Q3 2024 Benchmark Electronics Inc Earnings Call

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Good day everyone and welcome to today's benchmark third quarter, 2024 earnings call in Webcast.

Speaker Change: At this time, I'll participate in our listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. You may withdraw yourself from the key by pressing star 2.

Speaker Change: Please note this, Kam may be recorded, and I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Mr. Paul Mansky, Benchmark Investor Relations. Please go ahead, sir.

Thank you, Jess and thanks everyone for joining us today for Benchmark's third quarter fiscal year 2024 or any skull.

CEO and President Brian Schumaker, our CFO and Arvind Kamal VP of Finance.

After the March close today, we issued an earnings release pertaining to our financial formats for the third quarter of 2024. And we prepared a presentation that we will reference on this call. Both are available online under the Investor Relations section of our website at bench.com.

The skull is being webcast live and it replays will be available online following the call. The company has provided a reconciliation of our GAP to non-GAP measures in their own release as well as in the appendix to the presentation.

Police take a moment to review Lord looking statements disclosure on slide two 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 risk and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements.

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

For today's call, Jeff will start with an overview of the quarter, followed by an introduction to Brian, our new CFO. Arvind will then detail our third quarter results in Brian will provide fourth quarter guidance.

Speaker Change: As usual, we will conclude with Jeff sharing more insight into the mantras by sector, new business wins and some final remarks. If you'll please turn this slide three, I'll turn the call over to our CEO Jeff Bank.

Thank you Paul, good afternoon and thanks to everyone for joining today's call. The third quarter was another successful milestone for the company where we exceeded the midpoint of our guidance for revenue, margin and non-gap BPS.

Let me step through a few highlights.

Total revenue of 658 million was above the midpoint of our guidance range provided in July. We are pleased with the year of year growth in aerospace and defense and semi-cap, the latter being well into the double digits.

As anticipated, this was offset by declines in industrial, medical and advanced computing and communications.

Speaker Change: While demand over the last few quarters has certainly stabilized, we continue to see end-market softness in several sectors, weighing on our opportunity to grow revenue year over year.

Speaker Change: 3rd quarter, 9 gap gross margin of 10.2% marked the fourth quarter in a row of 10% or better margin performance.

Speaker Change: I'm particularly thrilled to share, 9-gap operating margin of 5.3% represents 16 consecutive quarter of year over year operating margin expansion.

Speaker Change: This performance coupled with our revenue achievement enabled us to deliver 57 cents in non-gap earnings per share in the quarter, which was at the higher end of our guidance.

Speaker Change: We continue to execute on a working capital initiative led by inventory management, which enabled us to deliver 29 million in free cash flow in the quarter. Bring me our Charlie 12 month total to 245 million.

Speaker Change: I would now like to pass the call over to Brian who has only been on the job a few weeks, but I'm already confident he will make a significant impact as we continue to drive our strategy forward. With that, Brian, over to you.

Brian: Thank you Jeff, and thank you to everyone for joining the call. Today marks my third week at Benchmark. During this brief time, I have already come to further appreciate the customer first culture, the depth and quality of the team, and the incredible opportunity in front of us driving significant shareholder values.

Speaker Change: As I considered joining benchmark, it was clear the company has done a great job of focusing on high value sectors while maintaining operational discipline for the last several years.

Looking forward, it is equally clear the EMS industry is entering a structural multi-year growth cycle, regardless of any near-term macroheadlands. I think Benchmark is uniquely positioned to capital.

and I'm thrilled to be a part of this as we seek to maximize our opportunity, both operationally and as a trusted partner to our customers. With that, I'd like to turn the call over the Arvind for a review of our September financial results.

Thank you Brian and good afternoon. Please turn to slide four for our revenue by market sector. As Jeff mentioned, our toll revenue in Q3 was $658 million.

Speaker Change: Semi-Capravenew, increase 13% you'll be supported by improving demand and new customer wins.

Industrial revenue decreased 2%. The decline was driven by reduced a man from existing customers, partially offset by new program runs.

