Q1 2022 Benchmark Electronics Inc Earnings Call
Good afternoon, and welcome to the benchmark electronics incorporated fourth quarter 2021 earnings conference call.
All participants will be in listen only mode. So can you just distance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
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To withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the call sort of Paul Lansky benchmark Investor Relations. Please go ahead.
Thank you Anthony and thanks, everyone for joining us today for Benchmark's first quarter fiscal year 2022 earnings call.
Joining me this afternoon are Jeff Bank, CEO , and President and Roop locker Rajiv CFO after.
After the market close today, we issued an earnings release, highlighting our financial performance for the first quarter of 2022, and we prepared a presentation that we will reference on this call the.
The press release and presentation are available online under the Investor Relations section of our website at Www Dot bench dotcom.
Call is being webcast live and a replay will be available online following the call.
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.
Please take a moment to review the forward looking statements advice on slide two in the presentation.
During our call we will be discussing 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 as described in our press release and SEC filings.
Results may differ materially from these statements most notably due to the ongoing impact of global supply chain constraints and Covid.
Benchmark undertakes no obligation to update any forward looking statements.
For today's call, Jeff will begin by covering a summary of our first quarter results and new program wins Roop will then discuss our detailed financial results, including our cash and balance sheet summary, and our second quarter 2022 guidance.
Jeff will then return to discuss our sector outlook provide a progress report on our strategic objectives, and then close with directional commentary on how we're viewing the year relative to our midterm model before opening for questions.
Please turn to slide three I will now turn the call over to our CEO Jeff Bank.
Thank you Paul.
Good afternoon, and thanks to everyone for joining our call today.
Hopefully by now.
Our press release and the strong results, we delivered for the first quarter.
We've made tremendous progress towards the strategic objectives, and the midterm model, we set out to achieve back in October 2020.
I'm pleased to report the March quarter was a continuation of this trend.
As you've no doubt heard repeatedly from companies across various industries significant global supply chain challenges persist and Covid disruptions continue particularly in Asia. Despite.
Despite this benchmark once again delivered revenue and non-GAAP EPS above the high end of our guidance range in the first quarter.
Revenue of $636 million was 51 million above the midpoint of our guidance and up 26% year over year.
This was the largest revenue quarter, we've had since the fourth quarter of 2018, well before the pandemic.
The revenue outperformance in the period was primarily driven by strength in our semi cap and industrial sectors.
Our non-GAAP gross margin in the quarter was nine 1% in line with guidance.
Amid the backdrop of supply constraints and tight labor, we've been absorbing some costs in partnership with our customers.
We're working on recoveries as appropriate which will be reflected in the second half.
We have also been strategically acquiring inventory to help meet our growing demand.
These are conscious investment decisions, we're making today in order to drive greater opportunities tomorrow.
In the near term this will have a temporary dampening effect on our gross margin expansion.
We expect that by the second half of 2022, our gross margin expansion will resume.
Turning to operating margin with the higher revenue base, we were able to leverage our operating expenses translating to non-GAAP operating margin of three 4%.
As a reminder, our non-GAAP operating margins include stock based compensation expenses.
Excluding these expenses our non-GAAP operating margin in the March quarter would have been greater than 4%.
non-GAAP earnings per share was 44 cents as compared to 21 cents in the year ago period, representing 110% year over year growth.
As mentioned previously the March quarter results were achieved with a backdrop of supply chain count challenges further COVID-19 related disruptions in some of our facilities in Asia.
And if those challenges weren't enough, we even had a tornado damage our site, our Austin site and disrupt production for a week yes.
Yes, we overcame.
I want to thank our teams across the globe for their incredible perseverance, which enabled these results.
But there is room for further improvement.
In the first quarter, we estimate that we were unable to fulfill over 200 million of demand requested by our customers.
Unfortunately, our backlog of unfulfilled demand continues to increase its component supply is still severely restricting our output.
Thanks to the diligent efforts of our supply chain and operations teams.
We were able to fulfill a meaningful amount of the demand in the period and even outperformed against our initial customer forecast for the quarter.
Which enabled our first quarter 2022 upside.
However, demand is continuing to increase.
Unfortunately, we don't see a broad improvement in supply constraints throughout 2022.
Given the disconnect between current demand and our ability to fulfill it.
Coupled with the expected continued strength in new bookings.
