Benchmark Electronics, Inc.

Good afternoon. Welcome to Benchmark Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lisa Weeks, Vice President of Strategy and and investor relations. Please go ahead.

Thank you, operator, and thanks, everyone, for joining us today for Benchmark's second quarter 2020 earnings call. Joining me this afternoon are Jeff Banks, CEO and President, and Root Lakharaju, CFO. After the market closed today, we issued an earnings release highlighting our financial performance for the second quarter, and we have prepared a presentation that we will reference on this call. The press release and presentation are available online under the investor relations section of our website at www.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-gap measures in the earnings release as well as in the appendix of the presentation. Please take a moment to review the forward-looking statements advice on slide two in the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements which involve risks and uncertainties as described in our press releases and SEC filing. Actual results may differ materially from these statements, most notably from the ongoing impact of the COVID-19 pandemic, and Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeff will begin by covering a summary of our second quarter results and by providing a current status of our global operation. Ruth will then discuss the second quarter results in more detail, including a cash and balance sheet summary and our third quarter guidance. Jeff will wrap up with an outlook by market sector and an update on our strategic initiatives before we conclude the call with Q&A. If you will please turn to slide three in the presentation, I will turn the call over to our CEO, Jeff Banks. Jeff?

Thank you, Lisa. Good afternoon, everyone, and thank you for joining our call today. Our second quarter results were achieved against the backdrop of mandatory facility shutdowns, component constraints, and extra processes required to keep everyone safe. I want to thank the entire benchmark organization for doing a remarkable job in taking care of one another and making sure we are operating as effectively as possible in the new world. During Q2, we achieved revenue of $491 million, which was down sequentially from Q1, but supported by strong demand in our medical and SEMICAP sectors. Non-GRAP gross margin for the quarter was 7%, and non-GAAP earnings per share were $0.07. Our non-GAAP earnings include $4 million or $0.10 per share of COVID-related costs that we could not fully anticipate as we entered the quarter. In addition to these COVID costs, we experienced other production inefficiencies as a result of the current pandemic environment. Our overall performance was helped by the aggressive cost reduction actions taken earlier in the quarter. Our cash conversion cycle for the quarter was 84 days. Despite operating challenges, we generated $23 million in cash flow from operations and returned $6 million of cash to shareholders as part of our recurring quarterly dividend payment. As we look forward, I wanted to step back and offer a few perspectives. I'll do that on slide four. Since I joined Benchmark last year, We've made a lot of positive changes, and all of these have been supported by an amazing team. From the hard work required to execute on our strategic initiatives and goals that we outlined last year, to overcoming unique challenges presented by the unprecedented global pandemic of today, let me simply say our team has risen to the occasion. Before I arrived, the company had embarked on a strategy to diversify the markets we serve and drive a portfolio mix with a greater concentration in higher value markets. In the past year, we have worked further to align the customers where we can add the most value, and these efforts have paid off. Today, we enjoy a diverse portfolio of products across many high-growth and high-value sectors. That being said, we are not immune to the current recession that this disease has caused. and we have an unprecedented amount of demand changes in our portfolio that's required a lot of the team's attention to ensure we capitalize on new opportunities while mitigating any risks. We believe this diverse portfolio and exposure to high-value segments will allow us to expand our quarterly revenue through the balance of the year. Supply chain in our complex time-mixed environment is a constant focus, and our recent results have been supported by the strong performance of our supply chain team. During the second quarter, and due to the team's efforts, we were not significantly impacted by component shortages, but they did, in some places, contribute to operational inefficiencies. Further, our revamped go-to-market organization has grown the manufacturing and engineering services opportunity pipeline by over 30% in the past 12 months. and have delivered three-quarters of sequential growth in bookings, which bodes well for our long-term growth potential. As we look out to the end of the year, we are still on track to exit 2020 with at least 9% gross margin, and we expect to build on this momentum into 2021. Please turn to slide five. As the global pandemic continues to evolve, we have expanded protocols focused on keeping a safe work environment for our employees. Our actions are informed by the best practices published by the CDC, the WHO, and local authorities, and we've completed a company employee survey to solicit direct feedback on our actions to date and ensure our employees agree that we are maintaining a safe work environment. Where possible, we are continuing to permit about 20% of our employees to work from home. We have shifted our customer engagements to a virtual environment with real-time video-supported factory tours as we limit travel to protect our teams. We even hosted a virtual grand opening of our new Phoenix operation with Governor Ducey and Mayor Gallego. Our teams have adapted well to the new reality, and we are finding creative ways to stay close to our customers and continuing to collaborate with them on solving new challenges. If you please turn to slide six, I could provide an update on the status of benchmark global operations. In Asia, China and Thailand were fully operational through the second quarter. As we entered Q2, our Penang, Malaysia operations, which includes our largest precision machining facility, operated at 50% capacity based on local restrictions, which were subsequently lifted at the end of April. From the 1st of May, Malaysia has been fully operational. Our European sites in the Netherlands and Romania were fully operational in the second quarter and remain so today. Across the U.S., our five operations in California were impacted by shelter-in-place orders through April. Since early May and to the present, All California locations, as well as our other U.S. sites, are fully operational. In Mexico, we have two operations in Tijuana and one in Guadalajara. The 100% shutdown that impacted our Tijuana operations was lifted in mid-May after we passed an inspection and were given authorization to operate by the Baja State. There has been a phased return to work since this time, and the Tijuana sites are now operating at approximately 75%. Our Guadalajara facility has been essentially operating at 75% productivity due to at-risk employees being required to stay home for the Jalisco state government restrictions. We are staggering shifts in other protocols in our Mexican operations to keep our employees safe and optimize output. This has been and remains a highly dynamic environment. As shelter-in-place orders were lifted in the U.S., we had hoped the country could maintain the declining infection curve. Unfortunately, this has not happened. As the incident rate domestically increases, there could be temporary shutdowns in one of our facilities at any given time, and we stand ready to execute decontamination protocols beyond our normal safe work and cleaning procedures. Our operation teams will continue to maintain our safety-first approach while managing schedules to ensure we meet delivery obligations to our customers. Now I will turn the call over to Rube to discuss the second quarter results, and following his commentary, I will share further insights regarding our business. Over to you, Rube.

