Q1 2020 Earnings Call

I want to give tremendous kudos to our team for all they have accomplished. This is a twenty-four-hour-a-day seven-day-a-week day-in-and-day-out effort to stay aligned productive coordinated. Our teams have approached this challenge with Incredible resolve and a sense of responsibility to our employees customers shareholders and local communities.

Please turn to slide for.

As a global covid-19 demek has evolved Benchmark continues to follow guidance from the World Health Organization and the Center for Disease Control and prevention as well as working with national and local governments to determine the best operating status for each of our global locations. While some employees are being asked to work from home. This is not an option for many directly involved in the manufacturing or design of critical products for our employees working in our facilities. We've added new protocols for extensive and frequent disinfecting and cleaning facing a personnel and more.

For those employees who could work remotely we have invested in tools and equipment to allow them to continue to be productive.

We're pleased with the results and creativity these teams have shown as they have found new ways to collaborate and communicate with each other and our customers.

Has a coronavirus began to make his way around the world. We saw challenges imposed by governments from various forms of stay home shelter in place and lockdown orders and often imposed by our own Health and Human Resources teams to ensure we are maintaining space facilities Benchmark provides critical infrastructure products and essential Services, each of our locations. However, government policies and implementations have still impacted operation.

Well start with us to Joe's site, which was impacted after the Chinese New Year. We were given early approval to re-establish operations to support critical metal medical products, and we're ramped back to full capacity by mid-march our China plan continues to operate at full capacity today.

In mid-march, there were new decrees that cause significant disruptions in our Penang Malaysia operation which includes our largest Precision Machining facility, unfortunately local restrictions off and enforce and we were only operating at 30% of capacity to start the quarter. This is now changing where we can move to full capacity starting this week. We've worked hard to minimize the impact by staggering shifts extending coverage and modifying our work flow, but we have not been operating at Optimum levels.

Our European operations in the Netherlands and Romania have had some limited interruptions, but continue to operate near full capacity.

In the last few weeks of March and in early April, we saw all states in the u.s. Implement some form of shelter in place orders. We were hit particularly hard in our California facilities where we have faith operations to in the Bay Area and three and Southern California, which are not yet back at full capacity as we sit here today. We're still working through a major disruption in our to Tijuana Mexico operations, which were shut down practically overnight by the Baha State despite previously passing an inspection and given the authorization operate by the central Mexican government.

These two locations currently remain closed with zero manufacturing output. Our Guadalajara facility is also not operating at full capacity due to government restrictions off. This has been and remains a highly Dynamic environment and through the collective effort. There are incredible employees. We are managing priorities to meet and fulfill as much demand as possible. Our estimate today is that we are operating approximately at seventy-five to eighty percent of productivity. We are hopeful to shelter-in-place orders do as intended and the infection curve and starts to decline so that normal operations can resume and all locations.

Please turn to slide five.

We've been recognized around the world as in the Central Business supporting critical infrastructure, and we're proud of the integral role were playing in the Frontline fight Benchmark began its Journey as a device manufacturer more than 40 years ago and is maintained Partnerships with some of the largest medical technology companies in the world. We are working with medical customers and governments get life-saving equipment where it is needed most by providing critical design services and Expediting manufacturing capacity even doubling or quadrupling production volumes for some customers.

Demand is increased for Diagnostic Imaging products, including Mobile X-Ray and MRI products and handheld ultrasonic devices. We are supporting multiple venting projects with new and existing customers, which are in high demand to support those who need the most critical support in hospitals around the world on the diagnostic front page are supporting point-of-care devices, including a rapid 1 hour covid-19 virus tester and a rapid sepsis testing device.

I want to say a heartfelt. Thank you again to our extraordinary teams for their flexibility and supporting our customers when it matters most not just in medical but across our birth folio where we are supporting critical infrastructure.

Next I'll turn the call over to route to discuss the first quarter results and following his commentary. I will share further insights regarding our business and view of future Demand by sector Home Group over to you.