Our operations teams have been strategically building inventory as it becomes available.
This will enable us to maximize throughput in our operations when longer lead time components arrive.
Please turn to slide four.
Our go to market organization working closely with our functional teams continues to secure new wins.
Both from our existing customers and our new accounts across our targeted sectors.
Let me highlight a few of those exciting wins for Q1.
In medical we were awarded new design and manufacturing programs for an ophthalmology therapy device as well as manufacturing of an image guided radiation platform.
We were also awarded a design program for a neurological monitoring system.
In semi cap, we continue to win.
Design award for wafer handling.
And processing in support of next generation semi cap tools.
This past quarter, we secured new engineering wins for lithography sub modules and metrology systems.
And the manufacturing program for planar as Asian modules.
Benchmark is proud to enable our customers to provide some of the most complex process technology on the planet.
In the A&D sector, we were awarded the manufacturing of our Ruggedized RF satcom device as well as an encryption and secure communications platform.
We were also.
Warded, the design and engineering of an RF module using a lower orbit space applications.
During the quarter, we were pleased to announce a key new partnership with Dianetics, a division of light as well.
Thereby benchmark will be manufacturing the electronics for the enduring shield defense system.
Diabetic selected benchmark do our deep experience and reputation in the A&D market, where we are known for our full product lifecycle support from design to new product introduction to aftermarket services.
And industrials, we were awarded the manufacturing program for Smart climate control devices, which is nicely aligned with our commitment to sustainability.
Elsewhere, we secured a new logo for manufacturing robotics sub assemblies to be used and warehouse automation.
We were also ordered a design and engineering program for the redesign of controllers going into construction.
Cultural equipment from a well known market leader in this space.
In computing and telco, we want new manufacturing programs for our high end computer power sub system, which was a new logo for us as well as a broadband network power assembly, representing another in a growing portfolio of next generation broadband wins for bench.
Sure.
We were also awarded a design responsibility for a specialized high end computing platform to be used in crypto applications.
We continue to see a mix shift within computing and telco from legacy applications to leading edge technologies and are pleased with the quality of new complex wins in this sector.
Further bolstering this shift and creating new opportunities for benchmark has been a renewed focus on re shoring manufacturing of these systems and platforms to the U S.
We look forward to incrementally participating in this emerging trend.
Our new business pipeline continues to grow across our targeted sectors and we remain very encouraged.
About the prospects for continued wins.
We're more Oems are looking for a strategic outsourcing partners that can take on both manufacturing and engineering projects to help.
Help them get to market faster and scale efficiently.
I will discuss our momentum and our various sectors later in the call and provide an update on our progress against our key initiatives.
But first I'd like to turn the call over to route to go into the details of our first quarter performance.
And our guidance for the second quarter.
Over to you.
Thank you, Jeff and good afternoon, please turn to slide six for our revenue by market sector.
Total benchmark revenue was $636 million in Q1, which is flat sequentially and 26% higher year over year.
Medical revenues for the first quarter decreased 8% sequentially and increased 8% year over year.
We expect medical sector growth through the rest of 2022 from new programs ramping and improving demand with existing customers.
Semi cap revenues were up 12% sequentially and 62% year over year demand levels throughout 2022 remains high for our complex mis precision machining and large electromechanical Assembly services, which are primarily related to front end wafer fab equipment.
A&D revenues for the first quarter decreased 14% sequentially and 9% year over year from program transitions.
Industrials revenue for the first quarter were up 10% sequentially and 44% year over year from demand improvements from oil and gas building <unk> infrastructure and lidar applications.
Overall, the higher value markets represented 82% of our first quarter revenue.
In our traditional markets computing was down 8% sequentially, but up 26% year over year from the planned ramp of high performance computing programs.
These programs will continue to ramp through the remainder of 2022.
In the telco sector revenues were down 2% sequentially, but up 12% year over year, primarily from demand improvement for satellite programs and new broadband ramps in.
In the first quarter, our traditional markets represented 18% of revenues and our top 10 customers represented 51% of sales.
Please turn to slide seven.
Our GAAP earnings per share for the quarter was 31 cents. Our GAAP results included restructuring and other one time costs totaling $4 3 million to $3 million related to the closure of our previously announced sites in San Jose, California, Angleton, Texas, and more park, California, and other small restructuring activities throughout our global network.
