Good afternoon and welcome to the Benchmark Electronics Incorporated Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to; Lisa Weeks, Vice President of Strategy and Investor Relations. Please go ahead..

Thank you, operator, and thanks everyone for joining us today for Benchmark’s third quarter 2019 earnings call. With me this afternoon, I have Jeff Benck, CEO and President; and Roop Lakkaraju, CFO. Jeff will provide introductory comments, and Roop will provide a detailed review of our third quarter 2019 result and outlook.

We will conclude our call today with a Q&A session. After the market close today we issued an earnings release, highlighting our financial performance for the third quarter of 2019, and we have prepared a presentation that we will reference on this call.

The press release and presentation 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 advice 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 fact 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. I will now turn the call over to our CEO, Jeff Benck..

Thanks Lisa and welcome to everyone joining us for this afternoon's call. During today's call, I will first provide a brief overview of our third quarter 2019 results and step through some meaningful new wins in the quarter. Roop will then take you through the financial updates and I'll close with a progress update on our key strategic initiatives.

Please turn to Slide 4. In the quarter ending September 30, 2019 we delivered revenue of $555 million which was at the high end of our guidance and we achieved $0.36 of non-GAAP EPS which was at the midpoint of our guidance range.

Revenue was driven by year-over-year increases in the higher value A&D and Medical markets, along with higher-than-expected revenues from NPI builds in the Semi-Cap sector which supported our sequential growth.

Our non-GAAP gross margins improved 60 basis points sequentially to 9.5% on our higher-value market mix and non-GAAP operating margins increased 10 basis points sequentially to 3.2%. We continue to deliver improved margins as we rotate our portfolio into higher-value vertical markets and take on more complex products from our customers.

Roop will take you through the details on working capital and cash flow for the quarter and full year. So please turn to Slide 5. As we discussed in last quarter's call, we added the company's first Chief Revenue Officer to integrate and lead our global go-to-market strategy.

Rob Crawford is now fully at the speed has put up much of his organization together and has made progress in refining our go-to-market and sector strategy. Two, further priorities in this area are to increase the funnel of the right opportunities, aligned to our value proposition and to accelerate bookings with new and existing customers.

I'm very pleased with the early results from the team during the past quarter. Our bookings in 3Q grew sequentially and we had some exciting new program wins which I will share in more detail. In our Medical sector, we were awarded a market-leading platform of therapeutic surgical devices with a new global customer to Benchmark.

Also, we are awarded a new program with an existing customer in the defibrillator market. In Aerospace & Defense we received a complex integration award for a satellite communication device and production orders for microelectronics assemblies that ultimately will be deployed in space from our Lark RF and high-speed design center.

In Industrial we received an award from a communications company, for a smart industrial IoT device supporting their initiatives in the transportation industry. In Semi-Cap, we were awarded new precision machining programs for some of the most advanced machine components with one of our existing industry-leading Semi-Cap customers.

This award was the result of very close and collaborative early design engagement. Lastly, in Computing and Telco, we were awarded a new manufacturing services contract for state-of-the-art visual display OEM, and family of programs for commercial printer modules for an existing OEM customer.

These are all excellent wins for our teams across a broad set of valued customers. These representative customers from 3Q speak to the breadth and scale of the opportunities we are closing, and will ultimately allow us to further grow our revenue.

Now, if you please turn to slide 6, I will turn the call over to Roop to discuss our financial results for the quarter..

Thank you, Jeff, and good afternoon everyone. We will start at slide 7 for a discussion of our third quarter 2019 financial summary. Revenues of $555 million was at the high end of our guidance of $525 million to $555 million. Our GAAP EPS for the quarter was $0.19.

Our GAAP results also included a total of $6.2 million of restructuring and other non-recurring costs, due to expenses associated with the previously announced site closure activities, and other restructuring activities. Of this total $5.8 million impacted operating margin with the remainder impacting other non-operating expenses.

Our Q3 non-GAAP operating margin was 3.2%, a 10 basis point quarter-over-quarter and 30 basis point year-over-year improvement, due to our improved operational efficiency and slightly lower SG&A. Non-GAAP EPS of $0.36 was at the midpoint of our guidance range of $0.33 to $0.39.