I see Jeff and good afternoon everyone. I hope everyone and their families are healthy and safe. Let me start by echoing Jeff sentiment on the incredible efforts of our teams to support our customers through a very Dynamic environment to deliver our first quarter results as we manage through the covid-19. Our priorities remain centered on one the health and safety of our employees to retaining the critical resources and capabilities support our customers three maintaining a healthy balance sheet and for insurance ensuring the financial flexibility to run our operations through uncertainty. I would suck these priorities in our actions to support each as we step through our results. Please turn to slide seven.

As a reminder on March 16th, 2020. We announced that the covid-19 outbreak would negatively impact our first quarter results relative to the guidance that we had provided on February 6th with our first quarter results were below are February guidance driven by direct costs associated with labor expenses personal protective equipment supply chain and efficiencies and under absorption all kinds of all calls by the disruptive impact of covid-19. Even considering the challenging environment. We achieved revenue of 515 million in the first quarter, which was supported by strong demand in our semi cap medical and and sectors are gross margins for the quarter were 8.4% and non-gaap earnings per share were $0.22 off our non-gaap earnings reflect Revenue changes as well as costs associated with employees who were restricted quarantined or otherwise affected by the covid-19 conditions. We also incorrect.

Hire overtime expenses and we paid labor premiums to those employees working in our China Factory as they worked to recover from the shut down as a result. We estimate that I'm trying to factory in efficiencies impacted our Global EPS by approximately $0.08 at the impact of covid-19 conditions expanded globally as Jeff mentioned there were further and fees and other operations Beyond China, which were reflected in our reported non-gaap eps.

Are casting version cycle for the quarter was 81 days. We used three million dollars in cash flow from operations and free cash flow was a negative 16 million as a result of Thirteen million spent on lifx. Originally we expected to spend approximately fifty million in capital expenditures in fiscal year 2020. We now expect that our Capital expenditures for fiscal 2020 will be reduced by approximately half and focus primarily on new product introductions and Associated ramps, please turn the slide aid for our Revenue by market sector

Medical revenues were the first quarter increased 15% sequentially and were up 14% year-over-year from valuing volume increases across several customers for new and existing programs demand through the quarter remain strong with in some cases increasing demand for products such as X-ray and scanning devices controls for hospital equipment, including ventilators wage Diagnostics devices that are critical to support the covid-19 demek semicat revenues were up 2% in the first quarter and up 25% year-over-year for increasing demand across the majority of our semi cab customers along with the ramp of new customer to our portfolio.

The sector was most significantly impacted by labor constraints related to aggressive shelter-in-place protocols in our Penang Malaysia in California locations, which began in mid-march.

Andy revenues for the first quarter increased 13% sequentially and we're up 15% year-over-year from new program ramps for defense satellites Munitions and security we did receive that signals late the quarter of demand decreases in commercial Aerospace segment Which is less than 30% of R&D sector revenues.

Industrial revenues for the first quarter decreased 4% sequentially and 12% year-over-year. The industrial sector was lower and had the largest variants of any sector as compared to our original q1 education from Target related invites.

overall the higher-value markets represented 82% of our first quarter Revenue

Turning now to our traditional markets Computing was down 71% year-over-year from the completion of the Legacy Computing contract in 2019 and 18% sequentially quarter-over-quarter from Lubbock data center storage and Commercial Printing product demand calcio was down 16% sequentially and down 37% year-over-year from lower demand for infrastructure build-out related products offer. Our traditional markets represented 18% A first quarter revenues are top 10 customers represented 42% of sales for the first quarter, please turn to slide night.

A revenue and 515 million reflects an increase on a quarter-over-quarter basis our gaap earnings per share for the quarter was $0.10 and our Gap results include a 2.9 Million of restructuring and other non-recurring costs in q1. These costs included 1.9 million of costs related to a previously announced site consolidation effort and other restructuring type activities around our network box and 1 million dollars for an impairment related to a building that is now being classified as held-for-sale are previously announced San Jose closure is on track to be completed in Q2 as a reminder. There were no gaap to non-gaap adjustments related to covet

18 turning to slide 10 for our non-gaap financial information for q1

Our non-gaap r219 Gap gross margin is 8.4% a hundred basis point increase quarter of a quarter and thirty basis points year-over-year Q 12020 results were impacted by labor and efficiencies due to the government mandating shut down in China and shelter-in-place requirements throughout the rest of our Global Network and the insurance of incremental expenses for personal protective equipment off or was 31.6 million and increase of approximately 7 million sequentially 219 sg&a was lower due to reduced variable comp including stock, addition to 1 we have the restart of payroll taxes sg&a was flat on a year-over-year basis.