Medical Revenue was down 28% versus the prior year. We continue to see inventory rebalancing and end-demand weakness primarily impacting medical devices.

Speaker Change: Andy Revenue was up 2%.

Speaker Change: Commercial Aerospace Demand remains strong both within aviation and space applications. Meanwhile, we continue to see robust demand within defense, where we are benefiting from existing program ramps and the launch of new programs.

ACNC decreased 27% year of year.

This decline was driven by several large HPC programs being completed earlier in the year, coupled with continued weakness in our communications business.

Please turn to slide slides.

Our Gap earnings per share for the quarter was 42 cents.

Speaker Change: Arnan Gap, EPS, was 57 cents, which was at the high end of our guidance range of 52 to 58 cents.

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

For Q3, Arnongap Gross margin was 10.2%. This represents a 50 basis point increase your over year.

Nongap S. Yena expense was 32.3 million, down 4% sequentially and flat year over year.

Don Gap, operating margin was 5.3%. Up 20 basis points, eventually, and up 10 basis points, year over year, driven by gross margin expansion.

Our third quarter, non-gap effective tax rate was 23.7%.

Nongap RIC in the third quarter was 9.9%.

Police turns to slide six for trended financials on a non-gap basis.

As you will see, despite demand challenges among some of our end markets, we continue to focus on protecting operating margin, which again expanded your over year.

Please refer to slides 7-9 for discussion of our Cash conversion cycle, liquidity and capital allocation performance. Our Cash conversion cycle days in the quarter or 90 days consistent with our performance in Q2.

In Q3, we continue to execute on our working capital efficiency plan, which combined with our net income performance, enabled us to generate 39 million in operating cash flow, and 29 million of free cash flow in the period.

On a trailing 12 month basis, we have generated 245 million in free cash flow.

Our cash balance on September 30th was 324 million, a sequential increase of 15 million.

During the quarter, we reduced debt by another 11 million, leaving 125 million outstanding on our turn-lone, and 155 million against Arvind Balber.

Speaker Change: from which we have...

391 million available to borrow. In the quarter, we invested approximately 8 million in KAPS in support of continued growth and enhanced capabilities in our Mexico, Penang, and Romania facilities.

and support of returning capital to our shareholders. We have paid cash dividends of 6 million in the quarter.

Finally, in Q3, we repurchased approximately 127,000 shares at an average price of $40.27 per share, totaling 5.1 million.

As of the end of the quarter, we had approximately 150 million remaining in our existing share-reporteous authorization. I would now like to turn the call back over to Brian to discuss guidance for the December quarter.

and Exhaust. Please advance to slide 10. For our fiscal Q4 ending December, we expect revenue to be within a range of 640 to 680 million.

Brian: We expect non-gap gross margin to be 10.2%, which is consistent with our performance over the last several quarters. Non-gap SGA in the expense is expected to be within a range of 34 to 36 million.

with those inputs, we would expect non-gap operating margin to be between 4.9% and 5.1%.

Speaker Change: For Q4, we expect approximately 3.5 million of stock-based compensation, 1.2 million in amperization of intangible assets, and 1 million of estimated restructuring in other expenses. Our non-gap diluted earnings per share is expected to be in the range of 53 cents to 59 cents.

Other expenses net are expected to be approximately 6.4 million. Although interest expenses expected to decline sequentially, this will be partially offset by an anticipated increase in foreign exchange costs.

We expect our Q4 non-gap effective tax rate will be between 22% to 24%.

are weighted average share count is expected to be 36.6 million.

Finally, we expect to continue to deliver positive free cash flow in the quarter, inclusive of 12 to 14 million in capital spending. For the year, we expect free cash flow to be greater than 130 million.

and with that I would like to turn the call back over to you, Joe.

Thanks, Brian. Please turn the slides well for a discussion of our performance by sector.

Our semiconductor revenue grew 13% year over year, driven by new wins and further share games.