For the quarter, our ROIC was 8.2% flat sequentially and down 160 basis points year-over-year. Turning to slide 8 for our revenue by market sector for the three months ended September 30. Industrial revenues were down slightly from our expectations and flat from Q2.

Revenues were down 10% year-over-year from softer demand from customers in the Industrial transportation market, and certain ramp delays from previously booked new programs. A&D revenues were up 8% quarter-over-quarter and 10% year-over-year from new program ramps and overall strength for existing products for ground-based and airborne vehicles.

Medical revenues were 12% higher quarter-over-quarter and 33% year-over-year, but we saw increased demand across our cardiovascular programs, including a last time buy build for an existing product that is going end of life. Semi-cap revenues increased 9% sequentially and were down 11% year-over-year from continued Semi-Cap softness.

The sequential increase is related to new programs that are starting to ramp. Note that, we are not yet seeing widespread signals that a broad recovery has begun. Our customers still expect the broad recovery to occur in the second half of 2020.

Overall, the higher value markets represented 77% of our third quarter revenue and were up 7% sequentially and 5% year-over-year. Turning now to our traditional markets, computing was down 55% sequentially and 59% year-over-year, due to the exit from our legacy computing contract. Telecommunications was down 2% sequentially and 22% year-over-year.

Year-over-year decline is from softer demand from satellite programs. Our traditional markets, which represented 23% of third quarter revenues were down 45% from last year and down 37% sequentially. Our top 10 customers represented 38% of sales for the third quarter. Please turn to slide 10 for a discussion of non-GAAP key business trends.

Gross margin for the third quarter was 9.5%, a 60 basis point sequential improvement and year-over-year improvement of 100 basis points. Year-over-year gross margin improvement is attributable to operational improvements throughout our global network, the exit from our legacy computing contract and the better mix from higher-value market revenue.

Our non-GAAP SG&A was $34.9 million, which is in line with our Q3 guidance and down from Q2 2019 due to a reduction in variable compensation expense. Non-GAAP operating margin was 3.2%, up 10 basis points sequentially and 30 basis points year-over-year.

We had $5.8 million in restructuring and other costs for Q3 that impacted our non-GAAP operating margin, including expenses associated with our announced site closures and other restructuring activities. Regarding our previously announced site closures, we are on track to be completed by mid-2020 as planned.

As mentioned previously, restructuring charges associated with these closures are expected to be between $6 million and $8 million, of which $3 million was recorded in Q3. Once the site closures are completed, we expect annualized savings of approximately $5 million beginning the second half of 2020.

We expect to incur additional restructuring transition charges in Q4 of approximately $3.5 million to $4.5 million and are related to restructuring activities discussed above and other employee-related expenses. Please turn to slide 11 where I'll provide a few updates on cash flow and working capital highlights.

We used $11 million in cash from operations from the quarter and used free cash flow of $22 million. And the full year 2019 we still expect to generate cash flow from operations between $75 million and $85 million. We also expect CapEx to range for the year between $45 million to $50 million.

Our cash balance was $348 million at September 30 with $168 million available in the U.S. Our accounts receivable balance was $348 million, a decrease of $15 million from June 30. Payables were down $76 million quarter-over-quarter due to the activity related to the legacy computing contract.

Contract assets were $161 million at September 30, an increase of $5 million from June 30. Inventory at September 30 was $316 million which is flat quarter-over-quarter. Please turn to slide 12 to review our cash conversion cycle performance. Our cash conversion cycle was 79 days for Q3.

Future cash conversion cycle will range between 75 days and 82 days as a result of the completion of the legacy computing contract. Please turn to slide 13 for our capital allocation update. In March 2018, we announced a recurring $0.15 per share quarterly cash dividend. $5.7 million in dividends were paid in Q3 2019.

Total share repurchases during Q3 were $18 million or 682,000 shares. Through September 30, we have repurchased approximately $118 million or 4.6 million shares at an average price of $25.76. As of the end of September 2019, we had approximately $83 million available under the current share repurchase program.

Turning to slide 14 for a review of our fourth quarter 2019 guidance. We expect revenue to range from $520 million to $570 million. Our non-GAAP diluted earnings per share is expected to be in the range from $0.34 to $0.42 or a midpoint of $0.38. For sequential modeling information for the fourth quarter please turn to slide 15.