Thank you, Jeff, and good afternoon.

I hope everyone and their families are staying healthy and safe. Let me start by echoing Jeff's sentiment on the incredible efforts of our teams to support our customers through a very dynamic environment. As we manage through the COVID crisis, our priorities remain centered on one, the health and safety of our employees, two, delivering for our customers, three, maintaining a healthy balance sheet, and four, ensuring the financial flexibility to run our operations through uncertainty. Please turn to slide eight for our revenue by market sector. Total benchmark revenue was 491 million. Medical revenues for the second quarter increased 14% sequentially and were up 18% year over year from continued new product ramps, strength throughout our medical customers, and increasing demand for critical devices necessary to support the COVID-19 fight, including x-ray, and ultrasound devices, ventilators, and diagnostic equipment, which we estimate is approximately a third of our sequential growth. Semi-cap revenues were up 5% in the second quarter and up 39% year-over-year from continued strong demand across our semi-cap customers. A&D revenues for the second quarter decreased 26% sequentially due to approximately $15 million lower revenue from our commercial aerospace programs, which is approximately 30% of the sector's revenue. The remaining decline in the sector is related to defense program timing changes, whether that is the end of certain programs or transitions to new programs. Demand from our defense customers for security solutions, aircraft, munitions, and satellites remains strong. We expect continued strong demand in Q3 and Q4 2020, including new programs ramping, which should result in sequential revenue growth. Industrial revenues for the second quarter decreased 15% sequentially. Demand for products in the oil and gas industry, which is approximately 20% of our revenue, continue to be generally soft and will likely stay soft for the remainder of the year. demand decreased for goods that support the commercial building and transportation infrastructure markets. Overall, the higher value markets represented 81% of our second quarter revenue. In the traditional markets, computing was up 20% quarter-over-quarter from new program ramps and two engineering and manufacturing programs and high performance computing. Telco was down 10% sequentially We saw pockets of strength and demand for network infrastructure, which was offset by lower demand for broadband and commercial satellite applications. Our traditional markets represented 19% of second quarter revenues. Our top 10 customers represented 44% of sales for the second quarter. If you'll please turn to slide nine. Our revenue of 491 million reflects a decrease on a quarter-over-quarter basis. Our gap loss per share for the quarter was $0.09. Our gap results include restructuring other one-time costs totaling $5.7 million. $3.3 million is related to the severance and other items for the announced closure of our Angleton site, which Jeff will cover in more detail in his initiatives update. $1.2 million is related to the completion of our San Jose closure, and the remaining is due to other various restructuring activities around our network. Our previously announced San Jose site closure has been completed on schedule and within our original cost estimates, starting with slide 10. For Q2, our non-GAAP gross margin was 7%, a 140 basis point sequential decline. As Jeff stated earlier, our results were negatively impacted by $4 million of costs related to COVID-19, including site shutdown days pursuant to government orders, idle and not fully productive labor costs, personal protective equipment, and incremental freight charges. The majority of these costs impacted our gross profit. We expect the second quarter to be the lowest quarterly gross margin in fiscal year 2020, and we still believe that we can exit 2020 at at least 9% gross margin. Our SG&A was 28.5 million, a decrease of 3.1 million sequentially and 3 million year over year due to the cost containment measures which we have continued including salary reductions for certain management personnel, including the executive team, freezing