Lisa Weeks – Investor Relations Paul Tufano – Chief Executive Officer and President Don Adam – Chief Financial Officer.

Steven Fox – Cross Research Jim Suva – Citi Sean Hannan – Needham & Company Mitch Steves – RBC Capital Markets.

Good day, ladies and gentlemen, and welcome to the Benchmark Electronics Incorporated Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I’d now like to introduce your host for today’s conference Lisa Weeks, Vice President of Strategy and Investor Relations. You may begin..

Thank you, operator, and thanks everyone for joining us today for Benchmark’s second quarter 2017 earnings call. With me this afternoon, I have Paul Tufano, CEO and President; and Don Adam, CFO. Paul will provide introductory comments and Don will provide a detailed review of our second quarter financial results and third quarter outlook.

We will conclude our call with a Q&A session. After the market closed today, we issued an earnings release highlighting our financial performance for the second quarter and we have prepared a presentation that we will reference on this call.

The press release and presentations are available online under the Investor Relations section of our website at www.bench.com. This call is being webcast live and a replay will be available online following the call. Please take a moment to review the forward-looking statements advised on Slide 2 in the presentation.

During our call, we will discuss forward-looking information. As a reminder, any of today’s remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties described in our press releases and SEC filings.

Actual results may differ materially from these statements and Benchmark undertakes no obligation to update any forward-looking statements. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release, as well as in the Appendix of the presentation. With that I will now turn the call over to our CEO, Paul Tufano..

one for infant health monitoring, the other for Medicaid – medication dosage monitoring. In A&D, we saw a broad growth. In bookings from a variety of existing customers in situational awareness platforms, ammunitions, communications and avionics systems. And finally, we saw in our Test & Instrumentation good growth again with our semi cap customers.

So I’m encouraged by this progress and what it means going forward. If we turn to the next Slide. As we’ve said in the past, our goal is to drive revenue growth at the right level and mix of profitability and to improve our level of execution and speed. We outlined three initiatives in previous calls to allow us to do that.

The first was to optimize our network, the second was to implement our market segment sales organization and the third was to expand our engineering solutions capabilities. I’d like to give you a brief update on these three initiatives.

First, if you remember in our last call, we announced the relocation of our headquarters to Arizona in the consolidation of the corporate staff. As you recall prior to this Benchmark was a virtual organization, but the majority of executive team spread around the country and the corporate staffs dispersed as well.

The objective of moving and consulting them all to Arizona was to get better efficiency, better rigor of decision making and speed. I’m pleased to report that the relocation will be substantially complete by the end of the third quarter. Today all my direct reports are in Arizona and as we speak the corporate staffs are being relocated.

As part of this relocation, Jon King, who has been our EVP of Operations and has been with Benchmark for over 20 years, has decided not to relocate and we transitioning to another position and brooding to retire. I want to thank Jon for all his many contributions to the company over the past twenty years. He’ll be sorely missed.

On Monday we announced that Mike Buseman, an industry veteran, will be joining us early August replacing Jon at EVP of Operations. Mike will focus on accelerating our initiatives with regard to operational excellence and customer experience and we’re extremely about Mike joined Benchmark.

With regard to our market sector sales organization, we have been focused on hiring sector knowledgeable business developed personnel specifically to accelerate our hunting activity. We are substantially complete in this area.

Coupling this group with our existing account management operations teams as well as engineering leads should position us for future bookings growth in the future. It is our fundamental belief that a robust engineering set of solutions yields higher value manufacturing opportunities.

And I’m pleased by the progress we’re making in expanding our offerings in the engineering area. And what I’d like to do today is give you a little color as some of the activities we are embarking on that and the progress we’re making.

In the medical arena, we are investing in a range of biomedical technologies including biometric sensing, precise fluid metering and fluid management. The goal of which is to drive growth in specific target applications in the area of remote patient monitoring, infusion pumps and in-vitro diagnostic application.

On our last earnings call, we announced as part of our relocation to Arizona. We would be creating two new design centers. One was a design center still focused on IoT applications. The objective of this design center is to develop an interactive IoT system.

And our goal is to provide a full situational awareness platform from sensors to gateways, which allows customers to customize their requirements to provide a competitive time to market advantage for IoT in machine to machine applications. We have majority of these building blocks today.

And the objective of this group in Phoenix to integrate them into a holistic platform, our reference platform if you will for application and solution developers. We’re making good progress in integrating this and staffing our design centre in Phoenix and I was extremely excited about the potential.