Operating margin was 2.3% a decrease from 2.6% in Q4 due to the lower than expected revenue and inefficiencies related to covid-19.

NQ 12020 our non-gaap effective tax rate was 19% which was lower than expected for the quarter due to the distribution of income across our Network. We expect that brings you to our non-gaap effective tax rate will continue to be in the range of 20% to 22% again because of the distribution of income around our Global Network non-gaap EPS was $0.22 for the quarter of an roic was 7.1%

Jeff will provide more details shortly about the strength of you're seeing a defense medical and semi cab we're also seeing a challenging supply chain environment and labor constraints due to the covid-19 virus as a result of these inefficiencies. We are proactively taking a series of actions to lower cost structure and reduce Capital expenditures our CEO the board and our senior executive team will take a temporary 10% salary while the rest of the senior leaders and the company will take a 7% salary cut through q320. Additionally, we expect to reduce variable compensation and other discretionary expenses such as travel the cost reduction actions in our factories will consist of employees taking rotating time off depending on the factory loading levels.

Cost reduction actions and are non Us locations will depend on a local law requirements in summary. We're being vigilant and very much appreciate the support of our entire organization as we took the current environment.

Please turn a slight 11 for an update on cash in our debt structure. Our cash balance was $412 million at March Thirty One with $223 billion available in the US. We have continued to return. Kashmir for locations and we will continue to repatriate in future quarters while balancing our foreign sites cash flow requirements. Our cash balances include $95 million of proceeds from borrowings under our roof liner credit. We borrowed against our revolver proactively support navigating through the current environment. We will continue to monitor our financial covenants and ensure compliance. We do expect our net interest expense increase by 500 K and Q to overall at the end of q1 2020. We are in a positive net cash position of approximately 170 million.

We believe We we have a strong

Capital structure and our liquidity position provides flexibility to manage our business through the current environment.

Our accounts receivable balance was $380 million a decrease of six million from December Thirty $1 contract assets where 160 million at March Thirty One and $161 December 30th tables were up Thirty million quarter of a quarter inventory of March Thirty One was $338 Million up twenty-three million quarter of a quarter due to mix changes from customers late in the corner and bringing in inventory to support long production cycles for products in our semi cab and medical sectors. We continue to make protect proactive Investments to secure the critical components needed to support our customers. Well managing inventory balances.

Please turn to slide 12 to review our cash conversion cycle performance.

Four Q 12020 cash conversion cycle was 81 within our expectations at the beginning of the quarter and was achieved even considering the challenging environment. This is consistent with our expectations often discussed previously after the completion of the Legacy Computing contract the third quarter of 2019. Our cash conversion cycle will be between $78 and eighty three days turning the slide 13 for Capital allocation update.

In q1, we returned approximately $25 to shareholders. It's included 5.5 million as part of our recurring quarterly cash dividend, which we recently increased to $0.16 per share in announced on February 3rd, 2020. We expect to continue the recurring quarterly cash dividend. We also repurchased approximately 724000 chairs or $19 as of the end of March 2026 at approximately 210 million available under the current share repurchase program after an increase approved by the board in February 2020. We are prioritizing cash usage for operational needs and as such we are not planning to repurchase shares and cute too because of the uncertain conditions related to covid-19. We will not provide our usual detail level. Next quarter wage. Gap will provide a detailed view of demand in our end markets bisector an overview of recent new business wins and an update on our key strategic initiatives.

Thanks for for that update.

