Arrow Electronics (ARW)

Q2 2011 Earnings Call

July 27, 2011 12:00 pm ET

Executives

Michael Long - Chairman, Chief Executive Officer and President

Andrew Bryant - President of Enterprise Computing Solutions Business Segment

Greer Aviv -

Paul Reilly - Chief Financial Officer and Executive Vice President of Finance & Operations

Analysts

Brian Alexander - Raymond James & Associates, Inc.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Shawn Harrison

Jim Suva - Citigroup Inc

Amitabh Passi - UBS Investment Bank

Sherri Scribner - Deutsche Bank AG

Ananda Baruah - Brean Murray, Carret & Co., LLC

Scott Craig

William Stein - Crédit Suisse AG

Craig Hettenbach - Goldman Sachs Group Inc.

Brendan Furlong - Miller Tabak + Co., LLC

Presentation

Operator

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Previous Statements by ARW
» Arrow Electronics' CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Arrow Electronics' CEO Discusses Q4 2010 Results - Earnings Call Transcript
» Arrow Electronics Inc. Q2 2010 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Arrow Electronics second quarter earnings conference call. My name is Latasha, and will be your coordinator for today. [Operator Instructions] I will now like to turn the call over to Ms. Greer Aviv. Please proceed.

Greer Aviv

Thank you. Good afternoon, everyone, and welcome to the Arrow Electronics second quarter conference call. I'm Greer Aviv, Senior Manager of Arrow's Investor Relations program, and I will be serving as a moderator on today's call. If you would like to access today's call via webcast, please visit our Investor Relations website at www.arrow.com/investor and click on the webcast icon. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operations and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components.

By now, you all should have received the copy of our earnings release. If not, you can access our release on the Investor Relations section of our website. I would also like to point out that we issued a CFO commentary that has been posted to the Investor Relations section of the website that should be used as a complement to the earnings press release. You can access a copy of our earnings reconciliation for the second quarter in our press release or on the Investor Relations section of our website.

Before we get started, I would like to review our Safe Harbor statement. Some of the comments that would be 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 reasons. Detailed information about these risks is included in Arrow's SEC filings.

We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. As a reminder to members of the press, you are in a listen only mode on this call, but please feel free to contact us after today's call with any questions you may have.

At this time, I would like to introduce our Chairman, President and CEO, Mike Long.

Michael Long

Thank you, Greer, and thanks to all of you for taking the time to join us today. I'm proud to announce that we've generated record sales and earnings per share of $5.5 billion and $1.36, respectively. Consolidated second quarter sales of $5.5 billion grew 20% year-over-year, with excellent growth in both Global ECS and Global Components.

Sales in ECS were above normal seasonality on a sequential basis, driven by broad strength across products and geographies. In Global Components, year-over-year sales growth was very strong and sequential sales were in line with normal seasonality. We continue to see terrific margin improvement this quarter, as gross margins increased to 110 basis points year-over-year due to acquisitions and our efforts to drive increased gross margin across the business. Returns continue to demonstrate our commitment to creating shareholder value with return on invested capital of 13.6% well within our long-term target range, and a return on working capital of 31.9% ahead of our target.

Global Component sales growth was very strong again this quarter, driven by year-over-year increases across a wide a number of products set and verticals in our core business around the globe. On a sequential basis, sales were in line with normal seasonality, though slightly below our initial expectation for another quarter of above seasonal growth.

We saw a continuation of strong sales and a book-to-bill trends in April and in May, and then growth slowed in June, and book-to-bill fell below 1. This well-publicized economic challenge in Europe have resulted in a more cautious marketplace. While the government in China continues to raise interest rates to curb inflation, despite a modest slowing of the economy there. Gartner recently reduced its outlook for semiconductor sales, 5% growth from previous expectations of 6%.

We believe this is a short-term issue and our underlying Components business remains healthy. The modest oversupply of inventory at the end of the second quarter, as well as the macroeconomic factors will likely temper the growth we will see in the third quarter.

In our Global ECS business, growth was above our expectation and normal seasonality on a sequential basis. The ECS team posted second quarter revenue driven by impressive year-over-year growth in all of our product lines. With proprietary servers, industry-standard servers and software, all growing in excess of 25%.

We continue to execute on our growth strategy as evidenced by the recent expansion into new markets such as unified communication and our expanded supplier relationships. Andy and his organization are doing a tremendous job of bringing value to our customers and suppliers, and we're clearly being rewarded for this.

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