travel, reducing discretionary spending, and delaying hiring, in addition to a reduction in variable compensation expense. Operating margin was 1.2%, a decrease from 2.3% in Q1 due to the lower revenue, reduced gross margin, offset by the lower SG&A. In Q2 2020, our non-GAAP effective tax rate was 29%, which was higher than expected for the quarter due to the distribution of income across our network and certain discrete tax items. The higher tax impact was approximately 1 cent per share. Non-GAAP EPS was 7 cents for the quarter, and non-GAAP ROIC was 5.9%. Please turn to slide 11 for an update on cash flow and a summary of our balance sheet. Our cash balance was $356 million at June 30, with $194 million available in the U.S., We did repatriate cash in Q2. We'll continue to repatriate future quarters when appropriate while also balancing our foreign sites cash flow requirements. Our cash balances include $30 million in proceeds from borrowings under our revolving line of credit. As June 30th, we were at a positive net of debt cash position of approximately $183 million, which was higher than the end of Q1 by approximately $12 million. We believe we have a strong capital structure in our liquidity position provides flexibility to manage our business through the current environment. We generated $23 million in cash flow from operations and $13 million in free cash flow after netting $10 million of capital expenditures. Our accounts receivable balance was $302 million, a decrease of $16 million from the prior quarter. Contract assets were $154 million at June 30 and $160 million at March 31. Payables were down $11 million quarter over quarter. Inventory at June 30 was $364 million, up $26 million quarter over quarter. Turning to slide 12 to review our cash conversion cycle performance. Our cash conversion cycle days was 84. The primary driver for the slightly higher cycle days was the effect from the increase in inventory. Inventory days increased due to mixed changes from customers late in the quarter and advanced inventory purchases to support long production cycles for products in our semi-cap and medical sectors. Along with the inventory increase, we did see a corresponding increase in customer cash deposits, which is used to offset advanced inventory purchases. Now turn to slide 13 for a capital allocation update. In Q2, we continued to pay a quarterly cash dividend of approximately $5.8 million. As a reminder, we increased our recurring quarterly cash dividend to $0.16 per share on February 3, 2020. We expect to continue the recurring quarterly cash dividend. We suspended our share repurchase program in Q2. We're not planning any share repurchases in the third quarter. Turning to slide 14 for a review of our third quarter 2020 guidance. We expect revenue to range from $490 million to $530 million. Our non-GAAP diluted earnings per share is expected to be in the range from $0.26 to $0.30, or a midpoint of $0.28. We expect to generate cash flow from operations for the full year, even considering the challenging COVID-19 environment. CapEx for the year will be approximately $30 to $35 million as we prioritize investments to support new customers and expand our production capacity for future growth. Implied in our guidance is a 2.9% to 3.1% operating margin range for modeling purposes. The guidance provided does exclude the impact of amortization of intangible assets, and estimated restructuring and other costs. We expect to incur restructuring and other non-recurring costs in Q3 of approximately $800,000 to $1.2 million. Other expenses net is expected to be $2.4 million, which is primarily interest expense related to our outstanding debt. We expect that for Q3, our non-GAAP effective tax rate will be in the range of 20% to 22% because of the distribution of income around our global network. Expected weighted average shares for Q3 are 36.7 million. This guidance takes into consideration all known constraints for the third quarter and assumes no further significant interruptions to our supply base, operations, or customers. Guidance also assumes no material changes to end market conditions due to COVID-19. I'll now turn the call back to Jeff for a detailed look at our sector outlook.