Turning now to the impact of the pandemic on Benchmark on slide fifteen. I want to provide some insight into what we're hearing from our customers by sector. I would like to focus on to diminish the current visibility of Demand by each market vertical and our ability to translate that demand to revenue based on operational and supply-chain constraints in summer. The second quarter will be less about demand than our operational and supply chain capability to support it. Our supply chain team has been proactively managing Parts Supply during this month since the early days of the outbreak in China. The team is assessing risk areas with our suppliers every day and taking preventive steps to ensure our critical Supply life to remain open. However, the global Supply base remained subject to the same ordinances and decrees that affect our operations and are causing inevitable interruptions in New Jersey.

suppliers ultimately impacting power output

Man remains strong for the medical products. We produce our medical designed services and new program ramps furthermore. As I discussed. We have been engaged by existing a new customer and helping produce medical equipment to help fight covid-19. And in some cases. This is meant a significant increase in demand this demand and our ability to support medical coverage will result in sequentially higher revenues in Q2 and we expect their second-half 20/20 Revenue in the segment will be higher than the first half.

In semi cab the demand recovery for Semiconductor Capital Equipment continues based on the current forecast from our customers, however, operations and supply chain of challenges that exist in our California and Malaysia operations are impacting our ability to fulfill all of our demand backlog in Q2 our competitive position remains strong sector where we have one new programs and expanded our penetration and key accounts over the past several years. We also expect increased Revenue in the second half of the year in this effort based on strong semiconductor Capital Equipment demand.

Samantha in the industrial sector is mixed and we expect some sub-sectors to be impacted more than others approx 20% of our industrial customers support wage oil and gas industry and we expect demand to be softer throughout the balance of the year. We also expect weakness in industrial transportation and infrastructure a break could be the Automation and Robotics sub-segments where we have a number of new wins.

As a result, we expect the industrial sector to be down in the second quarter with some recovery in the second half.

Similar to Industrial the traditional markets of computing and are mixed at present Satellite Communication related products are increasing but data off and Telco infrastructure. Build-up budgets are expected to be under pressure.

In Q2 impacts to our Tijuana and Malaysia operations and supply chain are impacting Computing and Telco revenues as well. But output should recover wage demand in the second half.

We also expect an increase in high performance Computing projects and Associated Revenue in the back half of the year.

R&D sector is comprised of approximately 70% defense related products and 30% Aerospace demand remains strong for defense products. But we were challenged at this time to fully support these programs in our California location including critical subcomponents shortages that are manufactured in Tijuana.

And these issues improve we expect higher defense-related revenues for our commercial aircraft programs. We have seen a significant decline in demand and we anticipate much lower demand through the rest of the year barring any major improvements in commercial Aviation.

Despite the challenging global environment and disruption or a normal customer engagement workflows. We are pleased with our continued design and Manufacturing wind momentum accomplished in life is shown on slide sixteen.

In our medical sector, we were awarded programs for a portable ultrasound and a Mobile Imaging device both with existing customers. We also received a design win for an automated drug freezer with a new customer which we expect to convert to a manufacturing wind in the future. The new ventilator program that we were awarded will appear as new business wins in Q2 wage.

in the medical sector

Insanity cap we were awarded a Precision Machining program for a next-generation in chamber tool focused on wafer elimination along with home design and Manufacturing award for an SUV Electronics controller expanding our participation in this cutting-edge technology.

In Aerospace and defense, we received additional awards for Munitions electronics and a flight recorder in which we will perform process design and Manufacturing. Our pipeline in the defense segment is very encouraging and we have been on the large number of projects that we expect to hear. The results of in the coming month is clear. This segment has made a serious commitment with Outsourcing more of their manufacturing needs, but they require sophisticated Partners who can meet their exacting standards Benchmark is up to this Challenge and has continued to invest in this segment.

In industrial we're making progress with new wins for a vehicle tracking and diagnostic devices and the design and manufacturing of a new artificial intelligence in a lidar scanner.

In addition to new business wins. We were pleased to be recognized by our customers for delivering complex products with high quality. For example, we announced that we were selected by Raytheon wage epic award for excellence related to the design and manufacturing of a ruggedized multi-domain router used in critical Communications supporting our military.

Benchmark secure technology has been a Raytheon partner for almost twenty years and we look forward to supporting this expanding strategic relationship across benchmark.

Know if you please turn to slide 17 given the current environment we've elected to suspend quarterly guidance for the second quarter. The quarter can unfold under a variety of scenarios magnitude of which remains uncertain depending on the timing of government action to allow the return to full production and supply chain improvements instead. We will offer some directional guideposts for now and resume guidance once we have more clarity and predictability.