Work aligned to future business focus as well as a $2 million loss on the sale of assets held for sale related to certain manufacturing capabilities that we exited in 2021.
For Q1, our non-GAAP gross margin was nine 1% consistent with the midpoint of our first quarter guidance sequentially gross margin is lower due to the mix of our revenue in Q1 and operational inefficiencies caused by the continued supply chain challenges and Covid disruptions on a year over year basis were higher.
By 80 basis points due to the revenue level and mix.
Our SG&A was $36 3 million, which was down 4% sequentially due primarily to lower variable compensation.
non-GAAP operating margin was three 4%, which included 70 basis points of stock based compensation expenses.
In Q1, 2022, our non-GAAP effective tax rate was 19, 3% because of the mix of profits between the U S and foreign jurisdictions.
non-GAAP EPS was <unk> 44 for the quarter to nine cents higher than the midpoint of our Q1 guidance based on higher revenue.
non-GAAP ROIC was nine 3%, a 70 basis point increase sequentially and a 290 basis point improvement year over year.
The improvement in our non-GAAP ROIC as a result of the continued profit growth in revenue strength and gross margin improvements.
Please turn to slide eight to review our cash conversion cycle performance cash conversion cycle days were 82 in the first quarter compared to 69 days in Q4 with the increase primarily due to our investment in inventory to support the strong customer demand across our market sectors.
Please turn to slide nine for an update on liquidity and capital resources.
We used $68 million of cash and operations and invested $18 million in capex. The capex investments added capacity throughout our network, especially in our Mexico and precision technology sites.
We expect to use cash to support inventory and capacity expansion in the first half of 2022 and are still targeting cash flow from operations to be between 40% and $60 million for the full year.
We expect our Capex spending in 2022 2022 to be between 50 and $60 million.
Our cash balance was 245 million at March 31, with 94 million available in the U S. Our.
Cash balances decreased $27 million sequentially.
The decrease in cash is primarily due to the investment in inventory.
As of March 31, we had $131 million outstanding on our term loan 73 million outstanding borrowings against our revolver and our cash net of debt is a positive $42 million or.
Our strong balance sheet and borrowing capacity will enable us to support our growing revenue and increasing customer demand.
Turning to slide 10 to review our capital allocation activity.
In Q1, we paid cash dividends of $5 8 million, which represents a dividend yield of approximately two 8%.
Total share repurchases in Q1 were $5 5 million, which represented approximately 214000 shares.
As of March 31, we had approximately 150 $559 million remaining in our existing share repurchase authorization.
At a minimum we will continue to repurchase shares to offset our annual equity dilution.
Beyond that we will evaluate share repurchases opportunistically, while considering market conditions.
Please turn to slide 11 for a review of our second quarter 2022 guidance.
We expect revenue to range from $615 million to $655 million, which at the midpoint represents a 17% year over year growth.
For the second quarter, we expect the medical sector to grow sequentially based on increasing demand with existing customers and new program ramps. We also expect sequential growth in A&D, although still challenged we are beginning to see some improvement in aerospace and expect defense to gain momentum later in the year.
Supply chain constraints are affecting our semi cap industrials compute and telco sectors in Q2 more significantly than in Q1, notably in semi cap third party constraints are expected to have a near term impact on the sector's performance as such after a particularly strong March quarter, we expect <unk>.
<unk> revenues to be modestly down sequentially in June .
Meanwhile, our industrials computing and telco sectors are expected to be roughly consistent quarter over quarter.
We expect the timing of material availability will improve for each of these sectors through the year.
The demand environment remains strong and in each sector demand outpaces supply.
We have over $200 million in unfulfilled demand with our investment in inventory and capacity as this demand moves into future quarters, we will be able to fulfill it.
We expect that our gross margins will be between eight 7% to eight 9% for Q2 and SG&A.
<unk> will range between $34 million and $36 million.
Implied in our guidance is a three 2% to three 4% 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, we expect to incur restructuring and other nonrecurring costs in Q2 of approximately 800000 to $1 2 million.
Our non-GAAP diluted earnings per share is expected to be in the range of 39 to 45 or.
Or a midpoint of 42.
Other expenses net is expected to be $2 6 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q2 are.
Our non-GAAP effective tax rate will be between 18% and 20%.
Expected weighted average shares for Q2, 2022 or approximately $35 5 million.
In summary, our guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base operations or customers.