Jeff?

Thanks, Rick, for that update. Following Ruth's guidance for the third quarter, I wanted to provide additional color on our view of demand by sector for the second half of 2020 on slide 16. As I stated earlier in the call, our global operations are at or near our planned staffing levels with the exception of Mexico. Given our current operational state, our ability to fulfill demand remains high. Through the second quarter and early into July, we have gained a better picture of the demand outlook from customers in each of our market verticals and have a current snapshot of what our revenue trends could look like in the second half. I want to reinforce this is just a snapshot because there will likely be puts and takes across our subsectors as we move forward. I will start with the medical sector where demand grew almost 14% sequentially from Q1 and is forecasted to remain strong throughout the rest of the year from new program ramps in imaging systems and for critical care and diagnostic devices supporting COVID-19. On the flip side, our core medical products that support cardiac, renal, and orthopedic therapies have seen demand reductions in the second half that have offset some of the increases as hospitals and clinics are deferring planned procedures and elective surgeries based on hospital capacity. We expect demand for these products to increase when the COVID crisis lessens. But the end result for our portfolio is that we believe it will remain at the Q2 level for the balance of 2020, which still represents double-digit year-over-year growth. In SEMICAP, the demand recovery for semiconductor capital equipment continues based on the current forecast from our customers. On the strength of this demand, we expect sequential quarterly revenue growth the rest of the year, further supported by some new program ramps as well. Our competitive position remains very strong, and we look forward to increasing our industry-leading precision machining position in this sector. Our A&D sector is comprised of approximately 70% defense-related products and 30% aerospace. Demand for radar, missiles, military aircraft, and satellite communication devices remains strong. and we expect continued strength in the second half. However, as Rup referenced earlier in our Q2 results, demand for commercial aircraft programs are not showing any signs of recovery in the second half of this year. Moving to the industrial sector, we see limited recovery for customers supporting oil and gas through 2020, which represents approximately 20% of sector revenue. We are also seeing softer demand for commercial aircraft and transportation infrastructure markets, as many of our customers' projects have been deferred. As a bright spot, we are seeing strength in testing, instrumentation, and IoT-related products. Similar to our industrials, the traditional markets of computing and telco will remain mixed. We see strength in computing, as we saw in Q2, with very complex, high-performance computing projects landing in the second half. However, these programs tend to be project-orientated, so it's important that the end customer schedule supports installing these machines in the year. Demand from customers we support in security computing and enterprise data centers will remain muted given the lockdown on enterprise IT capital spending. On the telco side, we've seen increases in network infrastructure products, supporting greater work-from-home bandwidth demand, but this has been offset by declines for next-generation network build-out and in some commercial satellite applications. If you'll turn to slide 17, despite a challenging global backdrop that has most of our business development team grounded, we had our third sequential growth quarter of bookings growth. Our marketing team has been instrumental in working with our operation and sales teams on virtual tours and capability demonstrations that is becoming a part of the new norm in our business. Fortunately, the demand environment remains favorable for outsourcing, as many companies continue to pivot to more variable design and manufacturing cost models. In the medical sector, we were awarded programs for a fall detection system and a new drug delivery device, which were both coupled with front-end engineering projects. Also, as we stated last quarter, we were awarded new ventilator programs that are being rapidly transferred into manufacturing revenue for Benchmark. In defense, we were awarded a number of new programs including design and manufacturing for space module electronics and for optical sensors for military applications. In industrials, we were awarded a new product that will come to market for microbial cleaning and commercial venues, which has become a critical application in the new normal of living with COVID and beyond. I'm also pleased to announce that we have partnered with CoreConnect to provide IoT ecosystem hardware from our new Phoenix EMS operations. Our