Give me where we are in the quarter and our assessment of our operations. We expect Revenue to modestly declined sequentially as we have lost manufacturing time, which cannot be recovered. We also expect that the second quarter will be the lowest Revenue quarter of 2020 despite the stronger demand Outlook and medical semi cap and defense.

checking

Quarter margins will be down sequentially primarily from lower revenues and Associated under absorption lower productivity levels incremental supply chain costs and employee related expenses at present many of our operations, which are shut down or operating at reduced capacity payroll costs cannot be mitigated. Even if employees cannot come to work.

Also, given our demand Outlook and new programs from wins in the past 24 months. We need to maintain critical resource capabilities, which route mentioned as a top priority. We also expect gross margins will recover to the 9% range in the second half of 2020.

As recovered we've taken a number of proactive actions during the quarter to manage expenses including compensation adjustments Merit and hiring delays and Thursday. We're permissible. We are biasing towards these actions versus headcount reductions in the near-term to support our long-term growth.

As a result of some of the actions we expect that sg&a will be reduced approximately 8% in Q2.

Beyond Q2 we also have also run a number of scenarios for the remainder of the year and we will take appropriate actions to further reduce costs as appropriate if the pandemic continues or Dammam conditions change.

We feel very confident that our experience disciplined execution and strong balance sheet will allow us to navigate this period of uncertainty while continuing to invest in the future months before I turn the call over to the operator for Q&A. I want to close our prepared remarks of the fuse thoughts on slide eighteen.

As we entered twenty-twenty we prioritize how we would spend our time this year to build a better Benchmark, even with the significant challenges brought on by covid-19 are dead initiatives remain unchanged. In fact progressing. These initiatives goes hand-in-hand with how we are managing the current crisis.

One of the greatest Testament Saint progress has been the multiple calls and emails. We received from our customers on our effective and standardized protocols and efficient communication to make sure our priorities remain aligned these endorsements firm progress on our journey to be a trusted partner and service provided for our customers.

We will continue to work on these longer-term initiatives to prepare the company to capture the growth that lies ahead our competitive position remains strong and I have the utmost confidence in our life and our Global teams.

And with that I will turn the call over to the operator to conduct a Q&A.

operator

we will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your life before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

And our first question comes from Jason Smith of Lake Street, please go ahead. Hey guys. Thanks for taking my questions fully understand why you're not providing specific page given the backdrop, but just curious if you could share what you're seeing from a bookings or order momentum perspective in April compared to the end of March and early early, if if the queue to guideposts assume that seventy-five to eighty percent productivity you currently have sorta is maintained throughout Q2.

Yeah, thanks Jason. It's all starting and can jump in if you want are you know, the demand demand is pretty strong particularly as we look out the second half. We did say this current quarter. We saw Revenue coming down sequentially modestly because we know we're we're constrained really buy more supply chain and operational, you know the state of the current operations to to meet the full demand that being said, you know, we're not immune to the conditions and the environment and say, you know, we we have seen some demand come down in the sectors that I talked about like industrial and and some of those areas compute and Telco we've seen some some order load shift. But we do feel like, you know, second half still looks pretty strong for us. That's why you see us saying that we believe that that we will do better than second quarter as as you go out to Q3 and Q4.

And kind of calm the low Point our assumptions with those guideposts were kind of looking at where we are today right with that seventy-five to eighty percent. No one we've got a fair amount, you know, we talked about Tijuana sites being unfortunately completely closed where you know anticipating being able to do some return to work there in the coming weeks. We kind of looking at where it is now dead in those guideposts it can change which is really why we were uncomfortable. We we've seen things where you know, Malaysia as of Monday, we weren't able to operate 100% And just as of today, I can report that it's it's going to 100% And we were at 50% So that was a really positive thing but you know a week and a half ago and told you about Mexico and and that was a negative. So it's g e fluid environment. I think the team has done a great job. We we have justification certainly for the critical infrastructure in the sites. We operate and that's allowed us to you know, maintain prestige.

Around the world and all of our facilities but you know local jurisdictions still rule the day and and we want to be safe. So we're taking all the precautions we can but hope that provides a little more color bulb know that's helpful. And I know you outline some constraints in other product lines, but are you seeing any capacity constraints in the medical business? Just given birth inbound momentum you're seeing

yeah.

