Arrow Electronics, Inc. (ARW)

Q2 2010 Earnings Call

July 28, 2010; 01:00 pm ET


Mike Long - Chairman, President & Chief Executive Officer

Paul Reilly - Executive Vice President, Finance and Operation & Chief Financial Officer

Greer Aviv - Investor Relations


Craig Hettenbach - Goldman Sachs

Amit Passi - UBS

Jim Suva - Citi

Matthew Sheerin - Stifel Nicolaus

Brian Alexander - Raymond James

William Stein - Credit Suisse

Steven Fox - CLSA

Brendan Furlong - Miller Tabak

Sherri Scribner - Deutsche Bank

Shawn Harrison - Longbow Research



Good day and welcome to the Arrow Electronics conference call to discuss the second quarter earnings. As a reminder, this call is being recorded. At this time, I d like to turn the call over to Greer Aviv for opening remarks and introduction. Please go ahead.

Greer Aviv

Good afternoon, everyone, and welcome to the Arrow Electronics’ second quarter conference call. I am Greer Aviv, 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, 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 Operation and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components.

By now, you should have all received a copy of our earnings release. If not, you can access our release on the investor relations section of our website.

Before we get started, I would like to review Arrow s Safe Harbor statement. Some of the comments to be made on today s call may include group s future 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 our SEC filings.

We will begin with several 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.

Mike Long

Thank you, Greer, and thanks to all of you for taking the time to join us today. The second quarter was another outstanding quarter for Arrow; as we achieved record level second quarter revenue and earnings per share. Both business units drove the strength in this quarter with continued strong momentum in global components sales, which increased 44% year over year, and better than expected sales growth of 21% year over year in ECS.

In addition, our cash flow generation was very good and came in well ahead of our expectations. Operating income growth substantially outpaced sales growth on both the year-over-year and sequential basis. Our operating income margin reached the highest level since the fourth quarter of 2007.

Earnings per share more than tripled year over year, substantially ahead of our revenue growth. And we also had a new record for return on working capital, which exceeded 36% in the second quarter and is more than two times greater than a year-ago level. Return on invested capital is also near record levels.

These results clearly demonstrate our commitment to sales excellence, operational excellence and the ability to maximize shareholder value. Time and time again, we have proven our ability to manage well through cycles.

As you will hear more in detail later in the call, all of our components regions contributed to the superb second quarter results, and we continue to see an upward trend in gross margin. Both the global components and the global ECS businesses posted sales ahead of normal seasonality.

We re especially pleased with our enterprise computing solutions business, with their better-than-normal seasonal sales growth, driven by good double-digit growth in practically all of our products. Our teams around the world have worked diligently to deliver industry-leading results in what is still a recovering global economy, and their dedication to Arrow has certainly paid off.

Following the end of the second quarter, we achieved another milestone in our global ERP implementation with the successful go-live in our northern European components business on July 6th. As a result of this go-live, the global components team in northern Europe is now managing critical activities, such as demand creation, quote-to-order, order-to-invoice and other crucial processes with the new system.

More importantly, we have not missed an order, receipt of inventory or shipment in northern Europe this month. The transition in this region was seamless, thanks to our CIO, Vin Melvin, and his global team for a job well down and to Brian McNally and the European components team for ensuring a true partnership with the IT team, all working for our collective success.

As we have previously mentioned, the pace of activity in northern Europe is 10 times the pace of the activity that we had in the implementation of the Australia-New Zealand conversion. Our solid cash position and strong balance sheet has enabled us to continue to invest in initiatives to grow the business, including our vertical markets, geographic expansion, expansion of our value-added services and our global ERP implementation.

We also increased our investment in inventory this quarter, as lead times remain extended and the supply chain is constrained. We re working to smooth the supply chain for our customers and to keep production moving. During the quarter, we completed the acquisition of Converge and Vertical, as well as announced and completed the acquisition of Sphinx Group Limited, a UK-based value-added distributor of security and networking products.

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