In addition to the IoT design center, we also announced we would have a rugged RF and high speed design centre as well.

Here we are expanding or leveraging the capabilities of our current large filter business and we’ll be expanding our RF component linens, developing modules and integrated microwave assemblies as well as leveraging high-speed circuit design RF fabrication.

All of these are just targeted to provide more complete switches to our Telco and our advanced aerospace and defense markets. Good progress has been made in the staffing in establishment of the design center.

On future calls, we will provide more color in some of the areas expressly that we believe will drive future revenue growth and more importantly higher value segment penetration. And as I close, I’d like to just turn you to the next slide, which is Slide 7.

If you remember correctly, we previously stated our targeted business model, which was to get to non-GAAP operating margins in excess of 5.5% and ROIC in excess of 12%. Earlier this year, we provided waypoints or milestones to track our progress and I’d like to give you an update on that progress as we stand here now.

On bookings as we said, our second half objective was to be at or above $150 million per quarter. As we said earlier, we are closing on that gap with – based on our second quarter performance. Revenue mix, we expected that we’d be at greater than 65% of our revenue mix in the second quarter in high-value markets.

We are hovering around that capability today and expect to be there just slightly above it in the second half. Our gross margins are 10 basis points away from our waypoint target, and our SG&A is 20 basis points above where we should be. Now obviously, SG&A is dependent on revenue growth, but we believe we have a shot to drive to both of those.

On long-term profit per square foot, which I believe is a metric of what ROIC will be going forward. We originally had a waypoint of $32 a quarter. That was based on a point-in-time metric. And in full disclosure, we were previously tracking LTM. So in order to make it apples-to-apples, we have modified the waypoint to an LTM waypoint at now $29.

And as you can see from the chart, we’re within $2 per square foot striking range for the second half waypoint. So all in all a good quarter making progress across all fronts, I want to thank all the employees of Benchmark for all their hard work they’ve had. Now, I’d like now like to turn over to Don to give you more color on our financials..

we are including our customer deposits, as we mentioned last quarter. Over the last year, we’ve been focusing on increasing these deposits to improve our working capital performance, and these deposits have become more meaningful. So we now report them in determining our cash conversion cycle performance.

Let’s turn to Slide 15 to review our third quarter guidance. We expect revenues to range from $575 million to $595 million, our non-GAAP diluted earnings per share expected to range from $0.32 to $0.36. Implied in this guidance is a 3.7% to 4.0% operating margin range. For modeling information for the third quarter, let’s turn to Slide 16.

Overall, we expect Industrial revenues to be up low single digits in Q3 based on modest strength from our robotics and automation customers. A&D is expected to be up mid-single digits in Q3 based on increased demand across multiple platforms and programs primarily in communication and munitions.

We expect Medical revenues to be up about 10%, with the increase in demand across a number of existing and recently launched programs. For Test & Instrumentation, after an exceptionally strong demand we saw in the past two quarters, we expect that demand to moderate somewhat in Q3, and we expect that to be down about 10%.

Turning to traditional markets. Computing revenues will be down about 20% after an exceptionally strong demand for storage and security-related products in the second quarter, as well as memory component shortages constraining higher demand.

And finally telco revenue should be down greater than 15% due to continued weak demand from our optical and – broadband customers. Interest expense is expected to be $2.3 million, and we expect the effective tax rate to range between 19% and 20%. Expected weighted average shares for the Q3 are expected to be $50.5 million.

As Paul stated earlier, we had a very good quarter and a great first half of the year, and we look forward to providing you an update on our Q3 results in October. And with that, operator, please open the line for Q&A..

Thank you. [Operator Instructions] And our first comes from Steven Fox of Cross Research. Your line is now open..

Hi good afternoon. My first question just has to do with the end markets. So it looks like you had some sequential improvement in industrial, but still down. I was just curious first of all with how much of the improvement was sort of credit to the market versus, say your own new program wins or the customers gaining share.

And then a similar question on Medical, where it seems to be struggling a little bit more.

Why is it going to turnaround in the next quarter according to the guidance?.

Okay, Steve this is Paul. Let's take Medical first. I mean, obviously, Medical revenue has not been growing as we had hoped it to be. But clearly, medical is a function of kind of the programs you have and where they are with regard to FDA certification and therefore their ability to ramp.