We continue to see signs of recovery in the sector, although it's clear to say this cycle has not followed historical patterns. We are long in the space and investing for the future. But the pace of the next up cycle has been a bit challenging to predict.

Speaker Change: While we expect 2025 to be a growth year, it seems the first half will continue to have pockets of weakness.

So, Laktoeans are still bringing the inventory levels down as others work to support incremental demand. Knit it against each other. We believe we are still in the early stages of the market recovery.

Speaker Change: Despite this near-term chappiness, I'm pleased with our continued win momentum.

Coupled with our capacity expansion, including our new facility in Penang, which opened in September. We are well positioned to capture incremental share during the inevitable upturn in this critical sector to the world's economy.

Supporting my confidence, we continue to score some meaningful new wins in this vertical.

This past quarter, I was particularly encouraged by the large number of new engineering winds we achieved on next gen platforms.

We also had a competitive takeaway with a large customer that includes both machining and assembly that will be manufactured here in the scenic area.

Our strong position and incremental wins are enabling us to grow our semi-cap revenue greater than 10% in 2024, which is more than three times the expected industry growth rates this year.

In medical, similar to the last few quarters, endoman softness is weighed on sector performance.

This is concentrated within the specific program or customer. It's clear there is broad market weakness, most notably within medical devices, which we expect to continue for the next few quarters.

We continue to pick up new winds and life sciences and classroom medical devices, which speaks to the long-term growth opportunity in the sector.

By way of example, this past quarter we had a number of key wins, including a competitive takeaway with one of our largest customers.

Speaker Change: We also won the Manufacturing for a new ultrasound device and had a key engineering win in the cardiology space with a new customer.

As you know, engineering wins, tend to drive future manufacturing wins. So, please, please, to see us keep up the momentum, both in our traditional medical sector, and in our growing biotech business.

Speaker Change: Turning to Complex Industrials, we continue to win new business and key growth sub-factors.

This task quarter we want an RF based monitoring module with applications across the number of industrial and commercial markets.

Speaker Change: Importantly, this key piece of business was awarded because of our engineering capabilities.

In addition, we want an impressive number of new engineering engagements across multiple customers over the last 90 days.

This ties directly to our continued investment in the Complex Industrial Sector, given a growth opportunity as we see.

Although this sector may be down sequentially in Q4, we expect to return to modest year of year growth in the period, which we looked to build on in the quarters to come.

Turning to AMD, this sector continues to perform very well for us, although year-rear growth moderated in Q3, we expect the pace to pick up and return to double-digit growth in Q4 on both the sequential and year-rear basis.

Our Defense Business continues to see demand strength from both existing programs and ramping new wins.

At the same time, our supply chain efforts are enabling us to meet the growing demand.

This test quarter, we are pleased to have a couple of new platform wins, representing a significant expansion of our manufacturing partnership within existing customer.

1 with incumunication controls and the other in aircraft modernization.

Within aerospace, demand is stayed strong for several quarters. I'm particularly pleased with the continuum of men and women bookings from new space applications, where just this quarter we secured several new winds across both engineering and manufacturing.

Lastly, ACNC revenue declined 27% year over year in the September quarter.

As we've been saying for some time now, we expect sector pressure to persist throughout the rest of 2024 and the first half of 2025, driven by the completion of several large HPC programs and some delays in the timing of the follow on platforms.

Speaker Change: Within Communications, a customer disengagement we previously discussed, continues the impact our year of your growth as expected.

Looking forward, we are working on new product introductions across multiple programs for a large wireless transport customer.

These efforts resulted in the size of a follow-on booking in the quarter that's expected to begin contributing in the second half of 2025.

Elsewhere within Communications, this past quarter we saw Keywin and the Geospatial Imaging Market, which carries the potential to be significant over time.

In summary, please turn the slide 13.

The September quarter was once again demonstrated benchmark stability to control a leaking control while we remain committed to investing in our customer's success in support of our mutual growth.

