All right. Perfect. I think we can go ahead and get started. I'm Joe Petrocchi, the semiconductor analyst for Wells Fargo. Excited to have Bill Alston, the President and interim CEO of Arrow Electronics. Thanks for joining us.
Thanks for having us.
Maybe to start, just kinda set the stage for the discussion, you know, what do you think, like, investors maybe don't appreciate about the Arrow story? And then we can kinda get into maybe a few, you know, other things that are kinda going on with the company right now.
Sure. Sure. You know, what don't investors understand about the Arrow story? Let's just back up. You know, the company's 90 years old. I think investors need to understand the legacy of the company, the history of the company. You know, you just don't wake up one day at 90 years old. You gotta earn your way there. I honestly believe that Arrow has earned its way through up cycles, down cycles, sideways cycles, to be the global brand that it is today, to have the global reach that it has today, and to have the employee base that it has today. I think investors might miss that. We have tremendous, tremendous employees that have long history with the company, that have long history in the industry, that really understand what makes it go.
If you look at where we are today and the work that's been going on at Arrow over the last few years on cost down, productivity, getting the model in a different position, if you think through that, and if you're a believer in the cycle that takes place in this industry, and if the cycle is at the bottom, Arrow's done a tremendous amount of work over the last few years to position itself so that as that cycle comes back, the business is really gonna outperform. That outperformance, based on where today's stock price is, it's the company's way undervalued. The stock price is undervalued. With the work that's been going into the model to create leverage, nothing but upside.
That's helpful. So, you know, you're in the interim CEO position now, right? Kinda maybe walk us through where we're at in finding a permanent replacement for the CEO, the timeline. You know, what are you looking for, in that person as well?
Sure. Been in the interim role for about seven weeks. I've been on the board for five years, so it's not like I'm a foreigner to the company and that the company's a foreigner, you know, the leadership team, I know them well. They know me well. As far as the CEO search goes, we put a search committee together at the board level, of which I'm a part. We have now selected a search firm, and we are starting to gather several resumes from the industry just to see what's available, and to see what kind of characteristics people might have. We put a characteristic list together of the CEO characteristics we'd like to have in the company, and we want to make sure that the incoming person understands the legacy, understands we're 90 years old, understands the dynamic in the industry, is a humble individual.
We're not looking for a chess beater, and understands how the management team has been put together, how the strategy's been put together, and the board has been involved in that strategy development for the past several years. We've been involved in the bringing up of the leadership team over the last several years. Lastly, a key characteristic that we're looking for is someone that has operational expertise and experience. Arrow's a big sales company, big distribution company, but we really want someone that brings in some operational expertise and operational chops to the company. Not that it doesn't exist, but to continue the daily cadence of hitting metrics, driving metrics, and performing to expectation.
Okay. That's helpful. You know, maybe in addition to, obviously, you know, helping with that search, I mean, you know, on an interim basis of running, you know, the company, what have been your areas of, like, strategic focus?
Yeah. As I said, the board, myself, we've all been involved in putting the strategy and helping the leadership team coalesce around a strategy, which, you know, looks at how do we margin up the company? How are we gonna create margin? Not just from the standpoint of taking cost out, taking cost out, taking cost out. We have to be good there. There aren't any companies today that perform well that aren't always focused on productivity and cost out. We're gonna continue to do that. The next phase is how do we get growth? What are we gonna do to get growth? If you talk to the Arrow folks, they'll tell you, "We can get all the growth you want." Time out, slow down, take a breath. Let's make sure we get the right growth.
The focus and the attention has been on shifting the mindset from constant cost out and head down in the weeds to driving growth, but growth that contains the right kinda margin. And when I say the right kinda margin, you know, if you look at how we have started to differentiate the business, we're big in semiconductor, obviously. That's, that's part of the core, if you will. But other pieces of the business that the strategy contains is services. Okay? If you think about, one, one piece of that would be, Aero Intelligence Solutions. That is a business within Arrow that builds very unique pieces of appliance that brings, that brings software and components together to build a, an appliance. And I say an appliance, a component, a device that would be, think about high mix, low margin. No, not low, low margin.
High mix, low volume. Sorry. High mix, low volume. In that, you know, 150 units. We've recently done some work for some ship builders that they wanted to have different kinds of GPS tracking devices. We built 150 of these units, incorporated software into it, and then it gets installed on board a ship. We've done some things like that. Think about how, you know, low volume, 150, 100 units, but high mix. Each one wants purple, one wants green, one wants blue. These bring together components, software into an appliance, and it carries a higher margin profile. That's a piece of the strategy that we're pushing on. Another piece of the strategy that you've heard us talk about is, on the service side, engineering services.
