from sort of this ongoing demand trend in some of the areas you're exposed to, are you expecting to be kind of contributed to the second half the year in your forecast? And then I have a follow-up. Thanks.

So your first question, the only thing that we have a little bit of surprise with sort of Brexit coming into the quarter. Everything really went off the plan, we sort of disclose how we saw that push out effect our business. My guess is that's the only difference between you guys calling this quarter a homerun and sort of being ho-hum about it, which for us we've made records in all three categories so it's kind of exciting. But in the end that's sort of a difference and we saw that. I guess I've become custom now that there is becoming more and more those types of surprises than we ever saw before although I don't have any of that in our planning for the second half. The planning in the second half for the computer business is still about us getting the new products up to speed as fast as we can, faster than sort of the decline of storage and the new Cloud server stuff really often running at a rate that can offset for us what is and has been a normal course decline that’s nothing new for you guys, but that was something we had overcoming our business and I think we've done a pretty credible job of doing that and growing the business. So, I mean it's kind of funny if we didn't had those headwinds we would be sitting here with unbelievable record but the fact is that is the nature of the business, this business is always going to change, we're going to have to adapt, we're going to have more investment in Cloud, we're going to have more investment in Digital, we're going to have more investment in IoT and I would expect that those things are going to upside for us in the second half past what we thought of. So, hopefully that answers your question, but we're going into the second half with a bad attitude, we're going into the second half thinking that we're going to do a pretty good job in the market.

That's actually really helpful. And then I guess just one last one for me. Are you seeing -- have you seen any shift in the competitive landscape? I know, after the March quarter results, your biggest competitor actually on their earnings call and then at some of the subsequent conferences had talked about the need to sort of get more competitive in certain areas. It's actually giving you guys some kudos for the job you've done over the last handful of years. Is it too early to see anything yet? And if you are seeing anything, sort of how is it showing up?

I think there's a difference in strategy that probably it's highlighting itself in a more acute way. Which shows there's really differences in the companies and it's something I've been shouting for five years now. Where we've been headed, I think it's starting to show up and -- come on in, the water is warm.

Your next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed.

I wanted to dig into the ECS segment a little bit. The growth rate decelerated, and in the press release, you talked about the software mix impacting that. On the conference call now, you've talked a little bit more about the storage environment. I Guess I'm just wondering, going forward, do you think that the shift to software is going to continue to be a drag on revenue, although it clearly is benefiting the operating line? How should we think about that and is there anything else in ECS that we should be aware of where you are seeing pretty significant shifts? Thanks.

From a high level, Sherry one of the reasons that we’re not coming out with new targets or the computer business is that the hardware will catch up again and grow, especially in the storage range and what you have is that market disruption right now. What you have are high growth rates for us in infrastructure, high growth rates in security, high growth rates in solid state storage. And there will be some crossover points to where we’re not artificially diluted by rotating storage piece. And once that crossover point comes, you will have growth again in hardware which is typically a little less profitable than our services and software piece that we actually do some work on and help get customers get that integrated. So, that’s what we are struggling with. It looks good that -- I mean you could just go, why don’t you guys get drives the heck out of the software and services for the rest of your life and forget about the rest of it. But the truth is we offer customers solutions to their problem and we don’t carry everything, we’re not going to have the solution, which is what we’re known for and that’s what we’re going to continue to drive. But sort of the macro problem, that’s actually more of a micro problem with what we’re dealing with now. But we fully expect for that to be self-correcting over the next few quarters.

Your next question comes from the line of Jim Suva with Citi. Please proceed.

I have one question probably for CEO and one for CFO, and I'll ask them both. When you mentioned about the Brexit, you mentioned I believe about a $40 million in deferral or push out. Can you confirm, was that closed subsequent to the quarter, or is that something you are still working on? And then probably for the CFO, it looks like your cash flow generation, both quarter-over-quarter from a year ago and year-to-date, is lower. Can you help us understand what happened there? Maybe potentially Accounts Receivable got deferred or delayed or how should we think about why cash flow generation year-to-date and year-over-year were a bit lower?

Jim I’ve got to answer first, because I am getting older and I might forget the question before you get to Chris. The Brexit issue is -- a good portion of that has closed. There is a portion of it we’re still working on. We don’t expect any hiccups in the close of it over the quarter, but that’s where we stand right now on it. And as I said, we believe things will flow back to normal. We believe it was a hiccup. It was inevitable when you have that kind of a hiccup that somebody is going to say, oh wait a minute. But then at the end of the day they still need that computing power in their data center. So they are going to spend the money, whether they like it or not and I think that’s the situation here also. I’ll turn the second piece over to Chris.

Jim, on the cash flow, again overall we’re very confident that we’ll continue on this trajectory that we’ve been on and I think for the third quarter in a row the cash conversion cycle did improve. I think what we're seeing internally and externally is a little bit of distortion around the quarter cut off issue reclosed on July 2nd, whereas last year we closed before the end of June and I think with those -- the calendar timing, it certainly did have an impact on DPOs and DSOs and it's something we noticed. But overall I have no concerns over where we are in cash flow and I think the trends will continue in terms of what we've been able to deliver.

There are no further questions in queue. I'll now turn the call over back to Mr. Steve O'Brien. Please proceed.

Thanks, Whitney. 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. Detailed information about these risks is included in Arrow's SEC filings. If you have any questions about the information presented today, feel free to contact me. Thank you for your interest in Arrow Electronics, and have a nice day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.