We believe consistency is important and the breadth of our portfolio across sectors and customers has enabled us to weather the dynamic market environment while continuing to improve our operational execution and margins.

Benck Mark is now delivered 16 consecutive quarters of year on year non-gap operating margin expansion.

This has been irrespective of the demand environment which is historically not been the case in our space.

Speaker Change: I believe this speaks to our moniopophocus on building the right portfolio and controlling our costs, particularly during periods in which revenue growth is challenged.

Speaker Change: We've also approved our Working Capital Management, led by our inventory reduction efforts.

This past quarter, inventory was down more than 140 million year over year. Making this the fifth consecutive quarter of annual inventory reductions.

This is supported our free cash flow generation, which is totaled almost one quarter of a billion dollars over the last 12 months.

We have leveraged our strong cash flow to further improve our balance sheet while returning capital to shareholders.

We've significantly reduced our revolving debt balance and have now been that cash positive for the last two quarters.

Speaker Change: At the same time, we've consistently paid our quarterly dividend, which was increased to 17 cents per share last quarter.

Finally, this past quarter we resumed our share of repurchase activity, buying approximately 5 million in stock.

Speaker Change: Let me wrap by saying, regardless of the market environment, our mission remains the same. We're going to support our customers with anything they require to improve product realization and speed their time to market.

We're also going to drive further operational improvements within the company, including efficient use of work in capital.

Speaker Change: Lastly, we will return capital or investors through the dividend and share repurchases.

We're encouraged by the pipeline of significant new opportunities in front of us. The winds we've already secured and those that are ramping. And the potential for an improved macro environment.

Speaker Change: All of which increases our confidence that we will see a return of growth in 2025.

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 star 1 on your telephone keypad. You may remember yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question.

Speaker Change: We'll go first to Jason Schmidt with the Lake Street.

Hey guys, thanks very much for taking my questions. I know the outlook for the year for each sector is unchanged, but just curious that there are any sectors, you're a bit more optimistic about now that you were last call.

Speaker Change: Jeff, I'll take it. Thanks, Chase for your question.

Speaker Change: We...

Certainly, are encouraged by some of the semi-cap recovery that we started to see. We did talk about there being, you know, some in consistency across OEMs, but we feel that we have started to see the recovery even though, you know, as we get into 25, we'll have a better feel.

and then AMD just continues to be strong and Q3 was a little bit of pause in year and year growth, but we see that.

Speaker Change: Picking up again in the fourth quarter. That's probably where I would center my thoughts.

Speaker Change: Okay, that's helpful. And just curious, if sorry, the pricing environment when you guys are going out to bid for programs has remained pretty irrational.

Speaker Change: Yeah, it's been very rational. There's always competition and we focus on what we're good at. We differentiate ourselves with the highly regulated complex solutions.

Speaker Change: Engineering content is always a plus. You saw we had one win where engineering helped us lead the engagement and really was a reason why we won.

You know, it is competitive, but the pricing environment is pretty rational and I think customers are in tough economic environment looking for cost savings and so there's certainly focus on how we can drive operational improvements to meet those needs.

But all in all I'd say it's a pretty rational environment.

Gotcha, and then just the last one for me and I'll jump back into QU. You highlighted the continued operating margin growth going forward. Even against this kind of more challenging demand backdrop. When the demand profile slips back, a hell much further upside, do you think you can drive that operating margin line?

Jason, this is Arvind, you know, I...

Jason: You know, you're seeing consistently we're delving, you know, 10% gross margins.

You know, non-gap operating margins in the kind of a 5% neighborhood.

You know, I would say one of the key things that we're looking at, you're seeing small pockets of this, the semi-cap recovery.

But once we get that more to be more uniform.

We anticipate anywhere from 25 to 50 basis points of additional, you know, a lie if you will, a lie percentage if you will, based on that recovery. So, and then, as Jeff pointed out in his script, that's more back in of 25.

Speaker Change: 2025.

and I think you want to know. Maybe maybe before.

Speaker Change: and Brian, you can turn away in two but this Jeff again. Hi!