You know, you can imagine I mentioned in one case related to you know, some of the products fighting The Cove it's like we've seen demand more than quadruple. You know, when the demand goes up 10x months. Of course, you're going to see short-term constraints while you you know, go get parts to build build products. So we're certainly capped there but in some of the scenarios, you know, we're we also know this isn't man that you know, it may not be sustained for the long term but it's a great opportunity to do more for the customers. We support get a few new customers in the mix and Delight them and and continue to do business with them, but I can't say we're not constrained in some cases in medical because we're on the lot of customer, you know engagement calls and Communications really daily and some of these most critical products. So, you know that there are some areas that are tight.

Yes may be all right, if I can remember that the the labor constraints we have our cross our Global Network, right? And so when you think about the medical sector as as all sectors are somewhat impacted the good news is we've got a higher demand that we're seeing in some of these medical products and upside which is Jeff said, you know, we're chasing moments and and making sure we can we can deliver on those. Okay, and then the last one for me and I'll jump back into Q. I know you guys have been pretty disciplined about what programs he bid for but just given the current backdrop. Are you seeing any of the bidding process pricing become increasingly competitive given the backdrop?

You know our space is competitive at the go. So, you know, most of the bids are competitively contested. I won't see I won't say that it's been dead necessarily more aggressive. You know, we're we're in a pretty high-value space now with, you know, approaching 80% of our Revenue which not, you know, there's a limited number of people that can do it. I you know the usual suspects and we know kind of where we need to be competitively I will say given the lack of you know, we can't have people on-site necessarily it really difficult. We're doing actually, you know, literally FaceTime walk through the sites to give people tours and stuff. I've been really encouraged by the pipeline of new business wage. And you know, we have a weekly, you know quickly check point where we look at that and I get to say even through the March quarter and in the April here, I've been surfing

And those weekly I don't always participate necessarily but I've been really wanting to see what the what the deal flow looks like and it's been pretty encouraging and and we're waiting our fair share. We we went through a whole post is a chart in the deck about all the the winds. In fact, we just got an award this morning from an industrial customer. That's pretty sizable that will probably roll up into our Q2 numbers, but we're still you know, a lot of it with existing customers doesn't require a site visit or checking us out which is just a great compliment to the work we're doing for them already, but I'm also seeing new customers with age. So I'm I'm anxious to get people back in our facilities and all that but I gotta say that that has me very encouraged up while you know, it takes time. As you know can take you know, a couple months and some of those design wins or Awards to to get to production, but it's good to see things continue to happen.

Okay, I appreciate the caller. Thanks a lot guys. Sure.

Next question comes from and thunderstorm of sidoti, please. Go ahead. Hi. I want to thank you for taking my question. So I just had a follow-up on the previous discussion are about the you said Jeff. You said you were encouraged about the pipeline of new business. So what would you say the new business comes from? Is it more from competing with in-house production or or or is it from competition competition? You know, I mentioned in my remarks that you know, I think they're more committed some of our largest defense customers would continue to want to move to Outsourcing some of that was capacity the last several quarters, but I think you know in the tough cost environment and where everyone's home assured you're going to look at who can do things most efficiently and I I feel like the commitment and the Defence there is there to stay and and many times to your point dead.

You know, we're competing with in-house production in in that segment medical is a little more Outsource. So, you know that that typically, you know, they've already been outsourced. So we're competing more with folks that do work in that space. That's where our strong us footprint RFD a capability the fact we do offer products that you know, we can do life-sustaining things, you know gives us a good leg up and and our history and medical allows us to do well against the competition. So it kind of varies a little bit by segment. I would say we're seeing more Outsourcing in in the defense and an industrial I think medical, you know, it's it's, you know, kind of the same complexion that we've seen em, I still think it's a long-term secular Trend, you know, we know we're not at a majority of people being outsourced. So um that I compute and helpful. Yeah, the majority is outdoors, but in the other sectors, we're in, Georgia.

It's not so I think there's a lot of good first time opportunities there, but it's also often times there's competitors involved.