So we believe that we'll see growth in the third quarter, primarily because some of the programs which have been waiting FDA approval like we expect to begin to ramp, and as they do so, it will drive additional revenue growth. So the Medical space is an interesting one, because you have to have a lot of bets on the table.

It takes a long time from a booking to a revenue realization. And depending on the level of FDA certification required, it is elongated.

So that's why we are so driven to get as many different types of technologies and capabilities out there to get higher bookings in the Medical space because you need to have a lot of chips on the table if you're going to get some wins. And that's how we view the Medical space.

In Industrial, look Industrial are our product, our engagements, are probably more limited as we said before in process control and energy. And one of the things we have to do is diversify our engagements in Industrial.

We'd have more end market diversification to allow us to continue to grown even when you have different market oscillations in end markets. So hopefully, that answers your question..

Yes, it does. Thank you for that. And then just, Paul, you mentioned a bunch of interesting technical points that you're working on. I guess I was most curious if you can expand a little bit on the RF side. You mentioned maybe investing a little bit more on the components, modules assemblies.

Is there any broader view you can put around that as to why you reached the conclusion, and whether that would involve acquisitions, or is there something that you can do internally? Thanks..

So I'm not sure we've talked about it at length. We have a filter business that does high-end filters, right? And so as we look at future growth and demand in Aerospace and Telco markets, what is going to be really important going forward is high signal integrity as it relates to the move to 5G for telco.

And in the area of defense communications and EM. Now we believe we have capabilities at both Lark as well as other parts of the company that if we couldn’t bring them together, we can serve these customers quite well and will grow with that. And so we're just concentrating our efforts to expand.

And it will start with more RF components and will bridge into modules and the like. And I think this will be a natural extension of our RF capabilities, where we marry the spare capabilities previously in different parts of the company into one and we give a higher value proposition to our customers.

And the world of 5G will be upon us and if that happens in 2020, we have to position to help our customers to realize it..

Great, that’s very helpful. I appreciate the color..

Thank you. And our next question comes from Jim Suva of Citi. Your line is now open..

Hi, thanks very much. It's great to see the revenue growth year-over-year. Paul, when we think about the initiatives you put in, specifically with salesforce, OpEx to kind of invest in the future harvest sales rate growth in the future.

Can you help us with the September quarter guide? Maybe my math is wrong, but it looks like sales are decelerating year-over-year rather than accelerating? Or maybe my math is wrong, or my timing is off about when we should see an acceleration from the efforts put into place in the first half of this year?.

Look Jim, I think that we always said 2017 is a transition year. And I'm pleased that we've seen revenue growth in the first two quarters of the year. Now the third quarter is normally down sequentially from the second, and that's embedded in our guidance.

Now even with that, I believe you will see, depending on where we are in that range, year-over-year growth. It may not be as much as our previous two quarters, but I know that in the mid to the high [indiscernible] flat to positive year-on-year growth. .

Okay, yes. And again I’m especially focused on the year-over-year growth to get rid of seasonality.

But if you're putting in an additional SG&A and OpEx in the first half of the year, shouldn't we see an acceleration and year-over-year growth? And if so, when would we expect that to gain traction?.

Alright. So look, when you put on additional go-to-market resources, right, depending on their level of understanding of the space and the Rolodex in the space, you can expect it's going to take them a couple of quarters before they even started gaining their first booking.

And from the time you get a booking, from the time you realize the revenue, depending on the sector, it could be anywhere from 90 days and probably easiest ones which would be compute and telco, up to 180 days to 240 days for Medical. So that's why it's so important to prime this pump. First of people to drive bookings, will drive revenue.

And I wish it was a more shorter cycle, but this is in our industry..

Great thanks so much for the detail. That’s greatly appreciated..

Thank you. And our next question comes from Sean Hannan of Needham & Company. Your line is now open..

Yes, good evening. Thanks for taking my question here. I have a few of them. The first one, Paul, you had mentioned that there were some component shortage impacts that are effectively embedded within the guidance, particularly affecting computing for September.

So I just want to see if we can get a little bit more clarity around that in terms of if we could perhaps frame some quantification.

And then as part B to that, were there any impacts that we actually realized in this June quarter we just reported?.

So Sean look, I think, Don made that comment. And I think it really references NAND memories. If you look at the market for NAND memory today, it is pretty tight. And in fact, unless you have reserved capacity, the lead times are really elongated. Now NAND memory use a lot of computing products.

And so whether or not you get enough allocation and the timing of that allocation to be put in the product and realize in terms of revenue is the real issue. So that was really the reference to components shortages..

