Q2 2023 Benchmark Electronics Inc Earnings Call
Speaker 1: I'm sorry you're lying out there. for that period.
Speaker 2: Good day and welcome to Benchmark Electronics Inc. 2nd Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode.
Speaker 2: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Paul Manski with Benchmark Electronics. Please go ahead. Call the number at the back to cry or call the invite number number.
Speaker 3: Thank you, Betsy, and thanks everyone for joining us today for Benchmark's second quarter fiscal year 2023 earnings call. Joining me this afternoon are Jeff Bank, CEO and President, and Ruth LaCaragio, CFO . After the market closed today, we issued an earnings release pertaining to our financial performance for the second quarter of 2023.
Speaker 3: and we prepared a presentation that we will reference on this call. Both are available on the investor relations section on our website at bench.com.
Speaker 3: This call is being webcast live and a replay will be available following the call. The company has provided a reconciliation of our gap to non- GAAP measures in the earnings release as well as in the appendix to the presentation.
Speaker 3: 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 which are not statements of historical fact are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings.
Speaker 3: Actual results may differ materially from these statements, most notably due to ongoing supply chain constraints, macroeconomic conditions, and semi-cap equipment spending.
Speaker 3: Benchmark Undertakes no obligation to update any forward-looking statements.
Speaker 3: For today's call, Jeff will begin by providing a summary of our first quarter results. Rup will then discuss our detailed financial results and our third quarter guidance. Jeff will then return to provide more insight on demand trends by sector, business wins, and closing remarks.
Speaker 3: If you would please turn to slide three, I will turn the call over to our CEO , Jeff Bank.
Speaker 3: Thank you, Paul. Good afternoon and thanks to everyone for joining our call today.
Speaker 3: The company executed well in the second quarter as we delivered revenue and operating income above the high end of guidance.
Speaker 4: despite continued weakness in the semi-cap market and lingering component availability issues that impacted some output in the quarter.
Speaker 4: Specifically, we grew revenue 12% year over year in the quarter when excluding supply chain premiums or SCP. We believe assessing our revenue growth excluding the zero margin pass through revenue more accurately reflects company performance.
Speaker 4: As an example, SCP was 17 million in Q2 2023 and 91 million in Q2 2022.
Speaker 4: This represents a $74 million year-over-year reduction.
Speaker 4: Excluding SCP, non-GAAP gross margins were 9.4%, up a point and a half from the prior year, while non-GAAP operating margins were 4.1%, up from 3.6% last year.
Speaker 4: This enabled us to deliver non-GAP PPS at the higher end of our guidance range.
Speaker 4: Inventory came down modestly in the quarter, but we still have more to do to achieve our days of inventory goals.
Speaker 4: Lastly, we generated positive operating and free cash flow in the quarter.
Speaker 4: including advanced computing, industrials, medical, and next generation communications.
Speaker 4: Although our sequential performance in semi-cap was encouraging, industry commentary around potential timing of the broader market recovery appears to be shifting deeper into 2024.
Speaker 4: Nonetheless, we firmly believe in the constructive long-term secular trends underpinning our anticipated future growth in this sector and are investing accordingly.
Speaker 4: We remain cautiously optimistic on the demand profile across our diversified sectors, which we believe will allow us to weather the current market uncertainty while continuing to deliver to our profitability targets.
Speaker 4: Before turning it over to Ruth, I'd like to highlight a couple of key announcements we've recently made.
Speaker 4: reinforcing our ability to attract world-class talent to benchmark.
Speaker 4: David Mozadez has joined us as Chief Commercial Officer, which is the new role at Benchmark.
Speaker 4: David's 30 plus years of industry experience in operations, engineering, sales and marketing across tech and specifically within EMS make him an incredibly valuable strategic addition to the team.
Speaker 4: David will direct Benchmark's commercial strategy, including vertical market sector plans and our global go-to-market approach, leveraging his deep expertise to drive continued business growth.
Speaker 4: At the same time, we also announced Dave Valkanov has joined as our new Chief Operating Officer.
Speaker 4: Dave is a global manufacturing executive known for his successful track record in driving lean principles and operational excellence.
Speaker 4: With over 30 years of experience in sectors such as aerospace and defense, industrial, automotive and semi-cap, he brings extensive global operations knowledge to our team.
Speaker 4: We are very pleased to have both executives on board and I'm confident they will make a significant impact.
Speaker 4: I also want to thank our current chief revenue officer, Rob Crawford, for his contributions over the past four years, and Wishing Wellen his retirement set to begin in August .
Speaker 4: Now, let me pass it over to Ruth to share more detail on the June quarter and our guidance for Q3.
Speaker 3: Thank you, Jeff, and good afternoon. Please turn to slide 5 for our revenue by market sector.
Speaker 3: Total benchmark revenue was $733 million in Q2, which is 6% higher sequentially and 1% higher year-over-year. As Jeff mentioned, excluding the effect of SCP, revenue was up 12% year-over-year in the period.
Speaker 3: The reconciliation of this and our sector level performance can be found in the appendix section of the presentation materials.
Speaker 3: Turning the slide six, medical revenue for the second quarter was up 14% versus the prior year. Our growth was fueled by strength and existing programs and new programs ramping. Semicap revenue decreased 4% year of year in line with our expectations.
Speaker 3: A&D revenue was down 10% year over year.
Defense continues to be challenged by supply availability coupled with the timing of program ramps.
This was partially offset by growth in commercial aerospace.
Industrial is revenue for the second quarter, increased 28% year over year, as new customer programs are ramping in areas, including test and measurement and energy efficiency.
Advanced Computing increased 19% year-over-year as we benefited from the continued execution of multiple high-performance computing programs.
In the next generation communications sector, revenue was up 53% year over year. Our year over year performance was driven by continued secular strength in 5G infrastructure and satellite communications.
In the second quarter, our top 10 customers represented 52% of total revenue.
Please turn to slide 7.
Our gap earnings per share for the quarter was 39 cents. Our gap results included restructuring another one-time cost totaling $3.3 million.
For Q2, our non-GAP gross margin of 9.1 percent decrease 10 basis points sequentially, primarily due to lower revenue within our semi-GAP sector.
Excluding SCP, our gross margin was 9.4% which was in line with guidance.
Our S-GNA was 37.7 million down sequentially because of cost actions taken in the first half coupled with lower variable compensation. Non-GAP operating margin was 4%, excluding SCP, operating margin was 4.1%, representing the high end of our guidance range.
In Q2, 2023, a non-gap effective tax rate was 21.2%. For the quarter, non-gap EPS of 48 cents was 2 cents higher than the midpoint of our guidance.
NON-GAP ROI C in the second quarter was 9.5%.
Please turn to slide eight to discuss the effects of SCP on a trended basis.
In Q2, SCP declined to 17 million versus 18 million in Q1 and 91 million in Q2, 2022.
excluding SCP, a revenue in the second quarter was $716 million, a sequential increase of $39 million or 6% and a year-over-year increase of $79 million or 12%.
Please turn to slide nine to review our cash conversion cycle performance.
Our castinvers and cycle days were 103 in the second quarter compared to 109 days in Q1. The largest contributor to the decrease was a reduction in inventory. Total inventory decreased sequentially in Q2 by 22 million.
Turning this slide 10 for an update on liquidity and capital allocation.
In Q2, we generated 25 million of cash from operations and invested 8 million in cat-backs to support continued growth at our Mexico facilities and enhanced capabilities and our precision technologies business unit.
We expect our CAPEX spending in Q3 2023 to be between 10 and 15 million. For the full year 2023, we expect CAPEX to range between 65 to 75 million.
Our cash balance on June 30th was 245 million.
As of June 30th, we had a 129 million outstanding on our term loan, 300 million outstanding barons against serve of valver and 246 million available to borrow under our revolver. As of June 30th, we had a 129 million outstanding barons against serve of valver and 246 million available to borrow under our revolver.
In Q2, we paid our regular quarterly cash dividend of 5.9 million.
Please turn slide 11 for a review of our third quarter 2023 guidance. We expect revenue, excluding SCP, to range from 680 million to 729.
SHGNA expense will range between 36 and 38 million.
Excluding SCP are non-GAP operating margin ranges forecasted to be 4.7% to 4.9%. As a reminder, this includes approximately 50 basis points of stock-based compensation.
Our non-GAP guidance excludes the impact of 1.6 million in amortization of intangible assets, and 1.1 to 1.5 million of estimated restructuring and other costs.
Our non-gap diluted earnings per share is expected to be in the range of 51 cents to 59 cents or a midpoint of 55 cents.
Other expenses net are expected to be approximately 9 million due primarily to interest expense, which is grown due to the higher rate environment.
We expect that for Q3, our non-GAP effective tax rate will be between 19% and 21%, the weighted average share account of 35.7 million. And with that, I'll turn the call back over to you, Jeff.
Thank you, Rup. Please turn the slide 13.
All metrics I reference here are related to demand trends we are seeing by sector are excluding the effect of SCP.
In medical, we continue to see strong demand from our existing products while also ramping new programs. Our particularly encouraged by the strong demand we are seeing in the defibrillator sub-sector as the benefits of having these life-saving devices readily accessible are becoming increasingly well understood.
We continue to build on our future success during this past quarter, securing new wins across our offerings.
For example, in manufacturing, we want a program to deliver sub-assembly to use the Medical Sterilization Equipment.
Within engineering, we want an engagement to design fluid pumps used in field applications by the DOD.
Lastly, we were pleased to be awarded a collaborative design engagement with a company to develop cardiovascular treatment devices.
With the continued underlying medical product demand strength and a steadily improving supply chain, we expect solid year-over-year growth in the period and on a full year basis.
Within Semicap, we're encouraged by the better performance in the quarter and believe the March quarter may have been our low point for Semicap revenue in the year.
However, as I mentioned earlier, we have heard from several OEMs that the timing of the broader market recovery may be pushed out a bit further than initially anticipated.
For Q3, we expect Revenant to be relatively flat sequentially.
However, the long-term secular group of members are still very much intact, including civil compensation, the quest for ever decreasing node sizes, and the global efforts to build a broader foundry ecosystem.
We continue to invest in the space to capture disproportionate share as the next up swing commences.
Moving to the A&D sector, we continue to score new wins in defense.
Justice Court will secure the manufacturing wind to provide actuation control modules for an extended range guided multiple rocket system.
Additionally, we expanded an existing engagement with the US Army to manufacture camera systems used in live-round tank gunnery training ranges.
Within commercial arrow, both demand and our ability to meet it continues to improve for us.
Combined, we expect Q3-A&D revenues to be up double digits sequentially and year over year.
Turning to industrials, we position ourselves well to participate in mega trends.
specifically automation, test or measurement, and energy efficiency solutions.
Examples of this in Q2 include a manufacturing win for geospatial devices which enable efficiency and productivity in the agriculture and construction industries.
At the same time, our design engineering teams have secured new business collaborating with customers in areas such as additive manufacturing, environmental controls, and security detection platforms.
Looking forward, supply conditions in industrial are showing improvement, which we anticipate will continue.
We expect sector revenue to grow year-over-year in the quarter and for the full year.
In advance computing, revenues were largely consistent with our guidance provided last quarter.
As a reminder, our advanced computing efforts are not in the support of cloud or data center infrastructure.
Rather, we helped build some of the largest and most sophisticated high performance computing machines in the world. These are often government agencies sponsored and by definition, relatively macro resilient.
We highlighted last quarter that we expected to complete a significant project during the second quarter. This happened, translating to a sequential decline in revenue.
I'll be at still up nearly 20% year over year.
Our third corridor will be the first full corridor without revenue from that completed project, translating the expectations of sequential and year-over-year declines.
With the strong first half performance coupled with a new win, expected to ramp in Q4, we continue to anticipate growth in this sector on a full-year basis.
Lastly, annexation or issued communications, we remain cautious on the sector given the carrier and operator cap expanding rationalization that is going on in the near term.
we remain well positioned to capture investment in broadband infrastructure, demand for satellite communications, and new broadband connectivity programs focused on rural areas.
However, some of these initiatives are exposed to infrastructure deployment delays and macro sensitivity. As such, we expect second-app revenue performance to be challenged with sequential declines in each of the next two quarters.
Although on a full-year basis, we continue to expect growth. In summary, please turn the slide 14. While there is always room for improvement, I'm pleased with the teams' execution in the quarter, despite the macro challenges and semi-capsych locality.
Excluding FCP, benchmark deliver 12% annual revenue growth in the quarter. At the same time, non-gap operating income grew 28% or more than twice the rate of revenue growth. The working capital initiatives we discussed on last quarter's call are beginning to bear fruit with positive operating and free cash flow generated in the quarter.
Looking to the second half, we expect to continue to reduce inventory and maintain our focus on operational execution, particularly as supply chains are expected to continue to improve, enabling us to fulfil more of our customer demand.
We will protect investment from future growth sectors, particularly semi-cap, given our conviction in the long-term secular drivers.
Although uncertain as to the shape of the recovery, we know it will come and we will be ready for it.
These collective efforts give us continued confidence we can grow revenue in the high single digits in 2023 when excluding the effects of SCP.
With that, I'll now turn the call over to the operator to conduct our Q&A session.
We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone.
If you are using a speaker phone, they pick up your hands at the full press and the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and two.
At this time, we will pause the onearily to assemble a rupture.
The first question today comes from Jim Ritudi with Newman Company. Please go ahead.
Hi, good afternoon. I just a question on the supply chain premium revenue that you're talking about. You may have given it, but what are your anticipated for Q3? I believe you said 17.9 is what it was in Q2.
That's right Jim, hey, this is Ruth, we're good to have you. So Q2 was 17 million. We actually didn't guide SCP for Q3 or Q4. So the guide we gave is exclusive of any SCP as we've done throughout the year. As we've seen though, the one thing I guess I'll comment incrementally is just...
Are you seeing new programs get pushed out, or just certain types of new programs get pushed out? Or is it all related to just sort of end markets of existing programs? How would you sort of describe the mix of what you're seeing if things are going to stay flattish? Yeah, I would say it's a little bit of both. And it's good that you kind of dug into that color a little bit, because we just had a super strong year of bookings last year. And a number of those programs certainly expected a lot of activity in 23, and some of those have pushed out. I will say they're still active in the sense that
their next generation tools, so there's no fear about losing a win or whatever, but it's like where an OEM might have said, hey, let's build six tools this year. Maybe now we're building one. So that's weighed a little bit, and we sort of anticipated going – when we kind of recast it in February , we probably anticipated that we would see more activity on the –
new wind front building in 23, and I would say while there's certainly a lot of programs going on, it has moved a bit to the right. And then just we have a broader footprint of winds across tool sets, whether it's
Flatish in the third quarter. It's just, we sort of anticipate initially that fourth quarter we'd be preparing for a huge ramp up in Q4. And now we're just hearing signals that hey, it may be a little longer. While there's certainly demand, we're seeing some strength in some of the areas that are under restriction. On some of the legacy nodes, we're seeing people purchase those tools and there's OEMs are looking to fulfill that. But I also would say some of the benefits of the CHIPS Act.
I don't see that at the beginning of 24. It just recently was published that some of the builds here in Phoenix Valley are taking longer just because of labor force and such to build those new fabs here in the valley as an example.
So still long in the space and believe that the ups, swing when it happens will be significant, but right now we're just not calling it in 23.
that came in in previous quarters that are ramping that we just expect to see throughout 23. What we can say is commercial arrow has performed more consistently through the year so far and has been an upward trend cycle.
As a reminder, if you wish to ask a question, please press star and one to be joined into the question queue. The next question comes from Anya Satterstrom with the Dodi. Please go ahead. Anya Satterstrom Hi, and thank you for taking my question. So I'm just curious, did you quantify how much revenue you left behind due to the supply chain challenges? I don't know that we specifically called it out, but it was north of 100 million that we've kind of carried over. It's come down some over the last six months. I don't know if we addressed it on last quarter's call.
Obviously, if supply chain frees up, we will fulfill more of that, but we still have a fair amount that is unfulfilled rolling into the second half of this year.
Okay, thank you. And what other opportunities do you have to improve the cash flow other than bringing down inventory?
Well, I mean, I think we've got a number of items. Part of it is inventory with the inventory we have. And so we're actively working with our customers on aligning the inventory levels and the demand schedule to the clear to build, these sort of things. And I think those are really the primary. With that said,
We are obviously making sure that AR collections were on top of these sort of things. The other things we are doing more strategically in terms of strategic suppliers and terms, aligning those terms more effectively as well as finding greater flexibility from that standpoint within those terms. So it is a multi-faceted...
Okay, thank you. And then just lastly, in terms of the semi-cap and that being pushed out a bit, how do you think that's going to affect your margins in terms of capacity utilization? Yeah, maybe I'll start in terms of from a margin standpoint. Maybe Jeff can add incremental color. I think, you know, as we talked about semi-cap, especially the precision machining side, the semi-cap overall for us is a very strong market sector from a gross margin standpoint.
We are making investments on a concurrent basis. It's why CapEx has – we've provided the range that we have. And we're going to continue to invest in SemiCap because it is cyclical, and that market upturn is coming. What we have done is paste out those investments effectively such that when they come online –
how they might be a drag on margins is reduced or limited. And then of course, as Jeff said, we've got some new programs that are starting to ramp there. And so all of this combined with the expectation that it will recover is going to bode well from an overall enterprise margin standpoint.
and in the interim we're very cognizant of managing the margin profile as we work through this softness.
Yeah, maybe I would just add, you know, on the EMS side of the business, you know, operational efficiency is improving, which is great. I think the incremental revenue that we've seen and product shipments has given us, you know, helps in areas of absorption. So our margins are performing quite well.
you know you saw that in 2Q and you'll see it in the guide without the recovery of semi-cap. So you know we kind of look forward to semi-cap is on the higher end of our corporate gross margins so when we're dealing with the downturn now
Thank you. That was all from me. Thanks, Anya. Good. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Paul Manske for any closing remarks. Thank you, Betsy, and thank you, everyone, for participating in Benchmark's second quarter 2023 earnings call. Before we go, I'd like to remind listeners that we'll be attending the 12th annual Needham Virtual Industrial Tech Robotics and Clean Tech one-on-one conference on August 7th. With that, thank you again for your support, and we look forward to speaking with you soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.