Okay, and and talking about the industrial so it's just like that's going to be slowing down more than others. But but then given you Outsourcing model that might help you because the industrial production that that needs to take place still might be outsourced this that sort of a fair you have to kind of dig down a level with industrial you you've got to go to the sub-sectors and you know, we do footprint in oil and gas which it's it's maybe twenty percent. I think we we stayed at 20% of that sector. We know that that you know is going to be tougher in the coming months and quarters given the oil, you know, the the whole everything going on and oil pricing and everything, but then you look at Roebuck which is also industrial, you know, and there's there's great opportunity there. We've got some new design wins in that segment automation continues to to be stepped up, you know.

But then we don't.

Do a lot in transportation, but we have some industrial transportation business. Um, but we we anticipate that might you know, that that might be a little bit certainly flattered to to a little bit of pressure there. So we kind of have to kind of play it out but I think it really depends by a segment that being said, we it won't have the Snapback that we suspect with medical and semi cab given the position and and and defense but we are anticipating that you know, we'll see some improvement from Q2. Okay. Thank you. I'm not talking about the the healthcare. So you have the search now the of the covid-19. A products that that you helping out with but if we go back to to the more electronic that product related related products have they been pushed out have you seen cancellation in those or how do you think about that coming back again? Yeah. Yep.

Hip surgery is the one category in products in that segment. The one category, I would say there's some softness but but overall, you know, it's not enough to drag the medical segment down for us. In fact, we're pretty bullish given the upsides on some of the covid-19. Addicts or some of the diagnostic and some of the things they've done doing as you see we've tried to be articulate about just the kind of things. I mean everything from one our tester for covid-19. One of our customers is developing. It's got great prompt mean that's exactly the kind of products that are needed we play in the ventilators and those things. So there's a lot of demand across the broad set of of products their the elective surgery. I would say I'm more uh, you know a push out but we're not seeing like we want to cancel things. It'll be more like hey, we think you know, if we can't fulfill all the demand into Q, that's fine, you know dead.

We may see some orders moved to the right, but but not wholesale cancellations, but but I think you're right in that that's hurting hospitals that they're not able to do elective surgery. And I know there's a lot of pressure on our government officials to to enable that to start picking back up and and we'll watch how that plays out. But for that, you know from that standpoint, I think it's more of a shift.

Okay, thank you. And what did you say about the tax rate for the second quarter was expected to be I'm sorry. I couldn't yeah, we we expect it to be 20 to 22% on home.

And how about the currency headwinds do see any currency headwinds or you know, we are seeing a little bit of currency headwinds. We have some effects impacts especially from the peso we continue to monitor that uh, it's persisting a little bit in Q2. So we'll look the manage that proactively as well.

Okay.

Thank you. That was all for me. Thank you.

Our next question comes from Mike see ghosts of Needham & Company, please. Go ahead.

Hey guys, thanks for thanks for taking the questions here first. Just a housekeeping item. I think there was a comment made during the the script that you guys are looking to take down sg&a expense 8% off in Q2 and just wanted to make sure I was thinking about that that is on a sequential basis. Correct? That is a sequential basis, correct? Okay, and if I'm thinking about those those cost reductions that we will be seeing is this more I guess on a temporary basis to help align the cost structure with how the how the revenue profile is changing and took his own certain times there. Is there anything more to take away from these these cost-cutting measures?

Yes, I'll break them up into two pieces my specifically around the cost actions that we articulated in in the call today with our prepared remarks. Those are temporary in nature often associated with kind of the demand profile. We're seeing and and the the current environment if you will separate from that, if you remember last last summer, we did announce broader a consolidation of some sites, uh, one of which was completed through a transaction in the fourth quarter. And and the other one the San Jose site, which I mentioned in my comments which is on track to be closed by the end of Q2. So the the cost actions we've taken are a result of the current environment separate from that. We as part of our announced off solidation of certain sites. Um, we're on track with that action as well.