new business pipeline is strong across our targeted sectors, and we remain very encouraged about the prospect for continued outsourcing wins in the coming quarters. Now, if you'll please turn to slide 18. During the first half of 2020, even with the significant challenges brought on by the pandemic, we've continued to make progress on our strategic initiatives, and I wanted to share a few updates as we close the call today. Benchmark is in the services business, and one of our top priorities is to deepen our relationship with customers as a strategic partner and trusted innovation collaborator. I can report that customer satisfaction, which I review with the team weekly, remains very high. During a crisis, there is a heightened level of communication and coordination required in serving customers, and as I noted last quarter, I have personally received multiple inputs on the discipline and excellence of our teams. In fact, in Q2, we received three Service Excellence Awards from our top customers recognizing our performance during this pandemic. As I stated earlier in the call, I couldn't be prouder of our organization. In addition, we are partnering with Applied Materials on their Success 2030 Sustainability Initiative and participated in their announcement at Semicon West earlier this month. Benchmark's committed to supporting ESG initiatives and are excited when we can further these actions working closely with a valued customer. Turning now to growing our business, with our revamped go-to-market organization, we have had our third consecutive quarter of sequential growth and new program wins. We have the right team on the field and will continue to reap benefits from the investment in this area. We are making progress in our medical, SEMICAP, and defense accounts and starting to see early results with new engineering and EMS wins in our industrial sector. We continue to drive enterprise efficiencies. Against a very challenging macro backdrop, our teams have maintained focus on meeting the needs of our customers and on our operating performances improving. We have also continued our global footprint optimization program, which we started almost a year ago. The objective of this program is to utilize ongoing voice of the customer feedback to align our geographic capabilities and footprint to meet customer needs. The outcome of our most recent round of strategic reviews is that we decided to close our Angleton, Texas operations. We plan to consolidate many of the programs into other benchmark manufacturing operations, which will improve utilization and efficiencies. I want to thank the employees of the Angleton operation for their dedication and support in the coming quarters until these transitions are completed. This initiative isn't just about closing factories, as we are also looking at where we want to expand our investment and footprint. In support of that, in June, we announced our newest facility with the virtual grand opening of Benchmark Phoenix. This new state-of-the-art facility in Phoenix features RF design and manufacturing, circuit fabrication, micro-E, SMT, systems integration and testing all under one roof. This enables us to provide the proverbial one-stop shop for sophisticated customers looking for extremely dense hybrid circuit designs who might also have a need for micro-E or SMT assembly on the same design. And with our new facility, they don't need to look any further. The customer response for this type of advanced manufacturing operation has been very positive, and we look forward to the growth from this operation. Finally, I want to close with our initiative on engaging talent and shifting culture. First, Benchmark is a great cultural foundation, and the work we've completed over the past year since I joined is a testament to the support we provide each other in this organization. At Benchmark, we are committed to advancing diversity and inclusion efforts at all levels in the company. In this endeavor, we are committed to more transparency, education and diversity training, and talent recruitment to improve our pipeline of diverse future leaders. We look forward to sharing details on our progress in the future as part of our increasing focus on environmental, social, and governance affairs. Now let me wrap up. The senior leadership team is engaged in driving these initiatives, and the level of collaboration throughout our organization is energized. We remain committed to our long-term strategy and we'll use this unprecedented time of change to hone our skills, right-size our operations, and expand our technical capabilities so that we will emerge with a stronger organization and business in the years to come. And with that, I'll now turn the call over to the operator to conduct our Q&A.

We will now begin the question and answer session. To ask a question, you may press 5 and 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Jason Smith from Lake Street. Go ahead.