We use our engineering folks that we have, and whether it's eInfochips or whether it's SiliconExpert, to offset engineers within our customer's pool of engineers to help them design and create and develop their next product. We might do that for a quarter. We might do that for six months, or they might sign us on for a year to be an offset to their engineering talent. Another piece of our service business is supply chain services, where we're pushing on and leading the management team to go out and get more of these contracts. Supply chain services is we take on the supply chain operation for some of our customers. Now, I'll give you an example. Think of a hyperscaler. A hyperscaler buys $5 billion worth of GPUs because they're going to put in a 500-MW data center in Indonesia.
We will provision, buy, relocate, store, house, and then move to the customer's site when they want it. We'll put in a distribution center somewhere in region where that customer's gonna be finally building out, and we will bring in their materials, keep them in our distribution center, and then provision them out to the site when required. Now, you don't see a lot of that on the revenue line because it's a fee-based model. We get paid a fee to do that. Those fees are, you know, in excess of 2X what our fees would be in the semiconductor side of the business. The Aero Intelligence Solutions, same thing. Margins are 2X what they would be in the semi side of the business.
Trying to create more of a mix around services and ECS would be the other piece, is what I'm pushing on, what the leadership team is pushing on, and what we're getting focused on as we move into 2026.
That's helpful. Maybe also, you know, kind of, like, as you take a more day-to-day role, you know, from relative to being on the board, I mean, has there been things that about Arrow that has surprised you that, that you, you know, thought was a good decision on the when you're on the board, but then when you're kind of more day-to-day, has maybe your opinion changed at all?
You know, I got this question earlier at the one-on-ones, you know. What have you seen that's different, you know? What I said was blue jeans. I mean, I've been retired for five years, and when I went to work, I went to work like this, but I've seen a lot of folks coming in in blue jeans. So guess what? I'm wearing blue jeans to work now, which I think is really great. Okay.
To answer your question more specifically, Joe, the focus on cost within the business and cost out and productivity and heads down internally focused over the last couple of years is, I guess if I step back from my board role and I said, "Jeez, I didn't realize that, that, you know, it was hands in and eyes in." I think right now what we're trying to do is we want to maintain that rigor on the productivity and cost out, but we have to get hands and eyes out focused on how are we driving volume and the right volume. You know, and those have been my conversations. You know, I have a conversation with our chairman every couple of weeks, you know, what, what's going on? How are you doing? Is your head still in a good spot?
That kind of thing. And those are the conversations that he and I have.
Okay. That's helpful. Maybe shift gears a little bit, you know, kind of looking at the, the demand side. Can you talk about just the trends that you're seeing within your global components business, maybe any color by geography or, or, you know, vertical markets?
Yeah. Yeah. Absolutely. Let's start east because, you know, that's, that's where components has come back, first and, and the quickest, if you will.
Yeah.
If you look at the east, and I'm talking Asia-Pacific, the components volumes have come back, have been back strongly in that region of the world, but, you know, to the big accounts, where you have a lot of volume but lower margins. That's across the market segments in Asia-Pacific. Probably the largest would be transportation that has come back the quickest. If you move west, you go to EMEA. EMEA has been weak in the components business across pretty much all of the verticals with the exception of aerospace and defense, and you can imagine why. We've had good growth there. Transportation's flat. If you look now where we're at in EMEA, industrials are starting to sprout some green shoots in the industrial space.
Compute and communications has been reasonably solid in EMEA, but the big driver of transportation has been flat, and industrials are now just starting to tick up. If you come back, you know, you keep coming further west in North America, we're seeing now the industrial markets, what we would call the mass markets, sorry, the mass markets coming back in North America, not strongly but gradually. If you listen to our third-quarter call, you know, that's the terminology we're using is we're using gradual recovery. We are seeing a gradual recovery. If you look at North America, transportation has got some growth. Aerospace and defense is flat.
Okay.
Compute, communications, networking has got growth, and now we're starting to see industrials. We term industrials as the mass market, if you will, and that's the industrial base within the United States. We would term those customers as a customer that buys $3 million or less of components. So think of companies like Carrier, Whirlpool, Honeywell, companies like that that we're now starting to see them, you know, pick up a bit. If you look forward a touch from where we, you know, our third-quarter call, what we were saying is that we're now at above parity.
Yeah.
With book-to-bill in all regions, which is, that's the first time in a while that we could say that. As I said, as I started off this conversation around, you know, if you believe that there's a turn coming and all the cycles bottom and then come back up, we're in a great position to go after the gradual comeback.
Do you think about, obviously, like, visibility is difficult, but as you think about just kind of, you know, 2026 and, like, how do you think about, like, your kind of initial expectations? Do you think it's still more gradual or maybe we start to kinda see if interest rates come down, you know, you gotta get maybe a little macro help or less uncertainty? Is that.
You know, I'm a real firm believer in the gradual recovery.
Okay.
Okay, I'm firmly parked in that spot.
Okay.
