Benchmark Electronics, Inc. (BHE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to the Benchmark Electronics First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. 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, Senior Vice President of Strategy and Investor Relations. Please go ahead.
Lisa Weeks: Thank you, operator, and thanks to everyone for joining us today for Benchmark's first quarter 2021 earnings call. Joining me this afternoon are Jeff Benck, CEO and President; and Roop Lakkaraju, CFO. After the market closed today, we issued an earnings release highlighting our financial performance for the first quarter of 2021 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.
Jeff Benck: Thank you, Lisa. Good afternoon, and thanks to everyone for joining our call today. Overall, we delivered a solid start to 2021. Our first quarter results reinforced our commitment to executing the strategy we have laid out and continuing to demonstrate operational excellence. In Q1, revenues of $506 million were above the midpoint of our guidance for the quarter, led by continued global strength in our Semi-Cap sector, which grew 37% year-over-year. Our non-GAAP gross margins of 8.3%, non-GAAP operating margins of 2.3%, and earnings per share of $0.21 were all in line with our forecast guidance. We had another strong quarter of working capital results as our cash conversion cycle was at 65 days, which enabled $37 million of operating cash flow and $30 million of free cash flow for the quarter. Despite some significant disruptions due to COVID that temporarily shut-down two of our facilities in Malaysia, our teams did an amazing job of caring for our people, recovering in the quarter and delivering for our customers. Our leadership and COVID Task Force continued to navigate our organization through the challenges of the pandemic and we are taking actions to encourage vaccinations across our employee population first here in the US and in other countries as the vaccine is available. I'm really proud of our team around the world who continue to deliver solid results, while successfully navigating COVID.
Roop Lakkaraju: Thank you, Jeff, and good afternoon. Please turn to Slide 6 for our revenue by market sector. Total Benchmark revenue was $506 million in Q1, which was slightly above the midpoint of our guidance. As expected, decreased revenues primarily from A&D were up - partially offset by increases in Semi-Cap and telecom.
Jeff Benck: Thanks, Roop, for that update. Following Roop's comments on our second quarter guidance, I wanted to provide some additional color on our view of demand by sector for the remainder of 2021. This is on slide 13. For the second quarter, we expect revenue to be up sequentially by about $30 million. This strength is led by expected sequential growth in Semi-Cap, A&D and Computing. In Semi-Cap, the demand outlook continues to build for semiconductor capital equipment and a strengthening in Q2 over our Q1 results. The strong demand for semiconductors due to the accelerating pace of digital transformation is fueling this growth, and we remain well positioned with the industry leaders in this sector. We believe this wafer fab equipment growth cycle has the potential to continue for several years not only due to the current severe semiconductor shortages, but also driven by government investment to address concerns about supply chain security and overall competitiveness. With this current demand strength and signals from our customers, we are revising our outlook for this sector upward from 10% growth to greater than 20% revenue growth over 2020 levels.
Operator: And our first question will come from Jaeson Schmidt of Lake Street. Please go ahead.
Jaeson Schmidt: Thanks for taking my questions. I just want to start with your comments on the shutdown of the Malaysian facilities. Could you quantify the revenue impact that had in Q1?
Jeff Benck: Yes. We - the team did an amazing job, Jaeson. We did have a significant enough impact from COVID that we ended up really halting operations for about 10 days in two of our facilities there. But the team, by working weekends and overtime, did a really quite amazing job in recovering in the quarter. So, I would say, really the impact from that shutdown was somewhat de minimis. I mean, it really was not a - not something that would stand out and really a testament to the team, just working the last two, three weeks of the quarter when they got back fully operational and they did a really nice job of recovering.
Jaeson Schmidt: Okay. That's helpful. And then just as a follow-up, I know Q1 is always a bit different because of Chinese New Year and obviously the macro remains a bit fluid, but could you just discuss how order patterns and bookings trended in Q1?
Jeff Benck: I mean, I think it was not all that different than what we've seen in prior quarters, because, like you said, there are some things that are different in Q1 as we start a new year. We don't always experience a ton of seasonality, but I think as the quarter progressed, we certainly have seen customers come in and start to talk about increase in demand, not necessarily all of it in quarter. We talked a little bit as in the commentary that we see indications that second half looks to be stronger than first half. But I think things played out pretty in line with our expectations. We did have some demand that we weren't able to fulfill in the quarter, given some of the tightness in supply, and we can talk more about that. But, all in all, I think the order load was pretty consistent.
Operator: Our next question comes from Anja Soderstrom of Sidoti. Please go ahead.
Anja Soderstrom: Hi, Jeff and Roop and Lisa, and thank you for taking my question. So if you could just elaborate a little bit on the supply chain challenges you have, what kind of visibility do you have there for the rest of the quarter? And you also said it puts a little bit of the limitations on the upside demand within the quarter, is there any way you can navigate that in the coming quarters?
Roop Lakkaraju: Yes. Anja, this is Roop. I'll maybe start with a couple of comments. I think to your last question first, can we navigate it? I think, we have the ability to navigate it. With that said, I mean it is a constrained market. It's not just semiconductors that really cuts across all commodities, but our teams are working hard at mitigating the risks associated with it and providing continuity of supply, but that means partnering with our customers and the supply chain environment. If I think about demand, it's strong, it's a strong demand environment across most of our subsectors. And with that in mind, when we look at how we might execute through Q2, we're obviously sequentially guiding up, which tells you the strength that we see. With that said, could we have some unfulfilled demand in the quarter? That's a possibility and it could be to the tune of $30 million to $50 million potentially, but that's not lost demand. That demand push us to the right and they will be fulfilled in the second half of '21 we believe.
Jeff Benck: I might just add to that, to Roop's commentary, when he talks about the potential for further unfulfilled demand, that's up and above our guidance, right. So that's not factored in and that's not necessarily a risk to what we're putting out as a forecast here. But it is a tough environment. You've got increased demand as the economic recovery continues, but then at the same time we've got the component constraints. So we're working closely with our customers who say, as you guys see it, we need to be working very closely together to plan for that, to ensure that we can get the needed supply to do that. So we are fortunate that we participate in some segments that are not as dependent on our components. When you think about our Semi-Cap business, which is up a lot, and we look for that to be stronger this year than planned, not near as component sensitive, right. In fact, if anything we're helping build the capital equipment with our customer partners that ultimately will help the industry produce more semiconductors. So we're actually part of that solution. But that's an area, for example, that's not near as sensitive to the tightening supply of components. But it's an issue the whole industry is dealing with and we're not - we're certainly not immune to it, but we think we've done a good job in navigating and we've got to stay vigilant on it.
Anja Soderstrom: Okay. So, hopefully, since you're part of the solution, you will be prioritized in the line for components. But in terms of the visibility though for the quarter and in the guidance, that supply need is accounted for, right? There is no risk to your guidance? It's just in case there is any upside?
Roop Lakkaraju: Yes. That's what I was trying to reiterate. It was the fact that our guidance actually takes into account our line of sight to supply barring anything that comes up unexpectedly. But we obviously do a lot of work to align with our suppliers. We did - the reason that we're sharing that - demand is very strong and we're just sharing the fact that it's stronger than what we're likely to be able to close, because some of that's within lead-time as you have demand shifting. We could - in a normal environment, could we have done even more of that potential there. It's not keeping us from growing though. We're still able to grow our business, but ultimately we'd like to resolve all of it. And as we close to suppliers, we will look to drive more revenue. Of course, the - and we want to fulfill any demand our customers have the ability to sell.
Anja Soderstrom: Okay. Thank you for that additional information. And in terms of the end markets, you talked about the elective medical coming back, do you see there - how is that trending?
Jeff Benck: Well, we kind of - we've watched what others have said in the space too. We have seen that. Our medical, kind of in the first half, has been flatter and we had a lot of growth last year, but we do see signals of the elective surgery demand picking up. We also participate quite a bit in the cardiac products and diagnostic products. And in some of that, we're starting to see early signs, I would say, not as much in second quarter but as we look at some forecast for third quarter and four quarter, that looks like there is - that we should see nice growth from first half to second half in our medical business, which is kind of leading us to continue to show that as green in terms of strong growth and in the full year, it's just - as you look in the second quarter, we're not seeing quite the uptake yet in most of that demand. Those demand signals are pointing to second half. And, also, it's probably further influenced by - we have some new products that are ramping that also really look to ramp in third quarter and beyond. So some of the new medical wins we had over the last 18 months are starting to kick in, but that's really more of a second half of that for us. So that's, kind of, how we think about medical right now.
Anja Soderstrom: Okay. Thank you. And I think you mentioned that you increased the CapEx guidance for the year, right?
Roop Lakkaraju: We did, Anja. We moved it up to $50 million to $60 million.
Anja Soderstrom: And what's driving that? Is there any further expansion or is this just machineries or?
Roop Lakkaraju: It really is in support of the bookings environment and the strength in the bookings that we've had and the revenue strength in the ramps. And then on top of that, Semi-Cap continuing to improve and we talked about Q2 strengthening over Q1. Just putting additional capacity in support of the demand that we see in the Semi-Cap in the out quarters.
Jeff Benck: Semi-Cap is interesting, Anja…
Anja Soderstrom: Okay.
Jeff Benck: Semi-Cap is interesting because we started in the fall-time, we saw 5%, 6% growth in '21, then last quarter we said 10% growth, now we're adjusting that to 20%. So clearly Semi-Cap is continuing to be very strong and strengthening as we've gone forward.
Anja Soderstrom: Yes. And, also, how should we think about the gross margin given the computing is going to be a bit stronger and that's part of the traditional markets, right, but is that still at your, sort of, average company gross margin or is that going to affect your margins?
Roop Lakkaraju: Yes. I think the mix is always - it is important to us in terms of our portfolio of revenue. One thing to reiterate is, we mentioned there are comments that the full year, we expect to be at 9% gross margin. So what that really means is, as you can expect a sequential improvement in the gross margins, the mix - it will be mix dependent and so compute will offset, which is lower gross margins in comparison for Semi-Cap, let's say. So you see that kind of balancing out between the two, if you will, to a certain extent. But, overall, as we continue to execute through the year and with the revenue growth that we spoke of, we expect gross margins to average out to around 9% for the year at least.
Anja Soderstrom: Okay, great. And then just one last question, if you don't mind. The more challenging areas were the commercial air and oil and gas and the industrials, what --
Jeff Benck: Yes.
Anja Soderstrom: What do you expect there? What is the --
Jeff Benck: I'd like to say aerospace, commercial aerospace is going to recover, but we don't see it yet. And we're saying for '21. We're not anticipating that. Obviously, we're watching some of the aircraft manufacturers' announcements and we know people are starting to fly again. So - but we also know international is like non-existent travel right now, it's pretty low, so we're not seeing an improvement in aerospace. As you know, we are 75% - we were 70:30, now we're about 75% defense, 25% commercial aerospace, so, well, it's down even in this year. Because if you remember March quarter last year, aerospace was holding up still because of pre-COVID, but now we've got the full year and wrap around of aerospace being down and frankly it has softened, so that's hurting the A&D segment for us. But our defense business is very strong and it's actually driving a little bit of sequential growth in 2Q. So that's kind of helping us in that segment. On industrial, oil and gas, yes, we - again, that's an area where we have not seen a recovery at this point. We sort of believe in the second half as we get to the back-end of the year that that segment will come back. Our industrial business is pretty diversified, but there are some other areas like some of the infrastructure space that that is also still really hasn't fully recovered for us. We believe that - we did shift a little bit our thoughts on industrial to say it would be flatter this year than what we might have initially projected, because we had a number of new ramps in that segment with new customers that were frankly very technology complex and not due to any fault of our own, some of those programs have moved to the right, just because it's taken longer to get the product completely designed and ready to go and volume manufacturing. So still feel good about our position in industrial, but the growth we had thought we might see in '21 we're sort of now saying it's more likely to be flatter.