Okay. And I thought [ph] that. I didn't know if this is something that ultimately impacting liability go and ship $10 million of revenue. I mean, if it's worth noting, I'm sure there's probably a quantified impact, and didn't know what that might be..

Well like I mean, at the end of the day, it will impact certain areas in storage arena, where we have a lot of exposure to storage. So could we have shipped more product in the second quarter if we had more supply of some components? The answer is yes. It's a watch item for us as we go through the second half of the year.

And specifically in the third quarter. And I think if you look at the entire supply chain in terms of a variety of different components, it's getting tighter across the board. And you need to just watch it for us. And we're being very, very circumspect as to what it means to our customers and what it means to reserve and capacity..

Okay. Thank you. And then shifting over to the wins, great job on what you've aggregated for a lot of these nontraditional markets. Just trying to get a little bit more clarity then in terms of your expectations when you look at that grouping of wins.

Would these be more of a revenue impact in 2018? Or based on the mix, is this even more of a bias toward 2019? Thanks..

It's a function of where it is. So obviously, the stuff that's in Medical and A&D, the time to realization is a little longer in terms of revenue. For the Medical products, because where they stand with regard to FDA registration, kind of spoke about that earlier.

In the A&D products, it is kind of where they are with regard to funding levels from the government, right, and the like. So those two sectors will probably have the longest booking to revenue realization time frame. In some of the other areas, especially industrial we can probably get it sooner.

And in the Test & Instrumentation area we can get it sooner. So it's a mix. That's why as we look at how we have to hunt and how we have to put out – get our bookings to achieve the target level, not much the aggregate, that's important, it's the composition that it is.

Because we have to have enough composition so that we're not over rotating the revenue two years away. And that's the big change in focus that we have in the company today. We have to make sure we have balanced bookings that translates revenue growth. So you have to understand the realizations for each booking sector. A long winded answer, I apologize..

Okay, last question here. December, typically your strongest quarter of the year.

Anything just in terms of forward thoughts that really would prevent that type of dynamic this year? Or is this looking to lineup per typical from what you're seeing thus far?.

Look – our focus is on the third quarter. I'm hopeful that the fourth quarter follows seasonal patterns..

Okay. Thanks for taking my questions..

Thank you. [Operator Instructions] And our next question comes from Mitch Steves of RBC Capital Markets. Your line is now open..

Thanks for taking my question guys. I just had two. So first of all, kind of return to the guidance. There’s two quarters in a row now where you guys are coming at the high end of the range. And before that, you actually came in above the midpoint.

So I'm just curious if there's any sort of internal change in how you guys think about giving guidance broadly on a quarterly basis?.

No, look, Mitch, not really. I mean it’s our job to give you our most balanced view what could happen, and that's what we do. Now I will tell you, right, as you expect any operator from executive to do, we are driving our organization to always deliver at the high end or better. And this is where execution becomes important.

As long as the market isn’t – was not blowing in your face, if you can execute, you should do better. And so we get a balanced view on guidance, but I look at how well the company performs or how well we execute. And that execution is how well we do on chasing parts to get to customer demand. It's how we can reduce inventory.

It's how we can do those things that drive margin and asset velocity. And if we do our job well, we should do better than we think we can do. Not always the case, but if we do it well, we should do better than we think we can do..

Got it, thanks. And then just one on the customer side, I know you had mentioned semi-cap in there. Is there any way to provide any more color on exactly what's going on there? It sounds like maybe this will slowdown in the back half.

Just what are the kind of dynamics on the customer side there?.

Well, first off, we have – well, we enjoy a broad set of engagements with a variety of semi-cap customers. So that is, I think, a strength of the company. And as you know, semi-cap demand is a function of end market demands, right, both in a variety of traditional technologies and new technologies.

And I think that if we were to step back and look at overall semi-cap demand based on the growth of data center requirements for content delivery and deep analytics, LCD television demand, memory demand and a whole variety of other things, the secular growth rate for that industry is probably better than it has been in the past.

And so while you might get a little bit of oscillation quarter-on-quarter, on balance, I think that industry will continue to grow faster than traditional norms over the next year, couple of years. And we are extremely pleased to be engaged with customers that are growing..

Perfect, thank you..

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Lisa Weeks for any further remarks..

Yes, thank you all for joining us on our call today. And we will be available post this conference call for follow-up questions today and tomorrow. Please don't hesitate to reach out. Thank you, and have a great day..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day..