You know what? If I'm wrong, it's okay.
Okay. Okay. You know, sticking with global components, you talked earlier about, like, that, you know, value-added services and things. Where do those exactly kinda fit? I mean, I think the hard thing for investors is you, you know, you look at the reporting segments, and it's hard to kinda see those things. You see global components. You think it's semis. It's IP&E, right? But how do we think about just where those value-added services fit and then maybe just touch again on, on kind of the margin structure there?
Yeah. They fit it to us, they fit in Global Components.
Yeah.
Okay? As I said, they do not drive the revenue line, but they drive the profit line. We have been on this journey of trying to shift mix to services for maybe a year. It is not like it is all flowing through, but it certainly is helping the bottom line. As we get more traction, which our plans for 2026 are going to measure, monitor, and track that traction into the business units with rigor, we will know where we, we and you will know that we are executing on those because we should see our OI line go up.
Okay. You talked about kind of, like, the things that you're focused for 2026. I mean, what do you think are the steps to accelerate that? Is it just more headcount? Is it just kind of educating customers? Like, how do we think about, like, what can really, you know, kind of pour some fuel on that fire to accelerate the services?
I'll give you my perspective, and it'll be very honest. It's focus within the company.
Okay.
It's just focusing and measuring those items. My point around, you know, the part of the CEO search is a CEO that has some operational background. You know, Raj, our CFO, has got great operational background. Okay? He understands it. He knows what moves the needles. The CEO's gotta be a partner to that. The CEO has gotta be part and parcel driving the business unit leaders to measure, monitor, track those things that are gonna move the needle. In the past, moving the needle was always getting more sales.
Okay?
That's not necessarily the case today. Let's go get the right sales that have the right, that contain the right margins, and let's go push on services and set the organization up, and we are in such a way that services can be stood up, measured, monitored, tracked.
Okay. What would you be sitting here next year at this time? Hopefully, it's your prep journey.
Joe, I'm telling you, I'm not gonna be sitting here next year at this time.
What would you view as, like, measured success, right, and, like, your performance?
You know, I think we, we've talked about it. You know, as you as you think out, and maybe not next year, but we should be getting back to margin levels that were pre-pandemic.
Okay.
There's no reason for the business not to be able to do that. Just in my mind and in the mind of the leadership team, that's doable.
Okay.
It isn't gonna be next quarter, next two quarters, but that's the trend line.
Okay. Maybe we'll shift over to the ECS business. You know, maybe first start just kind of the value that that brings to Arrow and why it makes sense for that to still be part of the business with the components. You know, a little bit different, right?
Yeah.
Same, same philosophy a bit, right?
There you go. You hit it. Same philosophy. It's a distribution business, right?
Yeah.
Is it, does it completely mesh and tie to components? No, it doesn't have to. It helps us differentiate from the other guys, which I think is extremely important, okay, to have a differentiated model that sets us apart from other pure disties. We distribute on the ECS side of the business. If you look at where that business is headed and where the market for that business is headed, that's a better way to look at it. Technology software, with what we are presenting to the marketplace, it's anticipated to grow 10%-15% over the course of the next five years. And we're good at it. We have a great brand within ECS, and it was kind of founded and put together.
I don't wanna say founded, but it was put together very successfully in Europe.
Yeah.
We have done a great job in Europe. We have now taken the European model and brought it to the United States. The fellow that ran Europe now runs our global ECS business, and he has taken the same philosophies, same tools, same strategies to the U.S. with ECS. The next phase, which we have embarked on already, is what we call Beyond Distribution. Beyond Distribution is where we feel this software selling is headed. What is happening is that software providers want to do what they do best. They want to develop and create software and modify their existing platforms of software. They do not want to have feet on the street selling to the mass market. They want to sell to the Big- Ten directly.
Yeah.
Everybody else, I gotta get my brand out there. I gotta get my software out there. They're coming to, we've gone to them and said, "We'll be your exclusive seller in this region of the world." They, this is an interesting opportunity. We pay them a fixed fee. We pay the software guy a fixed fee, and then we have the right to sell those software packages into the mass market in that region of the world. If our fixed fee is $10 and we sell $12, we keep $2.
Got it.
If we sell $13, we keep $3. So it's a fee-based model, and it has the opportunity to really upsize our margins. We started in Europe. We've been successful with it in Europe. We've brought it to the United States, and now we're doing it in the U.S. as well. We think that this is the direction that segment is headed.
Okay.
We like it. That's the other thing. We like it. We like it. We don't wanna sell it. We don't wanna get rid of it. We wanna continue to drive it. We have great leadership. We have great brand recognition, and it brings us financial stability to the balance sheet when one's down, the other's up. When that one's down, the other one's up. It helps us flatten out the ups and downs within the financials.