Overall, we expect Industrial revenues to be flat in Q4. We are rebuilding the funnel with newly aligned targets from our Industrial sector leader. Even with these headwinds, we believe previous bookings coupled with new funnel opportunities should return this sector to future growth. A&D is expected to be flat from sustained demand in Q4.

We expect a return to growth in Q1 and further overall growth in 2020 from new programs and a sustained strong U.S. defense budget. We expect Medical revenues to moderate slightly and be down mid-single digits after larger-than-expected builds in the third quarter. Looking ahead, we expect continued growth for Medical in 2020.

Semi-Cap is expected to be up greater than 10% primarily from continued new program ramps across our top Semi-Cap customers rather than broader demand increases for new programs.

Turning now up to the traditional markets, we expect computing revenues to be down greater than 20% due to completion of our legacy computing contract and demand softness in other storage products. We expect Telco to be flat from softer demand in commercial satellite and network testing gear.

Implied in our guidance is a 3.2% to 3.6% non-GAAP operating margin range for modeling purposes. The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs. Interest expense is expected to be $1.8 million and the effective tax rate is expected to be 21%.

The estimated weighted average shares for Q4 2019 are approximately 37.2 million. I will now turn the call back to Jeff..

Thanks, Roop. Let's go to slide 17. During the past quarter, we have made further progress on the strategic initiatives we outlined in July. As I referenced earlier in the call, optimizing our go-to-market efforts are our priority.

In addition emerging our sector leaders, marketing and new business development teams as part of our organizational alignment last quarter, we've also integrated the account manager role into the CRO's organization.

Account managers are focused on servicing our current customers, representing their breadth and depths of Benchmark capabilities to reduce complexity in the selling process. One of our key customer wins for this quarter was a testament to the effectiveness of our new coordinated selling approach.

Aligning our go-to-market structure, optimizing our targeted sector portfolios and improving the support of our existing customers are critical for accelerating revenue for Benchmark. The second initiative is driving operational efficiencies and process consistency across our sites.

Through a continuous feedback loop with our customers, we are focused on aligning our global footprint to where our customers want us to be now and into the future. This strategy considers our customers' geographic requirements for our capabilities and the ability for them to work seamlessly across our network.

As part of our planning process we are evaluating our global engineering and manufacturing services network, considering many factors such as utilization, scale, geographic placement, cost and certainly customer feedback.

As we announced last quarter, we decided to close our San Jose California and Guaymas Mexico operations with the target closure date of mid-2020. We are working closely with our affected customers and employees to manage these transitions.

Across our network, we remain focused on consistent process deployment and cycle time reduction programs to drive productivity improvements in order to increase asset utilization. Our teams are making progress on these initiatives.

The third initiative is creating a centralized G&A organization to accelerate our ability to efficiently deliver and scale our corporate services. Last quarter we kicked off a process to functionally realign our finance, HR, legal and IT teams by the end of this year and this activity is well underway.

This updated structure will enable us to deliver cost-effective shared services to the benefit of our internal teams as well as our customers. And finally, the fourth initiative is focused on accelerating engineering services and solutions. To help our customers -- help solve our customers' more complex challenges.

As we've discussed over the past quarters, we've invested in our Lark RF and high-speed design center in Phoenix, Arizona to provide differentiation in substrates and microelectronics. During the third quarter, several of our Micro-E qualification builds were completed and many new substrate prototypes were started.

Now as we turn into Q4, we are beginning to ramp our production Micro-E orders and deliver our new substrate qualification units to a host of new customers. We are excited to reach these pivotal milestones towards developing these differentiated capabilities.

We believe these are the right priorities for where we are as an organization and our executive leadership team is aligned and engaged in driving these initiatives throughout the organization. And with that, I will turn the call over to the operator to conduct the Q&A..

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jim Ricchiuti with Needham & Company. Please go ahead..

Hi, thank you. Good afternoon. A question first on the Medical business.

I'm wondering, if you could size this last time build-by that you had? How meaningful was it to the growth because clearly the growth in this part of the business came in stronger than you were forecasting?.

Yes. Jim this is Roop. Good to talk to you. So, that last time build was relatively small in the aggregate for the overall growth within the quarter. You can think about it as less than kind of 10% 15% of that number..