<unk> also assumes no material changes to end market conditions, and our operations due to COVID-19 .
And with that I'll turn the call back over to you Jeff.
Thanks for that update.
I will start with providing some additional color on our view of demand by sector and the anticipated contribution to our growth this year on slide 13.
And semi cap revenues have grown double digit year on year for 10 consecutive quarters through Q1, 2022, and we expect Q2 to be number 11.
On a sequential basis strong march quarter, coupled with incremental constraints from outside service providers will affect sequential performance.
We believe this is going to be temporary and expect sequential growth again in the back half of 2022.
More broadly we believe we are in the midst of the semiconductor Super cycle, which will last into 2023 and possibly beyond driven.
Driven by increase silicon content in nearly every corner of the market the growth in new domestic semiconductor fabs and post COVID-19 demand recovery.
We remain well positioned in the sector to support the breakthrough technologies developed by our customers with our design precision machining and electronics manufacturing capabilities.
For the full year, we continue to expect revenues to grow 10% to 15% in this sector over 2021 levels.
In our medical sector, we were down sequentially in Q1, and it was entirely materials related.
Medical is our most acutely affected sector relative to supply chain issues.
We expect these constraints start to ease in the second quarter and predict the medical sector to be our fastest growing sector for the year.
Growth will be underpinned by higher demand from existing programs and a large number of new program ramps and ultrasound imaging cardiac care and diagnostic devices, where we will leverage our deep expertise in design and manufacturing for complex medical.
<unk>.
Yes.
And industrials, we expect revenue in the June quarter to remain roughly consistent with the higher levels from Q1.
Sequential growth from this level is expected to resume in the back half as new program ramps and advanced Lidar applications Energy management systems, and Iot enabled smart devices begin volume ramps.
For the full year, we expect the industrial sector will grow above the corporate average.
Moving to the A&D sector outlook.
We have seen some indication of improved demand from both the aerospace and defense sectors.
Within defense, we continue to see strengthening bolstered by budget increases.
While aerospace is showing some early signs of recovery.
Sequentially, we expect there to be growth in June largely as a function of delays in March coming through in June .
However, with many of our recent design wins not expected.
To materially ramp for several quarters, we continue to anticipate growth prospects within A&D to be muted in the current year.
Within telco, we expect June to be roughly consistent with March but remain optimistic for growth prospects in 2022, driven by broadband infrastructure wins ramping aggressively throughout the year.
<unk> is becoming more connected and government programs aimed to enable broadband from anywhere and increased satcom adoption around the world provide an excellent backdrop to support further growth.
Finally in computing, we are planning on the ramp of some new high performance computing programs in second half of the 2022.
But program development timing may see some of this demand slip into 2023.
Okay.
For the second quarter, we expect revenue to remain flat to March quarter as ongoing supply chain constraints will limit sequential growth.
On a year over year basis, however, the midpoint of our guidance represents 17% growth.
Looking deeper into the year, we are confident in our ability to continue to grow as our fundamental demand and growing backlog outpace our ability to fulfill in the near term.
We are positioning ourselves to meet this demand over a multi quarter basis.
For all the reasons, we've articulated predictability in the out quarters. It remains below levels, we would prefer.
We do however believe we are positioned to deliver at least modest sequential growth for each quarter in the back half.
Turning now to our strategic objectives on slide 14.
Headed into 2021, we laid out three strategic imperatives.
Grow revenue faster than the EMS market.
Invest in the infrastructure and talent for sustainability and grow earnings faster than revenue taking advantage of the leverage in our model.
And looking at these objectives.
There is equally applicable today as they were then.
Not only do they remain central to how we manage the business, but they are also core tenants to achieving or over achieving the midterm financial targets, we set out to achieve by the time, we exit 2022.
As such we intend to continue reporting our progress on each of these objectives during the year.
First we said we would grow revenue even in this constrained environment we.
The investments we've made both human and capital coupled with new program wins based on our strong differentiated value proposition began to deliver a return on that investment in 2021.
This growth was supported by a renewed program win momentum at existing customers and an acceleration in bookings amid new customer logos.
As programs can take years to fully ramp.
It can have 2021 in early 2022 are beginning to show the fruits of that labor.
Revenue in the March quarter grew 26% year over year.
Representing the fourth quarter in a row of year on year growth.