Hey guys, thanks for taking my questions. I just want to start with Q2, and if you could discuss the linearity in the order patterns. Is it fair to assume sort of April was the bottom, May better, and June was even better than that? And I guess relatedly, could you just discuss how orders have tracked so far this month?

Yeah, I can start, and then we'll let kind of Ruth kick in. You know, we We obviously, given the lead time, the order load kind of progresses through the quarter, and it starts some of that backlog of orders is actually before the start of the quarter we're in. I think we've seen reasonably good linearity. It's not like we had a sudden uptake at the end of the quarter. I think that was normal. But that being said, we did have demand adjustments and reductions. 42Q, and also looking on Q3 and Q4. We did also say, you know, in the prepared remarks that we see continued recovery, but, you know, when you think about where we might have been before this, you know, recessionary environment, we're not in that level, but we do see, you know, improving, you know, demand as we go. We also, it's a bit of a tale of two cities for us, right, where we've got some existing products that the demand is weaker, and we can, you know, go into any sector you might be interested in knowing more about. But then as we get to, you know, other areas like some of the COVID-related products, we're seeing an increased demand. So from that standpoint, you know, that's a little more insight.

Rup, do you want to add to that? His call dropped.

He'll be right back.

Okay, no problem. Anyway, does that help? Okay.

Yeah, and then I know in Q2 you expected some constraints within the semi-cap market. I think that was mostly related to labor and with your facilities now being open. Assumption for Q3, is that for the constraints to all be alleviated at this point?

Yeah. Yeah, it is, in fact. We did say we had strong demand, and we were constrained based on the California sites disruption, and that we knew that that would be a challenge for us to meet all of the demand, and some would roll through the quarter. We continue to make progress on that in July, and I feel pretty confident that we're going to not have any pent-up or backlog that we can't fulfill in the quarter. So that's one of the reasons – Semi-cap recovery has been good, and we continue to see third quarter be stronger there, and we've indicated that.

Okay. And the last one for me, and I'll jump back into Q. The COVID costs that impacted Q2, what's the assumption for Q3?

Yeah, that's an interesting one to call. I'd go so far as to say we expect the expense will be the COVID-related costs to be less than than what we saw in the current quarter because we had a lot of operational disruption, a tremendous amount, right, more than a lot of even some of our competitors just based on where operations are located. But that being said, we're almost fully operational everywhere. We do have the Mexico sites, which are only 75%. So I see that cost being less, but it won't be zero. And, you know, it still could be a fairly significant number you know, north of a million or more, right? Because we still have personal protective equipment. We still got, you know, extra cleanings and who knows what other disruptions might come about. So somewhere, you know, not zero, but probably less than what we called out in the second quarter. Hey, Jeff, it's Rufus. Jason, I got reconnected.

Jeff, I apologize. If I could go back to add to Jeff's answer on that linearity question. Just a couple of things on that linearity. April, obviously, because of kind of how the quarter happened, we did see the linearity increase as we got later in the quarter in June. And as we made mention, because some of the medical products and semi-cap products, we got long production cycle times. So that carried into the third quarter. And obviously, we'll see that ramp as we continue through the rest of the quarter. And we've obviously got revenue growth also. So that's also contemplated in terms of that linearity. So you see it kind of up and to the right as we all continue through Q3.

Okay, I appreciate that caller. Thanks, guys.

No worries. Again, if you have a question, please press star then 1. Our next question is from Anya Silverstrom from Sidoti. Go ahead.

Hi, thank you for taking my question, and congratulations on that good quarter despite the challenges to it. Thank you. So I just have a – so last quarter you sort of said it wasn't really a demand issue for you. It was more the operational and supply challenges issues for you. How does demand look for you going into the second half and maybe also into 2021 if you could give some color on that?