Okay. Looking at that vertical, it came in stronger. You're guiding I guess to the business being down in Q4.

Is that -- was it the timing of some customer shipments? What was it that drove that?.

Yes, Jim there's a little bit I mean as you know 33% is pretty significant growth, right? So, while there is a pullback a little bit in fourth quarter, we expect it to be a growth market for us as we look into next year as well. So, it's a little mix-related, but you're coming off of pretty big growth step-up here.

And so that's not like totally unexpected to see a little bit of modulation there as we continue to focus and win in that segment..

Sure.

And on semi-cap it's encouraging that you're starting to see some improvement, but yet at the same time its sounds like what you're hearing Jeff from your customers is it sounds like more still looking out towards the second half of next year?.

Yes, we said that. And we -- that's pretty consistent with what we've been hearing. I mean we'd love to see earlier signs of life. But at this point, we're really preparing ourselves and thinking about the second half of next year.

And we know that there's been a little bit of strength in logic, but we also are looking for memory recovery here as well to drive volume..

Thank you. One final question, I'll jump back in the queue. I know you don't talk specifically about bookings, but you indicated that the bookings were up sequentially.

Can you give us any flavor for where you're seeing the strength in bookings?.

Yes, I mean we try to -- I did -- like we've said while we don't want to continue to publish a specific number, I want to give directional how are things doing there. That's why we share quite a bit of detail by sector some of the wins that we accomplished in the quarter.

Clearly, we've had good strength in medical and A&D which are two key focus areas for us two key growth sectors and winning some of the satellite business that we've been winning and some of the really sophisticated systems that are going to being part of those systems that are going to go to space. It's huge.

In the medical sector we talked about a therapeutic surgical device win and also we've been a supplier of defibrillator solutions for customers and had another win there. So, it's good broad-based strength. Every part contributed. We talked about industrial.

With the new leadership there that was going to take time to build that the pipeline back and we even had wins in the computing and telco space. But I'd say A&D and medical were the drivers..

Okay, terrific. Thanks a lot..

Sure..

[Operator Instructions] The next question comes from Anja Soderstrom with Sidoti. Please go ahead..

Hi everyone.

Can you hear me?.

Yes, hi. I can hear you..

Great. Congratulations on a good quarter. Thank you for taking my questions. So, Jeff you were talking about your initiatives that you're working on and bucket them and fill buckets.

Which one is more like urgent and more of a priority? And how far along are you with that? And what would you expect to see for the results?.

Yes, They're all -- all my children are important here. But I would say from go-to-market certainly was top of mind for me. That's why I brought Rob Crawford on the run.

Our go-to-market efforts were a bit further along there in the sense that he is on board now and we've kind of centralized sales and marketing and the business development efforts under him, getting our hands around the pipeline and continuing to drive growth there as well as the conversion of wins to revenue.

A lot of things to focus on there, but if I was to say which one is there a lot of focus on. The other one that probably a little bit of new updates on this quarter is around really our engineering services and solutions.

For quite some time the company has invested from before I joined a bet in this Lark RF technology and have been able to start to build microelectronic solutions in that facility and starting to deliver substrate samples and qualification samples to host the customers.

Really is a big opportunity for us and glad to see that those investments are coming online and the opportunity from that. But those are a few things to highlight in that section of strategic initiatives..

Okay, thank you. And in terms of gross margin improvement that maybe driven by revenue mix.

Is there anything else that you are aware of in terms of the improvement there?.

No. I mean, Anja it's primarily revenue mix. Obviously we finished up the compute contract in the third quarter as well. So that contributed a little but it's primarily that revenue mix..

Okay, thank you.

And what is your goal? I think you've said it before but if you reiterate that the goal for the traditional versus non-traditional mix?.

Yeah. I mean I think we have previously had with -- excluding the legacy computing contract, we were targeting 72% to 78% higher value market mix. We're, obviously, at the higher end of that range already.

As we look at 2020 and we're going through our planning cycle now, we'll likely see that target to be somewhere around 76% to 80% to maybe even 82% and we'll have to finish the planning cycle..

Okay, great..

That in itself is going to be a margin driver for us..

Yeah, yeah, yeah of course.

