Benchmark Electronics, Inc. (BHE) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Benchmark Electronics, Inc. Second Quarter 2021 Earnings Conference Call. All participants will be in a 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, Chief Strategy Officer, Head of Investor Relations. Please go ahead.
Lisa Weeks: Thank you, operator and thanks everyone for joining us today for Benchmark's second quarter 2021 earnings call. Joining me this afternoon are Jeff Benck, CEO and President; and Roop Lakkaraju, CFO.
Jeff Benck: Thanks, Lisa. Good afternoon, everyone and thank you for joining us today. Throughout the past 18 months, we've rallied through the uncertainty surrounding the pandemic and made decisions to increase our investments in new opportunities, which we believe are starting to bear fruit. We've had to make difficult trade-offs during this unprecedented time, but we never lost focus on prioritizing the safety and well-being of our employees and meeting the growing needs of our customers. This approach has served us well as we progressed our strategy in a volatile operating environment. As you may have seen from the press release this afternoon, revenues of $545 million were above the midpoint of our guidance for the second quarter and were up 11% year-over-year. Revenues benefited from the continued momentum in the semi cap market as well as stronger demand from customers deploying broadband infrastructure solutions in our Telco sector. Additionally, we are seeing early signs of recovery in some subsectors of the industrial markets.
Roop Lakkaraju: Thank you, Jeff, and good afternoon. Please turn to slide 6 for our revenue by market sector. Total Benchmark revenue was $545 million in Q2 which was at the higher end of our guidance, driven by continued strong performance in Semi-Cap and improving revenue in Industrials and Telco. Medical revenues for the second quarter were relatively flat sequentially as expected. We expect Medical revenues to be higher for the second half of 2021, as compared to the first half of 2021, due to new program ramps and improving demand. Semi-cap revenues were up 23% in the second quarter and up 60% year-over-year from continued demand strength from our front-end wafer fab equipment customers, where we saw increased demand from each of our top customers. Our revenue in this sector is primarily precision machining and large electromechanical assembly, which are less impacted from the global component shortages.
Jeff Benck: Thanks for that update Roop. Following Roop's comments on our third quarter guidance, I wanted to provide some additional details on our view of demand by sector for the quarter and the remainder of 2021. This is shown 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 computing and A&D with continued strong demand in semi cap. After 60% year-over-year growth in Q2, we expect our Semi-Cap sector will remain at Q2 revenue levels as demand still remains robust, but we are constrained in the near term by mechanical sub-tier suppliers. Based on signals from our customers in the front-end wafer fab processing space, demand will remain at high levels for the balance of 2021 and through next year supported by increasing demand for semiconductor capital equipment. With this ongoing demand strength and signals from our customers, we are revising our outlook for this sector upward from 20% to greater than 30% revenue growth over 2020 levels. This sector is clearly outperforming our expectations for this year. In A&D, where we grew 8% in Q2, we expect continued growth in third quarter led by increased demand for ruggedized electronics for ground-based military vehicles and secure communication devices. While commercial aero demand in the second half is stabilizing, we still expect the A&D sector to remain flat for 2021 as defense strength does not offset aero weakness for the full year. In the computing sector, we expect strong revenue growth in 2021 from high-performance computing projects with the largest revenue growth in the second half of 2021. If there are no further component decommits or design delays, computing could be up over 50% sequentially in the third quarter. As we continue to win new projects in this targeted sub-sector, we expect continued strength in high-performance computing revenues in 2022. In the medical sector, we're expecting revenue to grow sequentially in Q3 and Q4. For our portfolio we see revenue growth across our base business in the second half. Additionally, we have new program ramps contributing to second half growth. We still expect medical to have a growth year, but as always new medical program revenue is subject to the timing of product qualifications. In the telco market where we had good growth in the second quarter, we expect stable demand in the second half of 2021, which will lead to 2021 being a solid growth year from strong performance in broadband communication products. In industrials, we are pleased to see the order book increasing for our customers, supporting the oil and gas market, transportation infrastructure and Building Systems. With this demand improvement forecasted in the second half and a tremendous number of new program ramps in Q4 this sector has the potential to achieve greater than 10% growth for this year. If you'll turn to slide 14, I wanted to provide a few highlights on our strategic objectives. We remain focused on our longer-term strategic initiatives and progress against these even as we deal with short-term challenges, created by the pandemic and this constrained supply environment. Growing revenue remains a top priority at Benchmark. Our go-to-market team is doing a great job executing our sector development strategies with wins in our targeted sub-sectors where we have an advantaged position based on our technology and the track record of success with complex programs. Our booking levels for both manufacturing and engineering services remain strong. We'll continue to invest in a sustainable infrastructure and our talent for sustainable growth. We are in data collection mode to support our intended reporting, against the global reporting initiative, which will increase our transparency and further support our stand-alone sustainability report which we plan to publish next year. We are also expanding our diversity and inclusion efforts by developing a multi-year continuous improvement roadmap, supported by robust plans and actions with accountability held by the entire