Part of our differentiation and why we win is our superior engineering services.
These services are key in any market conditions as they are a value added gateway to deeper partnerships and greater opportunities.
However in times of labor tightness, they take on an increased significance.
As it represents a source of flex capacity for our customers who might otherwise.
The ability to quickly add resources.
To support our new program.
This high value engineering work is opening doors to incremental manufacturing opportunities for benchmark.
Our objective was to achieve a 70% attach rate of engineering services to manufacturing bookings.
We are pleased to report that in the first quarter, we achieved that goal.
Second we said, we would invest in sustainable infrastructure and talent.
Over the past year, we've continued to make investments in shared services, such as human resource systems employee development and cyber security to ensure that our shared infrastructure can scale.
We are also investing in to add capabilities and engineering and manufacturing as requested by our customers, while effectively managing our SG&A expenses.
Also to meet customer demands, we continue to invest in physical capacity, particularly in our precision technologies sites in support of continued growth in our semi cap sector.
In parallel we've made meaningful progress on our ESG and sustainability initiatives.
Culminating last month with our publishing our benchmarks first annual sustainability report, which lays out our current.
Hey.
Plans and progress on our ESG journey.
Encourage you to download a copy from our website to learn more about our progress in this important area.
And third we said we'd grow earnings faster than revenue building upon our commitment to return to revenue growth. We set the objective to deliver leverage to the bottom line at both the gross and operating expense line operating expense lines.
Supply chain headwinds notwithstanding.
Our increased volumes manufacturing efficiencies and a mix shift to higher margin products combined with operating expense controls on the higher revenue level has improved operating margin leverage.
In the first quarter 2022, non-GAAP earnings grew 110% year over year and grew four times faster than the already impressive rate of revenue growth.
Suffice to say I'm proud of the way, we continue to execute to the plan and I'm confident that with our backlog of demand and strong bookings momentum we are well positioned to continue to deliver to our objectives throughout the rest of 2022.
Let's now turn to slide 15.
Back in the fall of 2020, we laid out to mid term model for the company, which we committed to achieve by the time, we exit 2022.
In 2021, and we've made steady progress against these goals laying a foundation to build on in 2022.
I'm pleased to report that in Q1 2022, we achieved three of these four targets.
Revenue growth of 26% is that multiples of the EMS market growth rate and represents significant share gain in the high value markets we participate.
With quarterly revenue now above the 2019 levels. This demonstrates that we not only overcame the COVID-19 revenue impact of the last two years.
But we also overcame the revenue loss of a major low margin customer program that we decided to not renew.
With the higher revenue and continued operating expense discipline. We also achieved our non-GAAP operating expense ratio target coming in at five 7% in Q1, which was better than our target of less than 6%.
Finally, we delivered non-GAAP operating margin in March of three 4%, which was at the bottom end of our target range.
Clearly, we have room for further improvement, but while others have been cutting their forecast due to supply chain issues. Our team has overcome these external challenges and stay focused on continuing to improve our business model, while we build a foundation for sustainable growth.
In summary, if you will turn to slide 16.
Benchmark is encouraged by the demand trends among our target sectors and we're confident we have the team knowhow and differentiation to go after it.
With this as the backdrop and in consideration of our March quarter performance and our June quarter outlook, We expect 2022 revenue growth to be above our mid term model.
At 10% or better depending on our ability to close supply.
With our current revenue level, we expect non-GAAP operating expenses for the year to come in on track to our mid term model less than 6%.
Finally, we anticipate some of the operational detractors to gross margin were facing in Q2.
To improve in the second half of 2022, which will translate to a stronger operating margin.
The improvements in the second half will enable us to achieve the midterm model and grow earnings faster than revenue.
I look forward to updating you on our continued progress in the coming months as we successfully navigate these interesting times.
With that I'll now turn.
Freighter to help us conduct our Q&A session.
Operator over to you.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question will come from Jim Ricchiuti with Needham <unk> Company you May now go ahead.
Thank you.
Congrats on the quarter.
Wanted to go.
Back to.
The two segments that clearly.
Clearly outperformed industrial and semi cap.
Obviously, those areas, where I think well stronger than I believe you were expecting back in early February so.
Be interested to maybe if you could talk about both of those market verticals was this a case of you or you being able to procure components that allows you to ship or was it just some other dynamics within these two market verticals. Thanks.