So still a lot of upside potential there right?.

So I mean I think there's an opportunity for us. As we said semi-cap in the second half of 2020 is, kind of, what we see visibility towards. So all of these will be contributors continued top line mix, having the right mix and driving that margin expansion..

Okay, yeah. Thank you. That was all for me. Thank you..

The next question is a follow-up from Jim Ricchiuti of Needham & Company. Please go ahead..

It looks like you're fairly set.

It sounds like with the changes you've made in the go-to-market strategy, are you seeing -- can you anticipate the early success there being with newer customers? Or how do we think about that strategy as it relates to your existing customers?.

Yeah. I think they're both important to us. We had -- traditionally the company had been focused with the business development organization on new opportunities and that certainly brings new folks to us. But I strongly felt like we could also do more for the customers we're doing business with.

So I referenced that it might have been be little buried in the commentary that we are aligning our account management with that CRO organization.

And the whole thought there is we have business development leaders that will look for new opportunities but the account managers will really be working to make sure that our current customers are really pleased and that we're farming new opportunities.

And so it's definitely more sophisticated model than where we've been traditionally because I think we can do more for -- we've got some marquee customers look across the A&D space. We've got the who's who clearly, but I know we can do more for a number of those customers. And we can grow quite a bit just from within our installed base.

But that being said, new customers are always important and welcome and we'll make sure we maintain a balance but that's how we're thinking about it..

And Jeff any kind of flavor you can give us just with respect to the margin profile of some of the business that you are winning?.

Well, I mean the fact that aerospace and defense and medical, kind of, led in that and you saw it in -- kind of in the results. That allows us to be a bit above our -- at/or above our corporate margin, which is an opportunity as Roop talked about is we get the mix up there.

These are really sophisticated systems and the complexity involved allows us to have quite a bit of value-add and that allows us to garner more of that. So as we look at being in the mid-9s from a gross margin, we like that we've seen without the large computing contract that we've got to double-digits.

And so as we look out over time, we'd like to continue to nudge that range higher..

And maybe Jeff if I could just add a comment to that to Jim's question. I think as we think about Aerospace and Defense and Medical sectors, we've got target margins for each of our sectors and those margins tend to be higher than our corporate average.

And so as we look out into the future part of that margin expansion obviously, is getting not just revenue growth but the right mix of revenue growth across these sectors..

Well, I guess there's some precedent for that because last quarter excluding the large computing contract, you were generating gross margins above 10%, right?.

Yes, we were at 10.1% excluding that contract in a sensitive mix and it will fluctuate based on how customers' volumes are and stuff. But even this quarter in the mid-9s is pretty solid..

Yes. And Jim just remember it's a portfolio of business, right? We've got a lot of different customers. And within those customers a lot of different products with varying margins. And so it's always that -- finding that balance with that mix..

And last question for me is just as it relates to -- there's a lot of -- still some ongoing concern about the macro environment.

I'm just curious given what are you guys hearing from your customer base?.

Well, I mean, I think there's still noise out in the marketplace. With that said, our Aerospace and Defense and Medical markets you can see, there are strengths within them. Semi-Cap we've talked about, we expect it to ultimately come back in the second half of 2020 is our expectation.

I think the Industrial space is where there's a little bit maybe more potential effect. But to date we've seen a little bit of softness but it has much I think customer-by-customer considerations. And the compute sector for us obviously is coming down and it is not that primary growth sector for us.

But we've had some fluctuation there as a result of the legacy compute contract..

It feels like there's a little bit of trepidation out in the market. I mean I think everybody reads the press and gets concerned maybe a little bit about what's going on in the world economy. I do think we're in some pretty resilient sectors.

And that you think about the aging population and the need for some of these fantastic new Medical devices that are being built and you think about the cycle of Semi-Cap and how that drives and how that buildup as oftentimes before you see large volumes in consumer devices even.

And then in Aerospace and Defense, you know there's been a lot of investment and support for that with the current -- certainly in the U.S. administration. So it's kind of like Roop said, I think Industrial is one where maybe more going to follow the market fluctuation.

But I think we've got pretty good resilience with the breadth of our business across those sectors that we participate in..

Okay. Thanks a lot..

Thank you..

This concludes our question-and-answer session. And the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect..