Q2 2024 Benchmark Electronics Inc Earnings Call

Good day, everyone, and welcome to today's Benchmark Second Quarter 2024 earnings call and webcast. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session.

Operator: 2024, earnings call, and what. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note, today's call will be recorded, and I will be standing by should. It is now my pleasure to turn the conference over to Paul Mansky, Investor Relations at Benchmark Electronics. Please go ahead.

Please note, today's call will be recorded and I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Paul Mansky with Investor Relations at Benchmark Electronics. Please go ahead.

Paul Mansky: Thank you, Chloe, and thanks, everyone, for joining us today for Benchmark's second quarter 2024 earnings call. Joining me this afternoon are Jeff Benck, CEO and President, and Arvind Kamal, Interim CFO. After the market closed today, we issued an earnings release pertaining to our financial performance for the second quarter of 2024, and we have prepared a presentation that we'll reference on this call. Both are available online under the investor relations section of our website at Bench.com. This call is being webcast live, and a replay will be available online following the call.

Paul Mansky: Thank you, Chloe, and thanks, everyone, for joining us today for Benchmark's second quarter 2024 earnings call.

Speaker Change: Joining me this afternoon are Jeff Benck, CEO and President, and Arvind Kamal, Interim CFO .

Speaker Change: After the market closed today, we issued an earnings release pertaining to our financial performance for the second quarter of 2024, and we have prepared a presentation that we'll reference on this call.

Speaker Change: Both are available online under the investor relations section of our website at Bench.com. This call is being webcast live and a replay will be available online following the call. The company has provided a reconciliation of our gap to non- GAAP measures in this earnings release, as well as in the appendix to the presentation.

Paul Mansky: The company has provided a reconciliation of our gap to non-gap measures in this earnings release as well as in the appendix to the presentation. Please take a moment to review the forward-looking statements disclosure 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 that involve risks and uncertainties, as described in our press releases and SEC filings. Actual results may differ materially from these statements. Benchmark undertakes no obligation to update any forward-looking statement.

Speaker Change: Please take a moment to review the forward-looking statements disclosure on slide 2.

Speaker Change: 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 Change: Actual results may differ materially from these statements.

Paul Mansky: For today's call, Jeff will begin by providing a summary of our second quarter performance. Arvind will then discuss our detailed financial results and provide our third quarter guidance. Jeff will then return to share more insight into demand trends by sector, new business wins, and close with some final remarks. If you'll please turn to slide 3, I will turn the call over to our CEO, Jeff Benck. Thank you, Paul.

Speaker Change: Benchmark undertakes no obligation to update any forward-looking statements.

Speaker Change: For today's call, Jeff will begin by providing a summary of our second quarter performance. Arvind will then discuss our detailed financial results and provide our third quarter guidance.

Speaker Change: Jeff will then return to share more insight into demand trends by sector, new business wins, and close with some final remarks. If you'll please turn to slide three, I will turn the call over to our CEO , Jeff Benck.

Jeffrey W. Benck: Good afternoon, and thanks to everyone joining our call today. Our outstanding second quarter results are another proof point of our consistent progress toward our long-term operating objectives. We met or exceeded our guidance range for revenue, margin, non-GAAP BPS, and free cash. Let me step through a few highlights.

Jeffrey W. Benck: Thank you, Paul. Good afternoon, and thanks to everyone joining our call today. Our outstanding second quarter results are another proof point of our consistent progress to our long-term operating objectives.

Jeffrey W. Benck: We met or exceeded our guidance range for revenue, margin, non-GAAP EPS, and free cash flow.

Jeffrey W. Benck: Total revenue of $666 million was above the high end of our guidance range. We were pleased with sequential and year-over-year strength in A&D and SEMICAP, which, despite anticipated softness in the industrials, medical, and advanced computing and communications sectors, allowed us to outperform on revenue. Our non-GAAP gross margins again exceeded 10%, marking the sixth consecutive quarter of year-over-year margin expansion. Our non-GAAP operating margin of 5.1% was above the high end of our guidance.

Jeffrey W. Benck: Let me step through a few highlights.

Jeffrey W. Benck: Total revenue of $666 million was above the high end of our guidance range.

Jeffrey W. Benck: We were pleased with sequential and year-over-year strength in A&D and SEMICAP, which despite anticipated softness in industrials, medical, and advanced computing and communications sectors, allowed us to outperform on revenue.

Jeffrey W. Benck: Our non-GAAP gross margins again exceeded 10%, marking the sixth consecutive quarter of year-over-year margin expansion.

Jeffrey W. Benck: Our non-gap operating margin of 5.1% was above the high end of our guidance. This represents a 60 basis point expansion year over year.

Jeffrey W. Benck: This represents a 60 basis point expansion year over year. This margin performance, coupled with the revenue upside, enabled us to deliver $0.57 in non-GAAP earnings per share in the quarter, also above the high end of guidance. At the same time, we continue to benefit from the working capital initiatives we put in place last year. Notably, second quarter inventory was down $38 million versus last quarter, which was a key enabler to us being able to deliver positive free cash flow of $47 million.

Jeffrey W. Benck: This margin performance coupled with the revenue upside enabled us to deliver 57 cents in non-GAAP earnings per share in the quarter, also above the high end of guidance.

Jeffrey W. Benck: At the same time, we continue to benefit from the working capital initiatives we put in place last year. Notably, second quarter inventory was down $38 million versus last quarter, which was a key enabler to us being able to deliver positive free cash flow of $47 million.

Jeffrey W. Benck: We have now generated over $230 million in free cash flow over the last four quarters. Although there's work left to be done, I'm pleased with our team's consistent execution and the results that they deliver. Now, let me pass it over to Arvind to share more details on the June quarter and guidance for Q3 2024. Thank you, Jeff, and good afternoon.

Jeffrey W. Benck: We have now generated over $230 million in free cash flow over the last four quarters.

Jeffrey W. Benck: Although there's work left to be done, I'm pleased with our team's consistent execution and the results that they delivered. Now let me pass it over to Arvind to share more details on the June quarter and guidance for Q3 2024.

Arvind Kamal: Please turn to slide 5 for our revenue by market sector. As Jeff mentioned, our total revenue in Q2 was $666 million. Semi-capital revenue increased 5% year-over-year. We continue to see signs of improvement in the market and are well positioned to capitalize; industrial revenue decreased 15%. The decline was driven by reduced demand from existing customers, partially offset by new program ramps.

Arvind Kamal: Thank you, Jeff, and good afternoon. Please turn to slide 5 for our Revenue by Market Sector.

Arvind: As Jeff mentioned, our total revenue in Q2 was $666 million.

Arvind: Semicap revenue increased 5% year-over-year. We continue to see signs of improvement in the market and are well positioned to capitalize on it.

Arvind: Industrial revenue decreased 15%. The decline was driven by reduced demand from existing customers, partially offset by new program ramps.

Arvind Kamal: We believe we'll return to year-on-year growth in the sector as we exit this year. Medical revenue was down 23 percent. We continue to see inventory rebalancing and end-demand weakness impacting medical devices. This will take at least a few more quarters to work. Andy, revenue was up 36%. Commercial aerospace demand remains strong, both within aviation and space applications. Meanwhile, we continue to see robust demand within defense, where we're benefiting from existing program ramps and the launch of new programs.

Speaker Change: We believe we'll return to year-on-year growth in the sector as we exit this year.

Speaker Change: Medical revenue was down 23%.

Speaker Change: We continue to see inventory rebalancing and end-demand weakness impacting medical devices. This will take at least a few more quarters to work through.

Andy: ANDI revenue was up 36%. Commercial aerospace demand remains strong, both within aviation and space applications.

Andy: Meanwhile, we continue to see robust demand within defense, where we're benefiting from existing program ramps and the launch of new programs.

Arvind Kamal: We expect this to continue throughout the balance of the year. Finally, as we mentioned last quarter, going forward, we'll be reporting Advanced Computing and Next Generation Communications as one sector, or AC&C. This aligns more closely with how we manage these sectors internally. ACNC decreased 26% year-over-year. This decline was driven by several large HPC programs being completed earlier in the year, coupled with continued weakness in our communications. Please turn to slide 6.

Andy: We expect this to continue throughout the balance of the year.

Andy: Finally, as we mentioned last quarter, going forward we'll be reporting advanced computing and next-generation communications as one sector, or AC&C. This aligns more closely with how we manage these sectors internally.

Andy: AC&C decreased 26% year-over-year. This decline was driven by several large HPC programs being completed earlier in the year, coupled with continued weakness in our communications business.

Arvind Kamal: Our GAAP earnings per share for the quarter was $0.43. Our non-GAAP EPS was $0.57, which exceeded the high end of our guidance range of $0.48 to $0.54. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, and restructuring expenses. For Q2, our non-GAAP gross margin was 10.2%. This represents a 20 basis point increase sequentially and a 100 basis point increase year-over-year. Non-Gap SG&E Expense was $33.8 million, down 3% sequentially and down 1% year-over-year. Non-GAP operating margin was 5.1%, up 20 basis points sequentially and up 60 basis points year-over-year driven by gross margin expansion. Our second quarter non-gap effective tax rate was 23%.

Andy: Please turn to slide 6.

Andy: Our gap earnings per share for the quarter was 43 cents.

Andy: Our non-GAAP EPS was $0.57, which exceeded the high end of our guidance range of $0.48 to $0.54.

Andy: As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, and restructuring expenses.

Andy: For Q2, our non-gap gross margin was 10.2%. This represents a 20 basis point increase sequentially and a hundred basis point increase year-over-year.

Andy: non-GAAP SG&E expense was $33.8 million, down 3% sequentially, and down 1% year-over-year.

Andy: non-GAAP operating margin was 5.1%, up 20 basis points sequentially, and up 60 basis points year-over-year, driven by gross margin expansion.

Andy: Our second quarter non-gap effective tax rate was for 23%.

Arvind Kamal: Non-GAAP RIC in the second quarter was 9.9%. Please turn to slide 7 for Trended Financials on a Non-GAAP Agenda. Regardless of the level of demand strength in our end markets, we maintain a sharp focus on protecting margins, which continues to expand year on year due to our high value focus and expense. Please turn to slide 8 for a discussion of our cash conversion cycle performance. Our cash conversion cycle days in the quarter were 90 days compared to 94 days in Q1.

Andy: non-GAAP RIC in the second quarter was 9.9%. Please turn to slide 7 for trended financials on a non-GAAP basis.

Andy: Regardless of the level of demand strength in our end markets, we maintain a sharp focus on protecting margin, which continues to expand year-on-year due to our high value focus and expense discipline.

Andy: Please turn to slide 8 for discussion of our cash conversion cycle performance.

Andy: Our cash conversion cycle days in the quarter were 90 days compared to 94 days in Q1.

Arvind Kamal: This four-day improvement was primarily driven by a $38 million reduction in inventory during the quarter. Please turn to slide nine for an update on liquidity. Free cash flow generation continues to be a key performance metric for the company. In Q2, we continued to execute on our working capital efficiency plan, which, combined with our net income performance, enabled us to generate $56 million in operating cash flow and $47 million of free cash flow during the period.

Andy: This four-day improvement was primarily driven by $38 million reduction in inventory during the quarter.

Andy: Please turn to slide 9 for an update on liquidity.

Andy: Free cash flow generation continues to be a key performance metric for the company.

Andy: In Q2, we continued to execute on our working capital efficiency plan, which, combined with our net income performance, enabled us to generate $56 million in operating cash flow, and $47 million of free cash flow in the period.

Arvind Kamal: Given our first top performance and forecast throughout the balance of the year, we are again raising our full year 2024 free cash flow estimate. We now expect to deliver greater than $120 million for the year. Our cash balance on June 30th was $310 million, a sequential increase of $14 million. In the June quarter, we leveraged our free cash flow performance to further reduce debt by $26 million. As of June 30th, we had $126 million outstanding on our term loans.

Andy: Given our first half performance and forecast throughout the balance of the year, we are again raising our full year 2024 free cash flow estimate.

Andy: We now expect to deliver greater than $120 million on the year.

Andy: Our cash balance on June 30th was $310 million, a sequential increase of $14 million.

Andy: In the June quarter, we leveraged our free cash flow performance to further reduce debt by $26 million.

Andy: As of June 30th, we had $126 million outstanding on our term loan, $165 million outstanding against our revolver, and $381 million available to borrow under our revolver.

Arvind Kamal: 165 million outstanding against our revolver, and 381 available to borrow under our revolver. As of the end of the quarter, we have returned to being net cash positive. We invested approximately $9 million in CapEx in Q2 in support of continued growth and enhanced capabilities in both our Mexico and Penang facilities. We expect Q3 CapEx to be between $10 and $14 million. On a full year basis, we anticipate CapEx to be in the range of $45 to $55 million. In Q2, we paid cash dividends of $5.9 million. We did not repurchase any shares in Q2, as of June 30th.

Andy: As of the end of the quarter, we have returned to being net cash positive.

Andy: We invested approximately $9 million in CapEx and Q2 in support of continued growth and enhanced capabilities in both our Mexico and Penang facilities.

Andy: We expect Q3 CapEx to be between $10 and $14 million.

Andy: On a full year basis, we anticipate CapEx to be in the range of $45 to $55 million.

Andy: In Q2, we paid cash dividends of $5.9 million.

Arvind Kamal: We had approximately $155 million remaining in our existing share repurchase authorization; please advance to slide 11. Turning to Guidance. We expect Q3 revenue to be in the range of $630 to $670 million. We expect non-gap gross margins to be approximately 10%, consistent with the last several quarters. SG&A expense is expected to be within a range of $33 to $35 million, and the non-gap operating margin is expected to be between 4.8 and 5%. As a reminder, non-GAAP operating income excludes approximately $4.5 million of stock-based compensation, $1.2 million of amortization of intangible assets, and $1 million of estimated restructuring and other expenses.

Andy: We did not repurchase any shares in Q2. As of June 30th, we had approximately $155 million remaining in our existing share repurchase authorization.

Andy: Please advance to slide 11.

Andy: Turning to guidance, we expect Q3 revenue to be in the range of $630 to $670 million.

Andy: We expect non-GAAP gross margins to be approximately 10% consistent with last several quarters. SG&A expense is expected to be within a range of $33 to $35 million.

Andy: non-GAAP operating margin is expected to be between 4.8 and 5 percent.

Andy: As a reminder, non-GAAP operating income excludes approximately $4.5 million of stock-based compensation, $1.2 million of amortization of intangible assets, and $1 million of estimated restructuring and other expenses.

Arvind Kamal: Our non-GAAP diluted earnings per share is expected to be in the range of 52 and 58 cents. Other expenses, net, are expected to be approximately $6 million. Although interest expense is expected to decline sequentially, this will be partially offset by increased foreign exchange headwinds. We expect that in Q3, our non-GAAP effective tax rate will range from 22% to 24%, with a weighted average share count of approximately $36.5 million. On a fiscal year basis, we believe the average 2024 effective tax rate should be approximately 23 percent.

Andy: Our non-GAAP diluted earnings per share is expected to be in the range of 52 and 58 cents.

Andy: Other expenses net are expected to be approximately $6 million. Although interest expense is expected to decline sequentially, this will be partially offset by increased foreign exchange headwinds.

Andy: We expect that in Q3, our non-GAAP effective tax rate will range from 22% to 24%, with a weighted average share count of approximately $36.5 million.

Jeffrey W. Benck: On a fiscal year basis, we believe the average 2024 effective tax rate should be approximately 23%. And with that, I'll turn the call back over to you, Jeff.

Arvind Kamal: And with that, I'll turn the call back over to you, James. Thanks, Arvind. Please turn to slide 13.

Jeffrey W. Benck: Let me start with some further color on our performance by sector. Within SEMICAP, our second quarter performance was up 5% year-over-year and 4% sequentially, a bit better than our expectations entering the quarter as we continue to gain share. We're starting to see signs of recovery from existing programs within key customers while at the same time benefiting from several new wins which are beginning to ramp up. This win momentum continued in the second quarter, highlighted by a large new program win at an OEM where we're becoming a second source to support the projected growth. This quarter also saw us continue to build upon our engineering wins, reinforcing that we are not only a trusted supplier in building semiconductor capital equipment but increasingly as a design partner.

Jeffrey W. Benck: Thanks, Arvind.

Jeffrey W. Benck: Please turn to slide 13. Let me start with some further color on our performance by sector. Within SEMICAP, our second quarter performance was up 5% year over year and 4% sequentially, a bit better than our expectations entering the quarter as we continue to gain share.

Speaker Change: We're starting to see signs of recovery from existing programs within key customers, while at the same time benefiting from several new wins which are beginning to ramp.

Speaker Change: This win momentum continued in the second quarter, highlighted by a large new program win at an OEM where we're becoming a second source to support the projected growth plan.

Speaker Change: This quarter also saw us continue to build upon our engineering wins, reinforcing that we are not only a trusted supplier in building semiconductor capital equipment, but increasingly as a design partner.

Jeffrey W. Benck: We continue to be optimistic about the multiple catalysts driving future growth in the semi-capital sector and are pursuing this with continued capital investment, as evidenced by the planned opening of our newest building in Penang, Malaysia, later this quarter. Near term, although some customers are still bringing inventory levels down, we believe we are in the early stages of the market's recovery, which we believe will enable us to grow semi-capital revenue in the low double-digit range this year.

Speaker Change: We continue to be optimistic about the multiple catalysts driving future growth in the semi-cap sector and are pursuing this with continued capital investment as evidenced by the planned opening of our newest building in Penang, Malaysia, later this quarter.

Speaker Change: Near term, although some customers are still bringing inventory levels down, we believe we are in the early stages of recovery, of the market's recovery, which we will believe will enable us to grow semi-cap revenue in the low double-digit range this year.

Jeffrey W. Benck: Looking to 2025, signs are pointing to the potential for a broadly improved demand environment. Given our program wins over the last several quarters, coupled with our capacity expansion, I'm confident we're in a great position to capture this opportunity and continue to gain share. In Medical, as we have seen over the last couple of quarters, end-demand softness exacerbated by OEM inventory consumption has challenged sector performance, notably in medical devices. Our June quarter revenue is down 23% year over year.

Speaker Change: Looking to 2025, signs are pointing to the potential for a broadly improved demand environment. Given our program wins over the last several quarters, coupled with our capacity expansion, I'm confident we're in a great position to capture this opportunity and continue to gain share.

Speaker Change: In medical, as we have seen over the last couple of quarters, end demand softness exacerbated by OEM inventory consumption has challenged sector performance, notably in medical devices.

Jeffrey W. Benck: While in the near term we expect these headwinds will persist, we continue to secure new program winds in manufacturing and engineering in both the medical device and biotech subset. Looking forward, we expect these new programs will begin to contribute as we progress through 2025. In the meantime, we expect medical sector revenue to remain consistent with current levels in the second half of 2024.

Speaker Change: Our June quarter revenue is down 23% year-over-year.

Speaker Change: While in the near term we expect these headwinds will persist, we continue to secure new program winds in manufacturing and engineering in both the medical device and biotech subsectors.

Speaker Change: Looking forward, we expect these new programs will begin to contribute as we progress through 2025. In the meantime, we expect medical sector revenue to remain consistent with current levels in the second half of 2024.

Jeffrey W. Benck: Turning to complex industrials, we continue to extend our share in key growth markets with manufacturing wins in the quarter, including test and measurement and automatic ID and data capture solutions. Very importantly, as a sign of future growth in our industrial business, we secured over a dozen engineering wins this past quarter that we expect will lead to manufacturing wins. Industrial's revenue in Q2 was down 15% year-over-year and flat sequentially.

Speaker Change: Turning to complex industrials, we continue to extend our share in key growth markets with manufacturing wins in the quarter, including test and measurement and automatic ID and data capture solutions.

Speaker Change: Very importantly, as a sign of future growth in our industrial business, we've secured over a dozen engineering wins this past quarter that we expect will lead to manufacturing wins.

Speaker Change: Industrial's revenue in Q2 was down 15% year-over-year and flat sequentially.

Jeffrey W. Benck: Although our new program wind momentum continues, we are seeing near-term demand softness impact several of our existing programs. Like many of our peers, we expect these conditions to persist during the September quarter with early indications of a potential return to growth exiting 2024. Turning to A&D, we had another strong quarter of revenue performance, up 36% year-on-year and 3% sequentially. Our defense business continues to see demand strength from both existing business and ramping new program wins.

Speaker Change: Although our new program wind momentum continues, we are seeing near-term demand softness impact several of our existing programs.

Speaker Change: Like many of our peers, we expect these conditions to persist during the September quarter with early indications of a potential return to growth exiting 2024.

Speaker Change: Turning to A&D, we had another strong quarter of revenue performance, up 36% year-on-year, and 3% sequentially.

Speaker Change: Our defense business continues to see demand strength from both existing business and ramping new program wins.

Jeffrey W. Benck: Continued improvement in our supply chain is also benefiting us, as we are more able to fully meet demand. Within aerospace, demand has stayed strong for several quarters with a good balance between commercial air and space applications.

Speaker Change: Continued improvement in our supply chain is also benefiting us.

Speaker Change: as we are more able to fully meet demand.

Speaker Change: Within aerospace, demand has stayed strong for several quarters, with a good balance between commercial air and space applications.

Jeffrey W. Benck: As an example of this, during the quarter, we wanted a substantial expansion of the existing program with a commercial air customer while at the same time winning multiple new manufacturing wins within the space subsector. While these are early stage, the breadth of our momentum here is encouraging. Looking at the September quarter, we expect revenue to grow solidly both on a sequential and year-over-year basis. Given our year-to-day performance and back-half expectations, A&E revenue on a full-year basis is expected to grow in excess of $20 billion. Total AC&C revenue declined 26% year-over-year and 11% sequentially in the June quarter.

Speaker Change: As an example of this, during the quarter, we wanted a substantial expansion of existing program with a commercial air customer, while at the same time winning multiple new manufacturing wins within the space subsector.

Speaker Change: While these are early stage, the breadth of our momentum here is encouraging.

Speaker Change: Looking at the September quarter, we expect revenue to grow solidly both on a sequential and year-over-year basis.

Speaker Change: Given our year-to-day performance and back-half expectations, A&E revenue on a full-year basis is expected to grow in excess of 20 percent.

Speaker Change: Total AC&C revenue declined 26% year-over-year and 11% sequentially in the June quarter.

Jeffrey W. Benck: We expect sector pressures to persist through the back half of the year driven by the completion of several high-performance computing programs in the first half and continued pressure in our communications subsector as a result of significant customer disengagement, as discussed last quarter. Despite the near-term revenue challenges, we continue to win significant new business in the quarter. Just to highlight one, we were awarded manufacturer for a family of wireless transport and access systems, which we expect will contribute to a return to growth in this sector in 2025. In summary, please turn to slide 14.

Speaker Change: We expect sector pressures to persist through the back half of the year driven by the completion of several high-performance computing programs in the first half and continued pressure in our communications subsector as a result of significant customer disengagement as discussed last quarter.

Speaker Change: Despite the near-term revenue challenges, we continue to win significant new business in the quarter. Just to highlight one, we were awarded manufacturing for a family of wireless transport and access systems.

Speaker Change: which we expect will contribute to a return to growth in this sector in 2025.

Jeffrey W. Benck: Once again, I want to thank the benchmark team for another solid quarter built on consistent execution and delivery. Despite the challenging market dynamics, we continue to invest in our customers' success in support of our mutual future growth. Evidence of this is our ability to build on business with both new logos and expanding our share with existing customers, all while driving operating efficiencies to improve margins while bringing costs down for our customers.

Speaker Change: In summary, please turn to slide 14.

Speaker Change: Once again, I want to thank the Benchmark team for another solid quarter built on consistent execution and delivery.

Speaker Change: Despite the challenging market dynamics, we continue to invest in our customers' success in support of our mutual future growth.

Speaker Change: Evidence of this is our ability to build on business with both new logos and expanding our share with existing customers.

Speaker Change: all while driving operating efficiencies to improve margins while bringing costs down for our customers.

Jeffrey W. Benck: As I look at the 2025 objectives we provided back in Q4 of 22, we continue to make steady progress on almost every metric. The one exception is revenue growth, which has been impacted by the macro environment.

Speaker Change: As I look at the 2025 objectives we provided back in Q4 of 22,

Speaker Change: We continue to make steady progress on almost every metric.

Speaker Change: The one exception is revenue growth, which has been impacted by the macro environment.

Jeffrey W. Benck: Despite this demand volatility, we've delivered year-on-year non-gap gross and operating margin expansion every quarter since introducing our 2025 target model. We're well on our way to achieving our goal of greater than 5% non-gap operating margin on a full year basis. Also, per our 2025 targets, we remain committed to working down inventory and driving free cash. Our second quarter inventory was down 157 million year-over-year, helping us to achieve our fifth consecutive quarter of positive free cash.

Speaker Change: Despite this demand volatility, we've delivered year-on-year non-gap gross and operating margin expansion every quarter since introducing our 2025 target model.

Speaker Change: We're well on our way to achieving our goal of greater than 5% non-gap operating margin on a full year basis.

Speaker Change: Also, per our 2025 targets, we remain committed to working down inventory and driving free cash flow.

Speaker Change: Our second quarter inventory was down $157 million year-over-year, helping us to achieve our fifth consecutive quarter of positive free cash flow.

Jeffrey W. Benck: Our focus on inventory is not letting up, and we expect continued improvement. This gives us confidence to increase our free cash flow forecast for 2024 to greater than $120 million. Lastly, we are committed to returning capital to investors. Today, we announce that the Board has approved an increase to our regular quarterly dividend to $0.17 per share, effective immediately.

Speaker Change: Our focus on inventory is not letting up, and we expect continued improvement.

Speaker Change: This provides us confidence to increase our free cash flow forecast for 2024 to greater than $120 million.

Speaker Change: Lastly, we committed to returning capital to investors.

Speaker Change: Today we announce that the Board has approved an increase to our regular quarterly dividend to $0.17 per share. Effective immediately.

Jeffrey W. Benck: Although we did not repurchase shares in the quarter, we intend to do so in coming periods. Looking a bit further out, we are seeing clear indications supporting growth across many, if not all, of our sectors during the course of 2025, and you remain strong. Semicap is poised for re-acceleration, and we believe industrials will begin to recover later this year. Medical and AC&C may take a little more time, but we're cautiously optimistic about the growth for each later this year.

Speaker Change: Although we did not repurchase shares in the quarter, we intend to do so in coming periods.

Speaker Change: Looking a bit further out, we are seeing clear indications supporting growth across many, if not all, of our sectors during the course of 2025.

Speaker Change: A&E remains strong. Semicap is poised for re-acceleration and we believe industrials will begin to recover later this year.

Speaker Change: Medical and AC&C may take a little more time, but we're cautiously optimistic about the growth for each later next year.

Jeffrey W. Benck: In the meantime, we will remain disciplined operators and steadfast supporters of our incredible set of customers. Only by doing this can we best position ourselves to maximize the opportunities in front of us as the demand environment improves. With that, I'll now turn the call over to the operator to conduct our Q&A session. At this time, if you would like to ask a question... Please press the star and 1 on your telephone.

Speaker Change: Meantime, we will remain disciplined operators and steadfast supporters of our incredible set of customers.

Speaker Change: Only by doing this can we best position ourselves to maximize the opportunities in front of us as the demand environment improves.

Speaker Change: With that, I'll now turn the call over to the operator to conduct our Q&A session.

Speaker Change: Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star 2.

Operator: You may withdraw yourself from the queue at any time by pressing start. Fox with Fox Advice. Your line is open. Hi, good afternoon.

Speaker Change: And once more, for your questions, that is star and one.

Speaker Change: We'll move first to Steven Fox with Fox Advisors. Your line is open.

Steven Bryant Fox: I had a few questions. I guess I wanted to start off on the cash flow story. So obviously, like you said, it's been getting better each quarter. But if we look back over the last couple of years, there's been some big ebbs and flows. So how do we think about, maybe through the end of this year, what a normalized cashflow, free cashflow, can look like for the business? And then I had a couple of follow-ups. Yeah, Steve. Hi, this is Arvind.

Steven Bryant Fox: Hi, good afternoon. I had a few questions. I guess I wanted to start off on the cash flow story. So obviously, like you said, it's been getting better each quarter. If we look back over the last couple of years, there's been…

Speaker Change: Some big ebbs and flows. So how do we think about as you as you get maybe through the end of this year? What a normalized cash flow free cash flow can look like on the business and then I had a couple of follow-ups

Arvind Kamal: You know, I think, as we had stated in our prepared remarks, through the first half of the year, we've made $90 million in cash flow. We think it's going to be at least $120 million, if not a little bit greater. You know, the inventory reduction is the backbone of that improvement. So I think you can definitely see that, you know, 30 or 40 million or so, cash flow improvement in the back half of the year. So I think you should start there, first and foremost.

Speaker Change: Yeah, yeah, Steve. Hi, this is Arvind.

Arvind: You know, I think, you know, as we had stated in our prepared remarks, you know, through the first half of the year, we've done $90 million of cash flow.

Speaker Change: We think it's going to be at least $120 million, if not a little bit greater. The inventory reduction is the backbone of that improvement.

Speaker Change: So I think you can definitely, you know, see that, you know, 30 or 40 million or so, you know, cash flow improvement in the back half of the year. So I think you start there first and foremost.

Arvind Kamal: When you look, you know, at normalized cash flow, I mean, I think we kind of stood by this 70 to 90 million on a, you know, go-forward basis. Obviously, we're doing better than that in 24, but we're also coming off a pretty significant inventory balance, and we've kind of driven that down, which has allowed us to free up more cash than we initially projected, and you kind of see us outperforming over the last 12 months.

Speaker Change: When you look, you know, at normalized cash flow, I mean, I think we...

Speaker Change: kind of stood by this $70 to $90 million.

Speaker Change: on a go-forward basis. Obviously, we're doing better than that.

Speaker Change: [inaudible]

Arvind Kamal: But, you know, we do think that it'll moderate, but it'll still be healthy cash flow in 25 years. Okay, so 70 to 90 is kind of a base case going forward. That's how we're thinking about it today. Okay, great.

Speaker Change: Okay, so 70 to 90 is kind of a base case going forward, I guess, is that right?

Jeffrey W. Benck: And then, Jess, can you just expand a little bit on the new plants opening up? You mentioned Mexico and Penang, and you mentioned a few things going on in Penang, but, like, how are we, you know, as business comes back, sort of where's the capacity, what's the capacity being added for right now? And how do you feel that you need to expand over the next few quarters? Yeah, yeah, thanks.

Speaker Change: That's how we're thinking about it today.

Speaker Change: Okay, great. And then, Jeff, can you just expand a little bit on the new plants opening up? You mentioned Mexico and Penang.

Speaker Change: And you mentioned a few things going on at Penang, but like, how are we, you know, as business comes back, sort of, where's capacity, what's capacity being added for right now?

Speaker Change: And how do you feel that you need to expand over the next few quarters? Thanks.

Jeffrey W. Benck: I think you see two dynamics with us. We're clearly expanding our capacity in low-cost, near, you know, regionally and low-cost regions that are close to where consumption is. So, recently, actually, our COO was just over in Romania, where we have a facility over there supporting the European market, and we just almost doubled the capacity in that facility, and it's just coming online with, you know, the opening or expansion of that. That's on a site that we already, you know, have a footprint on.

Jeffrey W. Benck: Yeah, yeah, thanks.

Jeffrey W. Benck: I think you see two dynamics with us. We're clearly expanding our capacity in

Speaker Change: Low-cost near, you know, regionally and low-cost regions.

Speaker Change: that are close to where consumption is. So.

Speaker Change: Recently, actually, our COO was just over in Romania, where we have the facility over there supporting the Europe market.

Speaker Change: And we just almost doubled the capacity in that facility, and it's just coming online with the opening or expansion of that. That's on a site that we already have a footprint on.

Jeffrey W. Benck: Correspondingly, in Mexico, we talked about a new building going on there in Guadalajara, so we're excited about that and the potential that we see there. We still see, you know, many customers want to regionalize and near shore, some back from, you know, China and Asia, but just in general, with the move towards outsourcing, we feel like it made sense for us to continue to add capacity, and we'll be growing a footprint there.

Speaker Change: Correspondingly, in Mexico, we talked about a new building going on there in Guadalajara, so we're excited about that and the potential that we see there. We still see, you know, many customers want to regionalize and near shore.

Speaker Change: Some back from, you know, China and Asia, but...

Speaker Change: just in general with the move towards outsourcing.

Speaker Change: We feel like, you know, it made sense for us to continue to add capacity and we'll be growing a footprint there.

Speaker Change: The one other region that we've had quite a bit of investment is in SEMICAP and in our Precision Technology Group. That's where the new Penang facility sits.

Speaker Change: that we'll be looking to that we I think referenced in the remarks about that opening a brand new building over there in Penang in third quarter which will give us additional machining and clean room and and sophisticated assembly capability

Jeffrey W. Benck: The one other region that we've had quite a bit of investment is in SEMICAP and in our precision technology group. That's where the new Penang facility sits, that we'll be looking to, that we, I think, referenced in the remarks about that opening, a brand new building over there in Penang in the third quarter, which will give us additional machining and clean room and sophisticated assembly capability for the semiconductor market.

Jeffrey W. Benck: That complements an expansion we did here in Phoenix earlier in the year. I think we're well situated for this next upswing in SEMI because we invested in the downturn and now, you know, have available capacity as we expand the business. Great, and if I could squeeze one more in, it sounds like you're kind of calling spring in a semi-capital cycle, so I was just curious what kind of spring you're looking at. Is there frost on the ground, or is it like sunny, and it's baseball season?

Speaker Change: for the semiconductor market. That complements an expansion we did here in Phoenix.

Speaker Change: earlier in the year. So I think we're well situated where this next upswing in SEMI, you know, will be well positioned because we invested in the downturn and now, you know, have available capacity as we expand the business.

Speaker Change: Great, and if I could squeeze one more in. It sounds like you're kind of calling spring and semi-cap cycle, so I was just curious what kind of spring you're looking at it. Is there frost on the ground or is it like sunny and it's baseball season?

Jeffrey W. Benck: We're, you know, incrementally more constructive; we're now talking about double-digit growth this year, in a year that others have said capital spending will be down. You know, I think that we feel like we've done well with incremental wins, and we're starting to see some recovery there. Kind of been led on the memory side, and you know, we've been growing our position there. We're probably a little more exposed to logic when you look at it across the mix. But we are, you know, there's certainly a set of our customers that are seeing incremental improvement in the second half. But then there's a few others that are watching inventory closely.

Speaker Change: We're, you know, we're incrementally more constructive, you know, we're now.

Speaker Change: Talking about double-digit growth this year, in a year that others have said, you know, capital spending will be down. You know, I think that we feel like we've done well with incremental wins, and we're starting to see some recovery there. Kind of been led on the memory side.

Speaker Change: And, you know, we've been growing our position there. We're probably a little more exposed to logic when you look at it across the mix.

Speaker Change: But we are, you know, there's certainly a set of our customers that are seeing.

Speaker Change: [inaudible]

Jeffrey W. Benck: So I would, you know, I would say it's certainly, you know, more than stabilized, and we are starting to see sequential growth. What 25 looks like, I'll be interested to see how the second half shakes out and whether we see it be a super growth year or just, you know, incrementally positive. I think it's a little early to call, you know; we're 25, whether we'll be in the midst of summer by the beginning of 25, but certainly we're more constructive in the space. Great, super helpful. Thank you. Sure. Thanks for the questions. We'll move next to Melissa Fairbanks with Raymond J. Your line is open.

Speaker Change: I would say it's certainly more than stabilized and we start to see sequential growth. What 25 looks like, I'll be interested on how the second half shakes out and whether we see it be a.

Speaker Change: Supergrowth Year or just, you know, incrementally positive. I think it's a little early to call, you know, we're 25, whether we'll be in the midst of summer by the beginning of 25, but certainly we're more constructive on the space.

Speaker Change: Great, super helpful. Thank you.

Speaker Change: Sure, thanks for the questions.

Speaker Change: We'll move next to Melissa Fairbanks with Raymond James. Your line is open.

Melissa Fairbanks: Hey guys, great, great quarter. Great results. Really, really good to see progress on the inventories and the free cash flow as well. I also have a few questions for you. Maybe just a quick follow-up on the expansion in Romania. Is there anything we should be assuming for OPEX with the expansion, or will that just kind of flow through as production and revenue ramp? And have you disclosed which end markets you're servicing from that location? So, sorry to cut you off. Yeah, I can give you a little color on both.

Melissa Fairbanks: Hey guys, great quarter, great results, really, really good to see progress on the inventories and the free cash flow as well. I also have a few questions for you. Maybe just a quick follow-up on the expansion in Romania.

Speaker Change: Is there anything we should be assuming for OPEX with the expansion or will that just kind of flow through as the production and the revenue ramps?

Speaker Change: And have you disclosed which end markets you're servicing from that location? Sorry to cut you off. Yeah, I can give you a little color on both. Good question.

Jeffrey W. Benck: Good question. We certainly have factored that into our operating expenses. There's not a big step up there. It's been a benefit that we've been able to expand in the footprint we're in. So, you know, it's funny, like, the manufacturing is almost doubled, but it was only because we didn't need to add, you know, because there are offices and other parts. So, it was a modest incremental expense, which is great.

Speaker Change: We certainly have really factored that into our operating expense. There's not a big step up there.

Speaker Change: It's been a benefit that we've been able to expand in the footprint we're in. So, you know, it's funny, like, the manufacturers almost doubled, but it was only, we didn't need to add, you know, because there's offices and other parts, so it wasn't, it was a modest incremental expense, which is great.

Jeffrey W. Benck: We're doing a lot in the industrial space in that facility, so I look to industrial as a key kind of growth opportunity there. We also do support some semi-capacitors from there as well, more on the EMS side of things, not machining, but more, you know, complex assembly. So, that's where I would say most of the effort is. Of course, we do have medical customers in Europe, and there's opportunity there for growth, but those are the three focus sectors for that.

Speaker Change: We're doing a lot in the industrial space in that facility.

Speaker Change: I look to industrial as a key kind of growth opportunity there.

Speaker Change: We also do support some SEMICAP from there as well.

Speaker Change: More on the EMS side of things, not machining, but more...

Speaker Change: complex assemblies. So that's where I would say most of the effort is. Of course we do have medical customers in Europe and there's opportunity there for growth, but those are the three focus sectors.

Jeffrey W. Benck: And then maybe, Jeff, you highlighted a lot of engineering wins in many of your segments. I was wondering if you could give us a little more color on what that revenue opportunity could be, if that's something that can be quantified at this point, and maybe what the margin profile of that business looks like versus, you know, as compared to manufacturing wins. Yeah, we, you know, we track engineering for us. I mean, obviously, from a total revenue perspective, it's a smaller percent of the company, and we haven't typically broken it out.

Speaker Change: for that. Okay.

Speaker Change: Great. And then maybe, Jeff, you highlighted a lot of engineering wins in many of your segments.

Speaker Change: I was wondering if you could give us a little more color on what that revenue opportunity could be, if that's something that can be quantified at this point, and maybe what the margin profile of that business looks like, versus, you know, as compared to manufacturing wins.

Jeffrey W. Benck: But it's meaningful because, you know, we love to get involved early in product realization and help customers design the product. We might be doing engineering for tests, but oftentimes we'll be doing product development. We're a bit unique there. And, you know, at that point, when we design it, we tend to be, you know, who better to go build that. So we kind of look at it as a girly early indicator of an opportunity that, you know, can grow beyond that.

Jeffrey W. Benck: Yeah, we track engineering for us. I mean, obviously, from a total revenue, it's a smaller percent of the company, and we haven't typically broken it out.

Speaker Change: It's meaningful because...

Speaker Change: You know, we love to get involved early in product realization and help customers design the product.

Speaker Change: [inaudible]

Jeffrey W. Benck: From a margin standpoint, again, you know, it's a pretty competitive space, but it is higher than our corporate gross margin on the engineering work we do because, you know, customers do keep the IP, they pay us for the work we do, and we'd love to be an extension of their engineering team. And so from that standpoint, it can be, it can be creative, but it's not so much, you know. I mean, obviously, we want to continue to grow our engineering revenue.

Speaker Change: A good early indicator of an opportunity that can grow beyond that.

Speaker Change: From a margin standpoint, again, you know, it's pretty competitive space, but it is...

Speaker Change: Higher than our corporate gross margin, the engineering work we do, because, you know, customers do keep the IP, they pay us for the work we do, and we'd love to be an extension of their engineering team.

Jeffrey W. Benck: But, you know, I'm not sure that that's the only thing we're focused on; we're really looking at helping customers get to market quicker and and the opportunity for what the flow through could be into manufacturing. And yeah, we certainly have seen quite a bit of design work going on in medical, industrial, and semi-cap, probably more in those segments. We also look at attach rates like if we win an EMS business, how much of it involves engineering and vice versa. We start with engineering because we really want to capture manufacturing. Great. It sounds good.

Speaker Change: So, from that standpoint, it can be accretive.

Speaker Change: But it's not so much, you know, I mean, obviously we want to continue to grow our engineering revenue, but, you know, I'm not sure that that, you know, that's not the only thing we're focused on. We're really looking at helping customers get to market quicker and...

Speaker Change: and the opportunity for what the flow-through could be in the manufacturing.

Speaker Change: And yeah, we certainly have seen quite a bit of design work going on in medical, industrial, and semi-cap, probably more in those segments.

Speaker Change: But we also look at attach rates, like if we win EMS business, how much of it, you know, involves engineering and, and vice versa. If we start with engineering, we really want to capture the manufacturing.

Jeffrey W. Benck: If I can squeeze in one more, I think SemiCap, just kind of following on that, SemiCap is your highest or maybe close to the highest margin business. Nice to see that maybe we're turning the corner there. You know, some sort of at least a spring, it may not be a Tempe spring, but maybe, you know, a more mild spring.

Speaker Change: Great, sounds good. If I can squeeze in one more.

Speaker Change: I think SEMICAP, just kind of following on that, SEMICAP is your highest or maybe close to the highest margin business?

Speaker Change: Nice to see that maybe we're turning the corner there, you know, at least a spring, it may not be a Tempe spring, but maybe, you know, a more mild spring. Is there anything we should be assuming for the margin progression into 2025, or are there still so many moving parts?

Jeffrey W. Benck: Is there anything we should be assuming for the margin progression into 2025? Or are there still so many moving parts? You know, it is greater than the corporate average gross margin and kind of depends on the type of business.

Speaker Change: It is greater than the corporate average gross margin and kind of depends on the type of business. I mean, if it's clean room, super sophisticated, more value add, then it might be on the higher end of the corporate gross margin range.

Jeffrey W. Benck: I mean, if it's clean room, super sophisticated, more value added, then it might be on the higher end of the corporate gross margin range. So from that standpoint, it certainly can help us. Obviously, we've been north of 10% now for a couple quarters in a row. And, really, that's because we are a bit discriminating about where we play in highly regulated markets.

Speaker Change: So, from that standpoint, it certainly can help us. I mean, obviously, we're...

Speaker Change: We've been north of 10% now, a couple quarters in a row.

Jeffrey W. Benck: But, but a semi-cap certainly can help us go further. There's opportunity in that, I think, I think it's really going to depend, do we see a hockey stick? Or is it a more gradual ramp?

Speaker Change: by being a bit discriminating of where we play in highly regulated markets. But SEMICAP certainly can help us go further.

Speaker Change: there and there's opportunity in that. I think it's really gonna depend, do we see a hockey stick or is it a more gradual ramp? Certainly there's plenty of catalysts out there with the Chips Act and I know here in Phoenix there's.

Jeffrey W. Benck: You know, certainly, there's plenty of catalysts out there with the Chips Act. And, you know, I know, here in Phoenix, there are several buildings that are just coming out of the ground, and they're going to buy capital equipment as those come online. I think what probably excites me most about semi-auto is that we've won a fair amount of business, and I think we're gaining share independent of the market recovery. And that's really what's helping us grow in a flatter environment. I'll say, I won't even say down, I'll just say flat with double digit growth.

Speaker Change: Several of the buildings are just coming out of the ground, and they're going to buy capital equipment as those come online. I think what probably excites me most about SEMI is that we've won a fair amount of business, and I think we're gaining share independent of the market recovery, and that's really what's helping us.

Speaker Change: Grow in a flatter environment, I'll say. I won't even say down, I'll just say flatter.

Jeffrey W. Benck: And so, is that, if those opportunities kick in, and we've invested where some of my competitors have trimmed their capital in semi-semi, we've really doubled down. So I expect to see that be a larger contributor for both revenue and and margin as we get into 25. Colin exactly where that lands, you know, we've got work to do still on, on, you know, landing 2024. But, but we're, you know, like I said, pretty constructive. Okay, great. Thanks very much.

Speaker Change: with the double-digit growth and so is that is that if those opportunities kick in and we've invested where some of my competitors have

Speaker Change: Trim their capital in SEMI, we've really doubled down, so I expect to see that be a larger contributor for both revenue and margin as we get into 2025.

Speaker Change: [inaudible]

Melissa Fairbanks: That's all for me for now. Yeah, thanks for the questions. Your line is open.

Speaker Change: Okay, great. Thanks very much. That's all for me for now. Yeah, thanks for the questions.

Speaker Change: We'll move next to Jaeson Schmidt with Lake Street. Your line is open.

Jaeson Allen Min Schmidt: Hey guys, thanks for taking my questions. Jeff, just following up on that last question on gross margin. Obviously, based on the guide, Q3 will be the fourth consecutive quarter of double-digit gross margin. Should we think of sort of this double-digit level, the new runner rate going forward? I know it's going to be mixed dependent, but just kind of given, given the programs you go after, is this sort of a good range to use going forward? Hey, Jaeson, this is Arvind. Let me take that one.

Jaeson Allen Min Schmidt: Hey guys, thanks for taking my questions. Just following up on that last question on gross margin, obviously based on the guide, Q3 will be the fourth consecutive quarter of double-digit gross margin. Should we think of sort of this double-digit level, the new runner rate going forward? I know it's going to be mixed dependent, but just kind of given the programs you go after, is this sort of a good range to use going forward?

Arvind Kamal: So, you know, we're definitely pleased with our margin performance, based on our high value focus and expense management. And as we go forward, and this is certainly not meant to be a guide, but just as we, you know, just give you color. And as we think about, you know, how we think about going forward, as we start seeing more volume come through, there's definitely going to be some opportunity with margin, especially with added factory load and optimization, to see that margin potentially go a little bit higher.

Jaeson Allen Min Schmidt: Yep.

Jaeson Allen Min Schmidt: Hey Jaeson, this is Arvind. Let me take that one. So, you know, we're definitely pleased with our margin performance, you know, based on our high value focus and expense management.

Jaeson Allen Min Schmidt: And as we go forward, and certainly not meant to be a guide, but just as we, you know, just give you color, and as we think about, you know, how we think about going forward, you know, as we start seeing more volume come through, there's going to be definitely some opportunity with margin, especially with added factory load and optimization.

Arvind Kamal: The same holds for operating margin. You know, once we see that incremental volume and continue to focus on operating expenses, we should see, you know, equal or greater margin expansion. Yeah, maybe I'd just add a little color.

Jaeson Allen Min Schmidt: to see that margin potentially go a little bit higher. You know, same holds for operating margin. You know, once we see that incremental volume and continue to focus on operating expenses, we should see, you know, equal or greater margin expansion.

Jeffrey W. Benck: I totally agree with Arvind's comments. I think some of it's going to depend a little bit on loading. You know, we talked about incremental capacity and the number of factories, right, even on this call. And so, you know, right now, while we're, you know, seeing a modest decline, given some of the softness in a couple of the macro environments, a couple sectors, I think really, you know, I think the revenue growth is going to be meaningful, particularly the right kind of revenue, to see that further progression. We're certainly not looking to step back but to really take that further.

Jaeson Allen Min Schmidt: Yeah, maybe I'd just add a little color. I mean, I totally agree with Arvind's comments. I think some of it's going to depend a little bit on loading. You know, we talked about incremental capacity and number of factories, right, even on this call. And so, you know, right now, while we're, you know, seeing a modest...

Jaeson Allen Min Schmidt: decline given some of the softness in a couple of the macro...

Jaeson Allen Min Schmidt: I think really, you know, I think the revenue growth is going to be meaningful, particularly the right kind of revenue.

Jaeson Allen Min Schmidt: to see that further progression. We're not certainly looking to step back, but to really take that further. And part of that will also be the semi-contribution, as we already talked about.

Jeffrey W. Benck: And part of that will also be the semi-contribution, as we have already talked about. So, you know, I think that we've done really well in an environment where we have seen software demand and we've worked on operational efficiency, and we're gonna continue that cadence, but getting the right incremental business and growth in the wins we already have and the programs we have in the sites that aren't fully loaded will help a lot in that dimension. Okay, that's helpful.

Jaeson Allen Min Schmidt: so

Jaeson Allen Min Schmidt: I think that we've done really well in an environment where we have seen software demand and we've

Jaeson Allen Min Schmidt: worked on operational efficiency, and we're going to continue that cadence.

Jaeson Allen Min Schmidt: Getting the right incremental business and growth in the wins we already have and the programs we have in the sites that aren't fully loaded will help a lot in that dimension.

Jeffrey W. Benck: And then, just as a follow-up, you're seeing some nice traction in the A&B segment. But is this momentum really more of a function of the overall demand environment? Or is it really being driven by you guys taking share and winning these new programs? There are a couple things there. I mean, we, I would say certainly the A&E segment probably was most constrained due to component availability and supply chain challenges. In fact, we heard some of our peers reference that still.

Speaker Change: Okay that's helpful and then just as a follow-up you're seeing some nice traction in the A&B segment. Is this momentum really more of a function of the overall demand environment or is it really being driven by you guys taking share and winning these new programs?

Speaker Change: A couple things there. I mean, I would say certainly the A&E segment probably was most constrained due to component availability and supply chain challenges. In fact, we heard some of our peers

Jeffrey W. Benck: I think we've cleared a tremendous amount of that, and so that's allowed us to, you know, recover, and maybe there was a little bit of backlog there that might have helped, but obviously, you can see we grew more than 30% this quarter. A lot of that is a combination of existing programs and then also some new wins that are adding to it. As that, it's really a segment that we're committed to.

Speaker Change: reference that still. I think we've cleared a tremendous amount of that and so that's allowed us to you know to recover and maybe it was a little bit of backlog there that might have helped but I mean obviously you see we grew more than 30% this quarter.

Speaker Change: A lot of that is a combination of existing programs and then also

Speaker Change: Benck, Arvind Kamal, Paul Mansky, Arvind Kamal, Paul Mansky, Arvind Kamal, Paul Mansky, Arvind

Jeffrey W. Benck: The other thing, you know, on the defense side, there's a lot of activity around the world that, unfortunately, is driving a lot of spending there. I say unfortunate because, you know, they're usually related to wars. Wars unfortunately require a lot of defense spending, and so, you know, that's a driver just in the overall demand and then also just making sure that we're protecting our country and such.

Speaker Change: unfortunately is you know driving a lot of spending there I say unfortunate because you know they're usually related wars wars unfortunately

Speaker Change: require a lot of defense spending. And so, you know, that's a driver just in the overall demand. And then also just making sure that we're protecting

Speaker Change: [inaudible]

Jeffrey W. Benck: So I think that just the overall market looks to continue to be strong, but then, you know, supported by a mix of new wins as well and better ability to fulfill the demand. So there is more than one factor, a few moving parts on that Jason, but hopefully, that gives us some color. Okay, now that's helpful.

Speaker Change: So it's more than one factor, a few moving parts on that, Jaeson, but hopefully it gives you some color.

Jaeson Allen Min Schmidt: Thanks a lot, guys. Sure, thanks for the question. Jim Ricchiuti with Nita Mendoza.

Jaeson Allen Min Schmidt: Okay, I know that's helpful. Thanks a lot, guys.

Speaker Change: Sure, thanks for the question.

James Andrew Ricchiuti: Your line is open. Hi, good afternoon. This is Chris Grenga on behalf of Jim. Take care. Hey, I was just wondering if you could elaborate on some of the early indications that you mentioned about the growth that you're seeing in the specialty industrial. Just wondering if you could just elaborate on what you're seeing there. I think what? There's a number of dynamics going on there. We see continued, you know, focus on automation. Folks are looking at, you know, how do they get more efficient?

Speaker Change: Hi, good afternoon. This is Chris Grenga on for Jim. Hey Chris.

Christopher Grenga: Hey, just wondering if you could elaborate on some of the early indications that you mentioned about the growth that you're seeing in the specialty industrial, just wondering if you could just elaborate on what you're seeing there.

Speaker Change: I think there's a number of dynamics going on there. We see continued...

Speaker Change: you know, focus on automation, folks are looking at, you know, how do they get more efficient.

James Andrew Ricchiuti: We also see a lot of effort around energy controls, and we see good growth there. It's interesting even in the HVAC market, for example, folks moving from furnaces to heat pumps and variable speed control systems, and as that transition happens in the marketplace, you go from on-off to variable speed, now you've got electronics involved. So, we see an interesting growth in demand and, you know, electronics adding smartness to a lot of these devices. People want to be more energy efficient, but at the same time, also, that variable speed nature is an opportunity for us.

Speaker Change: We also see a lot of effort around energy controls.

Speaker Change: And we see good growth there. It's interesting, even if you take the HVAC market, for example, folks moving from furnaces to heat pumps and variable speed control systems. And as that transition happens in the marketplace,

Speaker Change: You go from on-off to variable speed, now you've got electronics involved.

Speaker Change: See an interesting growth and demand and you know electronics adding smartness to a lot of these devices People want to be more energy efficient, but at the same time also You know that that variable speed nature is an opportunity for us, so

Jeffrey W. Benck: So, I think that we're excited about that, and we're playing with a number of customers there. We do have a strong pipeline of industrial wins, and it's an area that we've grown our participation in, but we think there's a lot more we can do. And so, when we look at, you know, David Mosadis came on as our chief commercial officer, has a ton of industrial experience, and he's built out his team.

Speaker Change: I think we're excited about that, and we're playing with a number of customers there. We do have a strong pipeline of industrial wins, and it's an area that we've grown our participation, but we think there's a lot more we can do.

Speaker Change: And so, when we look at, you know...

Speaker Change: David Mosaddeif came on as our Chief Commercial Officer, has a ton of industrial experience and

Jeffrey W. Benck: We're putting a lot of energy into it just because we think we have, you know, a compelling offer for customers and we see the opportunity in things like I just described.

Speaker Change: He's built out his team. We're putting a lot of...

Speaker Change: there just because we think we have a compelling offer for customers.

Speaker Change: We see the opportunity in things like I just described, you know, HVAC is one.

Jeffrey W. Benck: We also, you know, like the robotics space and like what's happening there. You know, everyone's trying to be more operationally efficient, and we've got a lot of experience with complex systems and putting those kind of solutions together. So that's playing into our thoughts on industry.

Speaker Change: We also like the robotic space.

Speaker Change: And like what's happening there, you know, everyone's trying to be more operationally efficient. And we've got a lot of experience with complex systems and putting those kind of solutions together. So that's playing into our thoughts on industrial a little bit.

Christopher Grenga: Thank you for that. Within Advanced Compute, is there any overlap or any exposure to the AI training clusters or any overlap with the high performance compute franchise? Is that any? Yeah, it is. Yeah. Sorry, I didn't mean to cut you off.

Speaker Change: Got it. Thank you for that.

Speaker Change: Within advanced computers, is there any overlap or any exposure to

Speaker Change: The AI training clusters, or any overlap with the high-performance compute franchise. Yeah, sorry, I didn't mean to cut you off.

Jeffrey W. Benck: Oh yeah, just curious what if any exposure or overlap there is. Yeah, we, you know, we have built some of the largest help build some of the largest supercomputers, you know, if you look at the top 500, a couple of the top five, we've, we've played a key role in supporting that. And if you look at where they're going, whether it's National Lab or, you know, to a company that's looking to do large-scale simulations and analysis, I mean, it certainly has an AI bent to it.

Speaker Change: Oh yeah, just curious, what if any exposure or overlap there is there?

Speaker Change: Yeah, we, you know, we have built some of the largest, helped build some of the largest supercomputers.

Speaker Change: You know, if you look at the top 500, a couple of the top 5 we've...

Speaker Change: We played a key role in supporting that.

Speaker Change: And if you look at where they're going, whether it's National Lab or, you know, to...

Speaker Change: a company that's looking to do large-scale

Jeffrey W. Benck: And several of our customers have talked about HPC, you know, these sophisticated, oftentimes water-cooled systems, playing into the AI movement. So we think that's an area where we can participate. While we don't build the hyperscaler platform some of the guys in our space do, we certainly have played in the most sophisticated HPC environments and solutions. We think energy is a natural one, where everybody is putting a lot of effort into analysis around the climate and other complex problems they're looking to solve.

Speaker Change: Simulations and Analysis. I mean, it certainly has an AI bent to it, and several of our customers have talked about HPC, you know, these sophisticated, oftentimes water-cooled systems.

Speaker Change: , . . . . .

Speaker Change: Some of the guys in our space do we certainly have played in the most sophisticated HPC You know environments and solutions. We think energy is is a natural one where everybody you know is

Speaker Change: Putting a lot of effort around, you know, analysis around the climate and other, you know, complex problems they're looking to solve, and these systems can play into that pretty heavily.

Jeffrey W. Benck: And these systems can play into that pretty heavily. Another area that is kind of natural for AI is just SEMICAP, right? And when you think about wafer fab equipment and semiconductors going everywhere with the explosion of that, whether it's IoT or just intelligence in EV vehicles or anything else, I mean, we certainly see SEMICAP as a bit of an AI play. But the HPC, I mean, you're hitting on one that we know there's opportunity there. It may not be quite the same as the hyperscaler, but there's a lot of effort going into how do we just get smarter?

Speaker Change: Another area that...

Speaker Change: It's kind of natural for AI, it's just semi-cap, right? And, you know, when you think about wafer fab equipment and semiconductors going everywhere with the explosion of that, whether it's IoT or just intelligence in EV vehicles or anything else, I mean, we certainly see...

Speaker Change: The Semicap is a bit of an AI play. But the HBC, I mean, you're hitting on one that...

Speaker Change: We know there's opportunity there. May not be quite the same as the hyperscaler, but there's a lot of effort going into, you know, how do we just get smarter? Even quantum computing, you could argue, you know, plays a role there, and those solutions can play.

Speaker Change: Great. Appreciate the call. Thank you.

Jeffrey W. Benck: Even quantum computing, you could argue, plays a role there. And those solutions can play. Great. Appreciate the call. Thank you. Sure. Thanks, Jim. Anja Soderstrom with Sidoti.

Speaker Change: Hi, thank you for taking my question.

Speaker Change: Sorry if I missed this, but I heard you talk about a lot of the other end markets, but in terms of the medical, what are you seeing there in that maybe bottoming out in terms of inventory, build up, and when do you anticipate that to come back?

Anja Marie Theresa Soderstrom: Your line is open. Sorry if I missed this, but... I heard you talk about a lot of the other end markets, but in terms of medical, what are you seeing there in terms of that maybe bottoming out in terms of inventory buildup, and when do you anticipate that to come back? Yeah, I think medical is interesting because we were pretty exposed to it on the medical device side, as you can imagine. I know we've talked about some of the devices that we built to support them.

Anja Marie Theresa Soderstrom: We have seen some softness there. And we know that, you know, there was some inventory buildup coming out of COVID that we've seen our OEMs get more sensitive about, you know, bringing their inventories down. We've also, you know, we've seen some softness across a number of customers. So I can certainly tell you it's not one particular customer, but we've seen that medical softness. Our thinking right now is that, at least, we have seen some stabilization. So it's not like anything's falling off a cliff. But I think medical is one segment that is certainly weighing on our revenue growth this year. But, you know, everybody has a bit different exposure.

Speaker Change: Yeah, I think...

Speaker Change: Medical, it's interesting because we're pretty exposed to medical, to the medical device side as you can imagine. I know we've talked about

Speaker Change: Some of the devices that we build to support. We have seen a softness there and we know that you know there were some inventory buildup coming out of COVID that we've seen

Speaker Change: [inaudible]

Speaker Change: are thinking right now, at least...

Speaker Change: You have seen some stabilization, so it's not like anything's...

Speaker Change: Falling off the cliff, but we do think through the back end of 24.

Speaker Change: that we probably won't see.

Speaker Change: Substantial pickup, just based on the signals that we're getting and the visibility, you know.

Speaker Change: It's not uncommon to have six months of disability.

Speaker Change: We do believe in 25. We'll see that turn around, and we believe we'll see recovery there. A little hard to predict if that'll be first half or second half, but...

Jeffrey W. Benck: I will say we've seen more new opportunities in like biotech and everyone's doing a lot. It's amazing some of the DNA sequencing and some of the work that's going on in new drugs and new, really new solutions that are going to be great for the future of medicine and the industry and really for our collective health, right? But so we see a lot of growth there, and a lot of investment there.

Speaker Change: I think medical is one segment that is certainly weighing on our revenue growth in this year.

Speaker Change: But, you know, everybody has a bit different exposure. I will say we're seeing more new opportunity in like biotech and everyone's doing a lot, you know, it's amazing some of the DNA sequencing and some of the work that's going on, on new drugs and new...

Jeffrey W. Benck: And that's an area we, you know, see some new wins that are very exciting to us and opportunity there. But in the short term, the medical device area, definitely in the customers that we have, which is fairly broad, you know; we have a pretty large medical business, is softer in 24. Okay, thank you. And again, sorry if we talked about this before, but these cash cycle days, the cash flow has been improving quite a lot. Is there more room there, and do you have a target? Yes. Hey Anja, this is Arvind.

Speaker Change: really new solutions that are going to be great for, you know, the industry and really for our collective health, right?

Speaker Change: So we see a lot of growth here, a lot of investment there, and in that scenario we see some new wins that are very exciting to us and opportunity there. But in the short term, the medical device area, definitely in the customers that we have, which is fairly broad, we have a pretty large medical business.

Speaker Change: is softer in 24.

Speaker Change: Okay, thank you. And again, sorry if we talked about this before, but the cash cycle, the cash flow has been improving quite a lot. Is there more room there, and do you have a target?

Arvind Kamal: So we talked a little bit about, as you've seen or heard on our call today, we raised our free cash flow target to be at least $120 million or greater. And what's really driving that is the inventory reduction. Currently, we're four turns of inventory, and as we laid out in our long-term plan for 2025, we're looking to be about five turns. So yes, there's definitely some ways to go there. But for now, I think you can assume that $70 to $90 million on average for the year in terms of free cash flow type of modeling.

Speaker Change: Yes, hey Anja, this is Arvind, you know, so we talked a little bit about, you know, we, as you've seen or heard from our call today, we raised our free cash flow target to be at least $120 million or greater.

Speaker Change: And, you know, what's really driving that is the inventory reduction.

Speaker Change: You know, currently we're...

Speaker Change: four turns of inventory, and as we laid out in our long-term plan, you know, for 2025.

Speaker Change: We're looking to be about five turns.

Speaker Change: So, yes, there's definitely some, you know, ways to go there, but, you know, for now, I think you can assume that $70 million to $90 million on average for the year type of free cash flow.

Arvind Kamal: Yeah. And I think inventory has been an explicit focus, and it's nice to see the team continue to work on burning down inventories and working with customers on bringing down inventory. As Arvind said, we still have room to go. We don't think we're done with that journey, as he talked about the number of turns. So when... We certainly have made a tremendous amount of progress, and we're pleased with that, but there's more opportunity here.

Speaker Change: type of modeling.

Speaker Change: Yeah, and what you know, I think inventory has been an explicit focus and it's nice to see

Speaker Change: the team continue to work on, you know, burning down inventories and working with customers on bringing the inventories down. We, you know, as Arvind said, we, we still, we still have room to go. You know, we don't think we're done with that journey, you know, as, as he talked about with the number of turns. So.

Speaker Change: you know, when, when, you know.

Speaker Change: We certainly have made a tremendous amount of progress and we're pleased with that, but there's more opportunity here.

Arvind Kamal: We're not back down to what I would say normal, where we would expect. Okay, and then one last question, if I may ask, what's your practice for the cash on your balance sheet? You didn't buy back any shares this quarter. Is there any reason for that?

Speaker Change: We're not back down to what I would say normal, where we would expect to be.

Speaker Change: Okay, and then one last question if I may then. What's your then practice for the cash on your balance sheet? You didn't buy back any shares this quarter. Is there a reason for that?

Anja Marie Theresa Soderstrom: Yeah, Anja, I think our focus really has been in the short term to, you know, pay down our short-term debt, our revolver. And I think you've seen over the last several quarters, we've been really focused on bringing that balance down, and we'll continue to do that. And as we mentioned in the call today, we've increased the dividend. So with that, we're still focused on looking at opportunities to repurchase shares, as we outlined. Okay, great. Thank you. That was all for me. Thank you, Anja. And this does conclude the question.

Speaker Change: Yeah, Anja, you know, I think we'll...

Speaker Change: Well, our focus really has been in the short term is to, you know, pay down our short-term debt, our revolver. And you've, I think you've seen over the last several quarters, we've been really focused on bringing that balance down and we'll continue to do that. And as we mentioned in the call today, we've increased the dividend. So with that, but we're still remain focused on looking at opportunities to repurchase shares as we outlined.

Speaker Change: Okay, great. Thank you. That was all for me.

Paul Mansky: I will now turn to Paul for any additional or closing remarks. Thank you, Chloe, and thank you, everyone, for participating in Benchmark's second quarter 2024 earnings call. As a reminder, we'll be attending the 13th annual Needham Virtual Industrial Tech Robotics and Clean Tech Conference on August 19. Please check the events section of our IR website at ir.bench.com for updates on upcoming investor conferences. With that, we thank you again for your support and look forward to speaking with you soon. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.

Speaker Change: And this does conclude the question and answer session. I will now turn it back to Paul for any additional or closing remarks.

Paul Mansky: Thank you Chloe and thank you everyone for participating in Benchmark's second quarter 2024 earnings call. As a reminder, we'll be attending the 13th annual Needham Virtual Industrial Tech Robotics and Clean Tech Conference on August 19.

Speaker Change: Please check the events section of our IR website at ir.bench.com For updates to coming investor conferences with that we thank you again for your support and look forward to speaking with you soon

Speaker Change: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.