Okay. No, that's helpful. I mean, I guess, like, maybe spend another second on just kind of the components aspect of, you know, you talked about earlier just kind of, like, being able to come out with, like, more unique solutions for customers of doing small volume but very specific, you know, tailored solutions to your customers' needs. I mean.
Yep.
Are there more opportunities like that, and do you need to, like, change your line card on the ECS side to support some of that? Or, like, how do we think about, like, that dynamic?
That's a good question, and I haven't been asked that question before, and I'm not sure I've thought through it.
Not to put you on the spot.
No, that's okay. That's okay. I mean, that's what this is about, right? I think if we—yeah. Yes. The answer is yes. As we broaden out the line card on the ECS side of the house, and what allows us to do that is a platform we have called ArrowSphere.
Okay.
which is a very unique platform that, you know, it's interesting because now that you asked that question, we have suppliers coming to us saying, "We wanna be on your ArrowSphere platform." So that indirectly answered your question.
Yeah.
which I think makes a whole lot of sense. Yes, the answer would be yes. We would like to continue to fill out that line card on ECS, and we're gonna do it through ArrowSphere.
Okay. That's helpful. I guess, like, maybe shift gears a little bit. Like, you know, think about, like, the margin outlook, right, a gradual recovery. And it seems like maybe you guys are making some investments and things along the way to try and kind of re-accelerate growth. How do we think about just, like, total company, like, margin structure near term? And then where do you think you kinda talked about it a little bit ago, but where do you think you could go if you look out, you know, 18, 24 months?
Yeah. Like I said, you know, we'll be on this—sorry, this is me. I won't be here in 18-24 months, so I'm gonna talk for the next person.
Yeah.
We're gonna be on the trend to get back to pre-pandemic levels.
Okay.
That's where we're headed. We're gonna measure and track it and hold people accountable to make those things happen.
Okay.
That's the operational rigor that we gotta instill.
Yep. Okay. you know, can you talk about just kind of views on, you know, capital allocation priorities, you know, M&A?
Yeah. Our capital allocation priorities have not changed. You know, they are the same that they have been: organic growth, one, M&A two, and return capital to shareholders through share buyback. All of those are going to have an eye on, you know, what has the highest return for the shareholder, in terms of, you know, are we ahead of our ROIC targets.
Mm-hmm.
Any of those three categories. Now, I know the question might be, you know, you did not buy any shares back in Q3, all right? And we have been buying back at a $50 million quarter clip, which is insignificant from the standpoint if you miss a quarter, you can always make it up.
Sure.
You shouldn't read anything into the fact that we didn't buy any shares back in Q3. We just didn't. You know, we gotta make sure that we maintain our investment grade rating, and we didn't wanna put any of that in danger. Don't read anything into the fact that we didn't buy shares back in Q3.
Okay. Maybe on M&A, you guys have talked about, you know, potential opportunities, like, that, that might present itself. I mean.
Yep.
Do we think about you as looking to maybe further consolidate, like, this pretty, you know, can be fragmented distribution market? Is that something that you're interested in? Or I guess, what do we think about what, what's the right M&A, like, strategy?
Yep. Look, I'm a firm believer, and I've said this to the team and to the board. We're just not gonna buy something to add bulk.
Yeah.
Okay? That's not what we're gonna do. That's, that's a, you know, my view, my words, a waste of capital. If there are things that we could buy that add to what we're doing from a strategic perspective and margin up the company, those are the things that we're gonna go do. They have to be accretive. We're just not gonna go buy to buy because we can. We're gonna buy things that make sense, that fit the strategy, and are accretive, both to ROIC and to EPS, obviously. Things like things in the space of, if you, the other areas that we're pushing on within the company to expand margins, IP&E.
Yep.
Okay, that we've got nice growth around all regions in the IP&E space. So IP&E would be an area that we would want to, that makes sense from an M&A perspective. But just adding a, you know, another distributor to consolidate, in our view, doesn't make sense.
Okay. Okay. That's helpful. Maybe just, you know, as we think about, you know, free cash flow and just kind of working capital management, I mean, you talked about a gradual recovery of demand. How do you think about that from, like, an inventory level and, and.
Yeah.
What Arrow has and, you know, if there is a gradual recovery, how much inventory do you need to add, or do you need to add inventory?
We'll obviously need to add it in, in certain places.
Okay.
Okay, as you know, as revenue increases, we'll see our inventories come down. I think you need to think about, you know, working capital in the, you know, we're into what, mid-20s today? And, you know, I think we used to be somewhere in the upper teens. I don't know if we'll ever get back to the upper teens or middle teens, I should say, but we should certainly be able to drive it down from where we are today. You know, it's another area that the business needs to get a bit more rigor around, and tied to some metrics and some incentives.
Okay. Okay. I think that's a perfect place to leave it.
Okay.
Thank you for joining us.
Thank you.
Thanks, Joe.