Speaker Change: I also think that...

You know, we've done a good job of really watching costs and getting operational efficient.

Revenue growth helps a lot to just bring leverage and so as we see, we're returning to growth, particularly in some of the softness and industrial and medical. That will certainly help you know, if you think about S.G.A.A. is a presenter revenue.

Speaker Change: and what we might drop to the bottom line. Those things can contribute.

We're not saying we're done on operational improvements. We are maniacally focused on that and still look for areas.

A lot of times this is their demand in particular sites where we may have under utilization. You know even that's it a lot in Mexico and Romania and now we've got capacity and as we fill that that will help us there as well.

Ok, thanks for watching guys!

Thank you, Jason.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad.

Wilmaum next to Stephen Fox with Fox Advisor.

Hi, good afternoon everyone. Take a little bit of the corollary to the questions that it would just ask. The markets that are performing well industrial.

Kamal equipment, medical. Some of these markets have been sort of dragging on for longer than this typical on a downturn, and not that you guys are the only one seen at everyone in this flight chain is.

How do we get any kind of like even green shoots of improvements that may be coming? Do you see any of that at all? Or is this something that's just could last even longer than, you know, even next year?

Yes, thanks, Steve. Good question.

We are seeing some, I would say, green, blue, black, and industrial, I would say for sure.

We've seen the stabilization, you know, you'll see some year-on-year growth in fourth quarter. I think we're more constructive partly also because we've been waiting new business switch.

is going to help us there. Medical does seem to be...

Dracking on a bit longer, given the focus on, you know, inventories and where people are there and coming out of.

COVID, where people right size, it does feel like it's a bit more prolonged. But...

I would say in industrial we think that that's starting to turn the corner.

and she's good opportunity there.

and then in telecom there's just some unique things going on there. We've got some good new wins in AEC and C that we're pretty encouraged about but I would say just based on the ramp that'll be more back end of 25 that we'll see stronger recovery there.

Speaker Change: You know, we feel like we see on a site just because we know we're in NPI or new product introduction phase on that. So several new logos that will help us there.

That's helpful and then just on the engineering services piece of the business I mean it sounded like you mentioned it more in the script than you have in prior quarters That's that you didn't mention it previously. I'm just wondering if anything's changed there or if not where you're being more effective because you mentioned it across a bunch of different markets.

Yeah, we did have a lot of winds and engineering, not all the more were huge, but

We probably had a more pronounced number.

Speaker Change: We still think we can certainly do more. We are seeing good engagement in the semiconductor sector, which is the area that's been growing for us and that's great because we want to help with engineering across all the sectors.

Speaker Change: We highlight it because...

You know, I've hired a lot of folks on the industry and when they come to Benck, they're like, wow, we really design a lot of products, it's not just...

about having engineers that can do industrial engineering, a plant layout. We do a lot of product development and that's such a great lead into then being the best person to build the product. So it's kind of quarter our value, profit, and what differentiates us.

There is a lot of focus in engineering within our team because we do think that it's higher value add and like I said it can lead to the manufacturing piece.

Speaker Change: and sometimes it helps in environments, you know, they can be pressurone. We see it holding up pretty well in the macro that's happening here and it's just important to us and that's why we try to give a little more color.

Honour: Honour. Great, that's helpful. Thank you.

Speaker Change: Chur.

Speaker Change: [inaudible]

Speaker Change: [inaudible]

It appears we have no further questions at this time. I'd now like to turn the conference back to Mr. Mansky for any additional or closing comments.

Thank you, Jess, and thank you everyone for participating at Benchmark's third quarter 2024 earnings call. As a reminder, we'll be attending the Raymond James TMT and Consumer Conference in New York on December 10th. Also in New York, we'll be attending the 27th annual Needham Growth Conference on January 14th. For updates to upcoming events and other conferences, please check the events section of our IR website at ir.bench.com. With that, we thank you again for your support and look forward to speaking to you soon. Good evening.