Yeah, well, maybe I'll start and then let roop out in years Jeff.
Thanks, Jim for the question.
In semi cap.
We do do quite a bit of assembly work, but we also do a lot of precision machining.
Which is quite a bit different right, it's not as dependent on electrical components or board builds or or the like so that's a sophisticated.
High precision machining work.
We've continued to work on our operational efficiency to be able to put more output out.
We've also invested in capital to continue to increase capacity and brought more online. So it's an area we've been going after for a while.
And the demand has been strong we know we're in a bit of a super cycle there.
We do believe that's going to extend into 'twenty three it gets it gets cloudier as you go wave wafer out, but theres certainly a lot of people, indicating this is a very unique semi cap cycle and the front end wafer equipment.
Capital equipment providers are relying on us to produce you know many parts across several customers in that segment.
We've had demand, but it's also it's really been upon us to make sure that where we do need components or even raw materials that we can get them in and we we did we did a bit better than first quarter.
On industrial if you remember it was a few short years ago, we werent happy with our performance. There. We have made some changes we'd we'd won a bunch of new programs and frankly, we're seeing some things ramp there.
And that timing is always a little tough this is a very difficult environment to ramp new programs as youre pursuing parts and working to get those we've been working with in partnership with a number of customers to kind of free things up and it's the kind of environment, where a lot of the components may arrive really late in the quarter and it really comes.
Down to how well the team can execute to make shipments to our customers and the.
Frankly, the demand is has been there.
The output is a little more unpredictable.
Not unpredictable, but hard to call exactly because of the timing of the materials coming in and so you know we executed well I get a credit our team.
Even in the face of <unk>.
We'll have disruptions with COVID-19 .
Mentioned in the script, we had a tornado hit a building and in Austin that.
It was disrupted there for a week.
We've just done a nice job of staying focused on delivering on that.
Rick do you want to add anything on those you covered it so I think things really well just one thing in each area really with the strengthening in the semi cap is across our customer set.
And that's that's a.
Improving trend if you will across all of those customers and on the industrials, We've got a lot of ramps and new program ramps in our operations teams that really ramping effectively and.
And we proactively putting capacity in place and support and as we mentioned in Mexico as an example for the industrials and so that's.
That is helping support.
The performance as well.
Got it that's helpful color.
Just wanted to follow up with a question on the build in inventory.
Ken.
You say, whether this inventory build.
As we think about it is specific to customers or verticals.
Or is there still a large component of that.
Commodity components that are associated with this buildup in inventory.
Yes, Jim.
I'll start this is where.
The inventory build is purposeful with the amount of.
The strength that we have on the demand side and the amount of unfilled demand that we mentioned.
There is strong demand across the board in all of our sectors. The other aspect here is the supply chain environment continues to be very challenging it that those challenges cut across the various component categories.
The other thing is youre seeing late day commits and reschedule in these sort of things and so really our ops teams have done a really effective job in working with our customers to understand.
What the forecast looks like prioritizing that forecast in identifying the parts to support the bills that we are executing and so as we think about this inventory it's purposeful.
It cuts across and it's not just the primary buildup is in the raw materials area and it really is across all of those sectors. So we can get those parts to be able to fulfill as those parts come in they the demand levels that we have across the sectors.
I might just add to that that Jim. We we don't you know, we're not chasing broad commodity categories, where it's very much linked to the demand of a particular customer and their programs. So it's not like we're buying parts to be just for the sake of aggregating we do aggregate demand if customers have the same component across multiple customers or.
So of course to leverage our scale, but but we're not it's related to the to the demand in the forecast that's committed by customers, then and frankly, they're obligated based on that forecast. So it's.
It's not it's not like we're just you know thinking hey, let's try to corner the market on resistors or even some kind of semiconductor it's really related specifically to the bill of materials that we might be building for those customers I just wanted to clarify that no.
Got it.
Thanks for that maybe just didn't really ties into when you you guys talked about medical being for instance, the fastest growing.
Piece of the business for all of 'twenty two.
I assume that you've got some confidence about that just because of the way you are procuring.
Procuring some specific.
Parts for these.
And we mentioned that I can't remember who has room for either the medical was probably a little more acutely impacted.
Because the way the demand came back in medical for our customer set.