Yeah, I think, you know, I think as, you know, we did provide guidance for the third quarter. So, you know, we are seeing improvement in demand. And we also are much better from an operational standpoint. So we don't anticipate to be constrained by supply, right? We believe that we'll be able to fulfill the demand that's there. It is good to see, you know, some improvement there. And as we look at the second half, you know, in general, You know, we see some sequential, you know, as we go. A little early for 21 to talk a lot about it, other than to say, you know, we see a lot of strength in medical. We believe that will kind of continue into 21, certainly with the pipeline of new wins because we continue to win good business there. We also expect SEMICAP recovery to continue into 21. In fact, you know, this year the SEMICAP recovery very heavily dominated by logic. And as we look at 21, you know, we think memory has a good opportunity and certainly just coming out of the SEMICON conference, memory looks to have a strong 21. So, you know, we anticipate that that will be a good business line for us. And then defense continues to thrive. to be pretty solid and has not been as affected by the downturn here. So that's a little bit of indicator what we, you know, what we're thinking about in 2021. Okay, thank you.

That was good, Connor. And then for medical, and then you have the COVID-related production there helping you. How long do you see that lasting? And sort of when do you think the elective will kick in? Will there be sort of like a, and maybe a little bit downtick in between, or will it sort of replace each other?

So, maybe. Yeah, I would feel like I should. Go ahead. Sorry, Jeff, maybe if I could, I'll start if I could on that one. So, yeah, we do have COVID upside on you, but we've got general strength in the medical sector based on the bookings that we've seen, the strong bookings growth over the course of the past few quarters, and we've got a number of new ramps. Now, we've got strength within our existing medical customer base in addition to the COVID products. So, I think as the COVID products over the next couple of quarters or a few quarters may start to decline, we'll see the continued ramps of the medical programs that we have underway and continue to shrink with some of our other medical customers into 21. Okay.

Thank you. And then lastly, so, Have you, I guess it's been a little bit difficult for you this quarter, but have you sort of implemented any production efficiencies during the quarter that you think might be more permanent and carry over into the next year without margins?

So you said production efficiencies, did you say?

Yeah.

Just to clarify.

Or any other operational efficiencies. Yes.

Yeah, I mean, obviously, we've got, we outlined the Mexico operations for which we are still seeing some challenges. With that said, our other global operations are up and running. And so I think, you know, we've got contemplated any such considerations at this time in terms of what we've guided. Obviously, we'll have to see how the general market and the COVID environment continues in the second half and what have, you know, there may be a vaccination and these sort of things. So I think for the second half, Mexico is still a concern for us. The other sites are up and running at this point in time.

Let me just add a little bit there. Obviously, we've got a lot – we had a lot of inefficiency in Q2. I mean, we talked about 4 million that was – very specific covet expenses that we would say you know this that would have contributed 10 cents of eps if we wouldn't have to spend that money which is which is a big deal but beyond that there's a lot of other inefficiency like productivity engineering designers that maybe were 85 90 efficient because they're working from remote and they can't collaborate quite as easily So there's a lot of other just general inefficiencies that, you know, that we see the opportunity not only adjusting to the new normal, but then also, you know, as we get further through and hopefully, as Ruth said, there's progress on remedies and ways to combat this disease. But we also took a lot of costs out, like with a lot of the actions we took on expense. So that will mitigate that a little bit because as the COVID costs go down, then some of the other, you know, furloughs and salary reductions and things, we'd like, obviously, to not continue, you know, infinite items. So that's a little bit of a dynamic there, but certainly when you look at the margins in the second quarter, you know, we know we can do substantially better, and we're sort of guiding to that. We're talking about exiting the year, you know, 9% plus.

Okay. Okay, thank you for that, Connor. That was all for me.

This concludes our question and answer session. I would now like to turn the conference back over to Lisa Weeks, for closing remarks.

Yes, I just wanted to put in a reminder that Benchmark will be supporting a number of virtual conferences in the third quarter. On August the 6th, we'll be supporting the Needham Industrial Technologies Conference. On August the 11th, the Oppenheimer Technology Internet and Communications Conference. On September 17th, the Lake Street Capital Markets Big Four Conference. And on September 23rd, the Sedoti 2020 Fall Conference. We look forward to engaging with you during these events. And I wanted to say thank you again for joining our call today. If you have any further questions, please feel free to reach out, and I'll be happy to follow up. Thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.