Okay, maybe I'll just maybe I'll just add I was just going to add the fact that you know, like we really, you know, given the demand in the second half and given the fact the projects we've been working. Now. We really are biased towards protecting our capabilities and the resources and so that's really why we take in a you know, we've been proactive but we really tried to look at this from a a temporary. You know, how do we help us whether this, you know current where we've got such a disruption in our sights around the world and second quarter of you know, then that makes a ton of sense. Thanks. Thanks for helping clear that off and I guess another question I had for you and good news on your ability to open up those those facilities over in Malaysia, right and getting them ramped back up. But just Curious George Curious what that involves and how how long it would take to get that ramps back up and just trying to get a gauge to imagine every facilities different but let's say Mexico get a job.

Green light and the next couple of weeks. Would it be able to follow a similar track or how should we be thinking about that? Yeah. So, I mean it's complex as you can imagine when Malaysia birthday shelter-in-place. The first thing you have to do is, you know appeal to the government that hey we're building, you know, critical Medical Products. We're building a semiconductor infrastructure. We're building conductor Capital Equipment. We're building, you know, a number of products that are deemed critical in industry and critical infrastructure. And then you get you know, you get an approval. Okay. I will let you operate with certain guidelines and those guidelines initially when we got approval. We we actually we're only shut down fully for a short period of time less than a week. But then we went back to 30% and then we operated at 30% for let's say a month or three or four weeks and then we were able to step up to 50% because we met the guy dead.

Might have had an inspection.

We were able to distance we're able to reconfigure the factory were able to split shifts to get the 50% and increase our production correspondingly. Now, you know with the progress that the country home made and their comfort level with containment. We're able to get to a hundred percent and still meaning socially, you know, social distancing keeping people apart protective equipment like masks and and things in the in the Facility Cleaning multiple times a day doing health checks and and all of that so it it off it is the kind of thing where it takes time to get back. I would say like in our California facilities that that's been an elongated process that might take four or five six weeks to get to 100% off but, you know, everyone really wants to deliver for customers and and while we stay safe, you know, might our teams around the world recognize the importance of what we're doing and and so, you know, there's motivation to get there it just wage.

Just not something that's necessarily a light switch. And Mexico is a little bit different because our Mexico site. We already had Federal approval and certification to continue producing and then the Baja State said no we're going to over we're going to we're going to go on top of that and we're going to say even though Federal approved it the states not going off of it. So we're going to shut down shut all operations and then we're going to certify independently and that we work through that so, you know again, it's it's there's a play-by-play here as you can tell there's we have a very large team working on this daily along with this folks in the region and I think we've been proactive that's what a lot of our Soo Jo site to open up really early age were probably reopen three weeks. And after the closure in China went a lot of other factories were down five six weeks, but it does feel looking across the EMS laughing.

Okay, so we just coincidentally, you know, we we have facilities and Tijuana. We have a bigger footprint in California and we're in some areas that were hard-hit and and we're we're confident we're going to get through life, but we are dealing with a little bit more disruption operationally, I think than some of our competitors.

Right, right. Definitely a little bit of a a moving Target when you can't get the federal and the state governments the lineup. Yeah, it does that sound familiar right happening in the US wage went to one other question that I had for you and it was more around the the semi cap. I wanted to make sure that I I heard you correctly. So it sounds like to me that might be might be slightly down from q1. But if anything it's going to be due to your inability to fulfill some of the demand coming in based on the shelter-in-place in the Malaysian facility wage, I guess partial utilization you're currently at now. We're semi is not a yeah not as man problem. You know, we we have plenty of demand it is really easy to fulfill it. We're you know, we're going to we're going to work hard to you know, to to continue to grow that because you know, the

demand is there but as you said both Malaysia and are stronger footprint for

Decision technology in the in the Bay Area, you know cuz making it a bit more demanding, you know a bit more challenging to get there. But as long as we look at it, we you know, if you go to our chart fifteen and the presentation we kind of tried to do this this guidepost where we said we kind of had a side arrow on semi cap saying that you know, we bought a flattish it could be up if we could fulfill all the demands.

All right, that's helpful guys. Thank you, and I'll jump back in the queue. Best of luck. Thank you. This concludes our question-and-answer session. I would like to turn the page over to Lisa weeks for any closing remarks.

Yes, we just like to thank everyone for joining our call today. If you have any follow-up questions, please don't hesitate to reach out. We certainly look forward to providing you an update on our second quarter results in our next earnings call and hope that you and and all of your families say well. Thank you.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.