Benchmark Electronics, Inc.

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. 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 Manske with Investor Relations at Benchmark Electronics. Please go ahead.

Thank you, Chloe, and thanks, everyone, for joining us today for Benchmark's second quarter 2024 earnings call. Joining me this afternoon are Jeff Bank, 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. 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 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 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 statements. 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 three, I will turn the call over to our CEO, Jeff Bank.

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. We met or exceeded our guidance range for revenue, margin, non-GAAP BPS, and free cash flow. Let me step through a few highlights. 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 industrials, medical, and advanced computing and communications sectors, allowed us to outperform on revenue. Our non-GAAP gross margins, again, exceeded 10 percent, marking the sixth consecutive quarter of year-over-year margin expansion. Our non-GAAP operating margin of 5.1 percent was above the high end of our guidance. This represents a 60 basis point expansion year-over-year. 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. 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. 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 delivered. 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. Please turn to slide five for our revenue by market sector. As Jeff mentioned, our total revenue in Q2 was $666 million. Semi-cap revenue increased 5% year over year. We continue to see signs of improvement in the market and are well positioned to capitalize on it. Industrial revenue decreased 15%. The decline was driven by reduced demand from existing customers partially offset by new program ramps. We believe we'll return to year-on-year growth in the sector as we exit this year. Medical revenue was down 23%. 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. A&D 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. 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. AC&C decreased 26 percent 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. Please turn to slide six. Our gap earnings per share for the quarter was 43 cents. Our non-GAAP EPS was 57 cents, which exceeded the high end of our guidance range of 48 to 54 cents. 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 100 basis point increase year-over-year. Non-GAAP SG&E expense was $33.8 million, down 3% sequentially and down 1% year-over-year. 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. Our second quarter non-GAAP effective tax rate was for 23%. Non-GAAP RIC in the second quarter was 9.9%. Please turn to slide seven for trended financials on a non-GAAP basis. 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. Please turn to slide eight for discussion of our cash conversion cycle performance. Our cash conversion cycle days in the quarter were 90 days compared to 94 days in Q1. This four-day improvement was primarily driven by $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 in the period. 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. We now expect to deliver greater than $120 million on 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 loan, $165 million outstanding against our revolver, and $381 available to borrow under our revolver. As of the end of the quarter, we had 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, 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-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. Non-GAAP 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. Our non-GAAP diluted earnings per share is expected to be in the range of $0.52 and $0.58. 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%. And with that, I'll turn the call back over to you, Jeff. Thanks, Arvind. 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. 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. 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. 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. 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. Nearer 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 will believe will enable us to grow semi-cap revenue in the low double-digit range this year. 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. While in the near term, we expect these headwinds will persist, We continue to secure new program wins in manufacturing and engineering in both the medical device and biotech subsectors. 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. 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 percent year-over-year and flat sequentially. 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 percent sequentially. Our defense business continues to see demand strength from both existing business and ramping new program wins. 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. 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-date performance and back-half expectations, A&D revenue on a full-year basis is expected to grow in excess of 20%. Total AC&C revenue declined 26% year-over-year and 11% sequentially in the June quarter. 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 manufacturing 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. 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 customer 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. 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. Despite this demand volatility, we've delivered year-on-year non-GAAP 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-GAAP operating margin on a full year basis. Also, per our 2025 targets, we remain committed to working down inventory and driving free cash flow. Our second quarter inventory was down 157 million year over year. helping us to achieve our fifth consecutive quarter of positive free cash flow. Our focus on inventory is not letting up, and we expect continued improvement. This provides us confidence to increase our free cash flow forecast for 2024 to greater than $120 million. Lastly, we committed to returning capital to investors. Today, we announced that the Board has approved an increase to our regular quarterly dividend to 17 cents per share, effective immediately. 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. A&E remains 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 next year. 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.