Advanced started to recover but it was further in the last year than it was at the beginning of the year and so by the time, they sort of recovering the lead times it already really extended and so it's taken a bit longer to get the lines are cleared of builds on the medical side, it's not a problem and demand in it.
Was a little bit down which are little lower than we had initially anticipated in Q1, but we know the demand is there we are starting to free things up that'll continue to improve through the year and that's what gives us confidence to still call medical.
A fast growing segment.
Really hasnt, we didn't demonstrate that in Q1, that's fine. Thank.
Thank you.
Our next question will come from Jason Smith.
<unk> with Lake Street, you May now go ahead.
Hey, guys. Thanks for taking my questions I, just wanted to circle back to sort of the upside in Q1 was that driven by a handful of programs here with a pretty broad based.
I would say it's.
We mentioned in.
The answering Jim's right semi cap in industrials really helped drive.
Our primary level of strength, there and theres, a number of customers across both of those market sectors.
Within within that Q1 period, Jason Yeah number of this.
Several of the sectors were up year over year, but those two where the where the leads and that's why we called them out.
Okay, but not.
Not just a select number of programs within each of those and Mario.
No. In fact, we said that was semi cap you had several customers that were pressing for incremental.
You know product so it wasn't it wasn't like one unique I mean, it was really broad broad based strength I would say for sure but those two sectors contributed the most and Jason as we mentioned earlier in the industrial sector sector. We've got a lot of new programs that are ramping.
Helping support that as well.
Okay got it and then I know you alluded to it in your prepared remarks, but how are you thinking about potential kind of COVID-19 restrictions in China, and I guess relatedly given that your footprint or where there is much smaller than some others in the space have you started to see increasing sorry inbound interest for you.
Yes.
We.
I'm not sure I understand the second question, what do you mean by the inbound interest.
I mean, just looking at customers not wanting to run their programs to the China facilities.
Yeah, Yeah, yeah, well I can speak to both as kind of a two part question and then I'll, let roop at.
In terms of Covid.
Obviously Asia is going through a bit of the.
The crown and some of those cycles that the U S went through early very early in the year. So we're watching China closely obviously, we watched it since then and some of those areas get impacted at the end of last quarter didn't didn't impact us we were able to to to mitigate that.
Where our facility is in Suzhou has not been impacted but we're watching it close because China is going through a bit of a surge here those aren't the other regions in Asia for us like Malaysia and Thailand.
We've been dealing with the disruptions through first quarter.
It feels like things are stabilizing.
We feel good about them in the sense that hopefully theyre going to see the same kind of recovery that we experienced here.
And then in terms of demand.
We do like you said have one facility in China.
We built China products for.
Sell in China. So that's worked well for us, but we have had other customers come to us not our own customers, saying, hey, we'd love to be in a low cost region, but we want a near shore to the U S and so we're seeing a lot of demand in Mexico.
Our Mexico facilities, we have a couple and so there is no question that is not a new trend but.
We have had a number of competitive wins and in Mexico, probably with people, saying not so much they want to leave Asia, because we see good demand in in Thailand. For example, but they just they just might say hey, I wanted to build more regionally you know with all the supply chain restrictions and the cost of freight everybody sort of saying hey, its not.
It's not so great to build everything in China and put it on a boat.
Might want to build closer to the consumption, but it might still be really sensitive about being a low cost region. So we're seeing that distribute demand nicely over our our footprint globally.
Okay.
Duke.
Same goes for Europe , we're seeing a lot of interest in our remaining visualization yep Yep.
Okay, and then just the last one from me and I'll jump back into queue. I you did allude to some key commenced which I think is consistent with what you said last quarter and it may be too difficult to give an exact number and certainly not looking for that but how should we think about the stickiness of that.
200 million in unfulfilled demand I mean, what how.
How are you thinking about potential D commenced with in that pipeline.
Well I think.
We are always very cautious in evaluating what that unmet demand is and is there a risk that it potentially.
Can do you can get the committed or is perishable, yeah, and I think we've alluded to that in past periods. What we although we haven't seen that specifically Jason right. What we've seen is actually a growth in overall demand and as we have evaluated that pipeline of unfilled demand.
We've seen it roll into subsequent periods and customers being committed to that and demand that they are seeking.
And in terms of <unk> I mean, we we kind of hoped maybe maybe not easily in the second quarter of last year that hey by first quarter of 'twenty. Two you know we'd be we'd be flushing parts and it's just been it's been a challenging environment and I think Q1 wasn't any really significantly better than.