Anja Soderstrom: Sorry. One last question. We talked about the infrastructure, how do yourself being impacted from the new administration's potential new package there?
Jeff Benck: Well, I think, we typically get the question about like defense budget and what will happen there, we work on military modernization, so we absolutely believe that regardless of the office, they were going to see continued support of defense, you see the challenges we have where we got to keep our military competitive in the world. In terms of infrastructure, as it comes the roads and highways, maybe not as direct of an impact to us, right. We're not - we don't participate as much in that segment. But the - we are really encouraged about the big investment that this is in Biden's package related semi-capital, Semi-Cap equipment and foundries. And very close to home here in Phoenix, where we're headquartered, Intel and TSMC both said that they would open additional multi-billion dollar foundries here in Phoenix, the Phoenix Metro area. So the fact that we support a number of capital equipment players in that segment. As we talked a little bit in the remarks is probably why we think that that may be a longer secular growth story than maybe the typical two, three-year cycle because of the heavy investment for the US to say we're going to do more to incentivize domestic semiconductor production and to build those foundries requires the sophisticated complex equipment that we help develop and build. So we think that that could be very good for us into 2022 and beyond.
Operator: Our next question is a follow-up from Jaeson Schmidt of Lake Street. Please go ahead.
Jaeson Schmidt: Just two quick follow-up questions. On the Semi-Cap market, sort of this incremental, let's call it, $37 million in the revenue you now expect based on sort of the updated guidance, is that being driven by a number of different customers or is it concentrated in a few specific customers or programs?
Jeff Benck: It's a couple of customers, couple of large customers in the Semi-Cap space, but it's not all Semi-Cap. We also see strength in starting the ramp in some of the high-performance computing large platforms we're working on. That happens to be a large customer there. We also saw some of the defense sort of sequentially up and some projects there, which is multiple customers. So it's not really based on one customer. Semi-Cap is fairly concentrated for us though and a number of large capital equipment players. But the second quarter up is - it's more broader than just Semi-Cap. So I want to leave you with that. That's all Semi-Cap driven.
Jaeson Schmidt: Okay. No, that's really helpful. And then, just lastly, that 50% attach rate number for engineering to manufacturing services seems early impressive. Is that sort of the range that you'd like to maintain going forward or what, sort of, is the long-term target?
Jeff Benck: That's a great question. It's a great question, because we've talked a lot about that. We have always, sort of, said we want at least half of the opportunities to involve engineering services and we have been somewhat below that last year. We haven't published it every quarter, but we would like to be at that level. There will be some ups and downs as bookings happen. Sometimes they don't always line up. But the other thing going on is that, as some of the engineering firms working on to leading the manufacturing wins and so it's not all, hey, we win the manufacturing and then can we help with engineering. Many times now we're being asked to develop the product and ultimately build it. So we definitely see it going both directions, but we really are tracking this closely and that's probably why we specifically called it out, because we're looking at every quarter as to are we getting engineering attach rate, because we want to sell a richer suite of services. We know we can do more. We know that engineering services tends to be a little bit higher margin than the EMS world. So it's a good thing for us and helps us with the gross margin, but, yes, we would like to continue to build on that and be north of that 50% going forward.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Lisa Weeks for any closing remarks.
Lisa Weeks: Thank you, again, for joining our call today. If you have any follow-up questions regarding our earnings release, please don't hesitate to reach out and I'll be happy to follow up. I also wanted to put in a quick reminder that Benchmark will be supporting the Needham Virtual Tech and Media Conference on May 18th and the Stifel Cross Sector Insight Conference on June 9th. We look forward to engaging you - with you at these events. With that, please have a good afternoon. We look forward to sharing our second quarter results with you in our July earnings call. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