The back end of 'twenty, one and so we still have suppliers. Unfortunately that stuff has been on order a long time and a D come it can happen.
It's hard for us to characterize that it's not across one given components.
Components supplier, but we still are seeing some disruption there and that's why when we look out and think about the second half of this year, we feel confident enough to take our growth rate from what we said was going to be seven to double digits, but just you know a lot of specificity beyond that particularly in the in the.
<unk> quarters in.
Q4, and it's just hard to fully appreciate whether the environment will be more predictable from a supply standpoint.
But as we've kind of demonstrate with the numbers, we've been putting up in and with the rollover of demand that we can't fulfill in the quarter.
You know we have we have a lot of opportunity from from the demand side, if we can get supply.
Okay. That's perfect I appreciate the color guys. Thanks, Thanks, guys with noise.
Yeah.
Again, if you have a question. Please press Star then one our next question will come from and you saw the storm with Sidoti You May now go ahead.
Thank you for taking my question and congratulations on a great quarter.
Quite a challenging environment.
Alright, Thanks Tanya.
First in the medical.
You said that that kind of softer first quarter was mainly due to an.
Supply chain challenges that the demand is there so instead.
Instead of my sort of back to the pre COVID-19 levels.
That building out well how is that trending I think I think that's fair to say that it's returned to pre COVID-19 level maybe.
Customers have optimism and been able to do more.
It'll be a little hard because people paused and a lot of like elective surgeries. So it might even be above pre COVID-19 and some customers because their people put off things. So the demand is very high but maybe that's not going to be the steady state level over time.
But I think.
That's one element the other element and roop alluded to is that we we've had strong bookings for two years in a row. So you know those bookings and medical can take three years to come to market and so we do have a fair number of new customers added to the mix too. So that's.
Also why our confidence in medical growth is because is pretty good.
Okay. Thank you and then in terms of China.
You said, you don't see and maybe a direct impact from that because it's not really.
Affecting the region you are in.
But do you see maybe an indirect impact of them on that.
Being more challenging.
Yeah components because other.
That's it.
Yes, I guess on your leg lets clarify a couple of things and so yeah, we have electronic suppliers in China, we do see effects from that so we wanted to be clear about that.
Overall supply chain standpoint, with that said our teams have managed that fairly effectively and helping support.
The continued growth in and.
Commitments with our customers right.
Other part of it is you know our China factory just as in into Joe just as all of China has been dealing with Covid had been managing effectively through any kind of COVID-19 considerations in these sort of things and we havent seen as others may add in Shenzhen or other places.
Any stoppages to date.
But they're pretty strict right theres multiple times a day COVID-19 testing I mean, it's complex right now the operating environment. We're fortunate our region hasn't had a formal shutdown when <unk> did go down you know because its sort of electronic center. I mean, we were glad that it was a week and it didn't persist because if that if that were to.
Go down for a significant amount of time it might affect one of our component suppliers more dramatically.
So you know you say just four or five days really matter I mean, right now everything matters, but.
We're not alone in that I think a lot of the world lives with a lot of boards and components coming from that region. So we're all paying close attention, but I don't think.
We have any unique risks there.
In fact, as you know with more and more of our competitors I mean, we probably have the smallest actually factory footprint in China.
But we do it at one facility in Suzhou.
Okay. Thank god that in terms of the inventory level as you say.
I will send you off recurring inventory to be ready when the components come in but.
We expect that to sort of remain at the same level throughout the year I think in the first quarter.
Yeah, I mean, it's interesting the way we kind of see it is that the supply chain market is going to continue to be challenging through the year, but as we look at how our inventory will track through Q2, we think that this period really will be kind of the peak in Q2, we do expect it to have a gradual decline.
Client as we get through 'twenty, two and continue to fulfill it.
Against the demand we have.
Yeah.
Okay. Thank you that was all for me. Thank you. Thank you Sonya.
Yes.
This concludes our question and answer session I would like to turn the conference back over to the management team for any closing remarks.
Thank you for joining our call today do you have any follow up questions as always we encourage you to reach out to the Investor Relations Department and we'll be happy to get those addressed.
Outside of that wish everyone, a happy afternoon or evening, depending on your location and look forward to sharing with you our second quarter results in July with July's earnings call. Thank you very much.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.