senior leadership team. This roadmap includes increased training, some enhanced policies and recruiting strategies for our internal organization as well as the ongoing commitment to Board diversification. You may have seen our recent announcement where one of our Board members Merilee Raines, left our board. We have certainly appreciated her service and wish her well. We are proud to welcome Lynn Wentworth to our Board, filling Merilee's open seat. Lynn is an outstanding director and sits on three public companies where she currently holds two board chairs, and one audit share position. Her vast experience and history of operational execution will provide additional capabilities and insight to our already talented slate of directors. Lastly, we are laser-focused on growing earnings. From our second quarter results to the midpoint of our Q3 guide, we're expecting a greater than 30% sequential earnings improvement. These expected results are enabled, by our continued revenue growth trajectory. Our target to sustain gross margins, at 9% for the full year and our commitment to, control our expenses. In summary, on slide 15, I'm very excited about our progress in the first half and remain optimistic about our second half outlook. Given the continuing strong demand outlook in Semi-Cap, improving demand in industrials, and expected second half ramps in high-performance computing, we are revising our full year growth outlook to high-single digits for 2021. Of course, this assumes no worsening component supply constraints or broader pandemic impacts. With this revenue growth and mix, we're expecting sequential quarterly improvement in both, gross and operating margins in both three and 4Q. On the gross margin line, we are still targeting to achieve 9% for the full year 2021. With these results, we are still expecting operating cash flows between $80 million and $100 million. Through the first half of 2021, we repurchased $30 million of stock, and may continue to purchase the stock opportunistically as well as continue our recurring quarterly dividend which we raised last quarter as part of our capital allocation plan. In closing, I remain excited about the overwhelming positive indicators that we are seeing from our teams and our customers. I want to express my heartfelt thanks to our team, including our hardworking suppliers, for their ongoing support at a very high level. I'm excited about how 2021 is shaping up. And look forward to providing you an update in our October earnings call. And with that, I will turn the call over to the operator, to conduct our Q&A. Operator?
Question-and:
Operator: We will now begin the question-and-answer session. The first question comes from Jaeson Schmidt with Lake Street. Please go ahead.
Jaeson Schmidt: Hey, guys. Thanks for taking my questions. I just want to clarify your comments on the $100 million in demand this quarter potentially being left on the table. Is that simply due to not being able to ship? Or have these projects and designs been lost? I'm just trying to get a sense of this revenue will eventually flow to you guys in the out quarters?
Jeff Benck: Yeah. That's a great clarifying question, Jaeson. This is really given the component-constrained environment It's not demand that's going away. It's -- frankly some of it is upside demand that we've taken from the recovery starting in many of the sectors and a lot of that is in -- within lead time. And as you know lead times are extending. So it's difficult to close on clear-to-builds to be able to get the revenue. And some of it, I would say would come from the rollover from last quarter as well because we left some unfulfilled demand on the table. We're pleased that assessing it the majority of that will roll into fourth quarter and probably some in the beginning of 2022. Some -- there are some portion that could be perishable, but for the most part we intend to capture that lost revenue in the third quarter.
Jaeson Schmidt: Okay. That's really helpful. And just given the tightness out there and need for spot buys and just general inflationary pressures. Just curious, what you're seeing from that standpoint? And if you are seeing those higher costs if you're passing them along?
Jeff Benck: Yeah. Everyone is dealing with the cost of expediting some components have gone up in price given the tightness of supply. So we're definitely seeing it. We're in hand-to-hand combat trying to keep costs down at the same time trying to get precious supply. As you can imagine, we work really close with our customers to make those decisions. And in many cases, we are asking customers to help us with that just given the nature of the relationship and the way our contracts are structured. But it's a difficult time. No question. Everyone is a bit frustrated. Wish there was more we could do. But at the same time, we're also talking to customers about making sure they have their forecast out and it's certainly not too soon to work on 2022 and those are the discussions we're having.
Jaeson Schmidt: Okay. And then just the last one for me, and I'll jump back in the queue. Curious, if you guys would be willing to share how much of the computing segment is comprised of what you guys consider high-performance computing. I'm just trying to get a sense, it seems like that high-performance computing really is more -- or really could be under that kind of higher value markets rather than the traditional markets?
Jeff Benck: Yeah. We've had that debate. Some of our competitors take Compute and Telco the higher-value segments and they classify at all as high value. Certainly, we see high-performance Compute as higher than traditional Compute business from a margin. It's on the higher side, although that segment overall is below our corporate average for margins I would say. The HPC, I don't know that, we'll break it out but just directionally it's meaningful. It's not $10 million, right? So it's a pretty big number in there, because we've got multiple customers we're supporting in that segment. Roop, do you want to add anything?
Roop Lakkaraju: Yeah, Jaeson just maybe I'll add to Jeff's comment there. On HPC, if you remember it can be somewhat project-based as well, right? So it's a bit lumpy. And so the percentage of what it represents of computing can vary by quarter. We -- as we had indicated we saw a push out of the demand into the second half. So we'll expect to see the mix of that be a bit stronger in Q3 and Q4 as well.
Jaeson Schmidt: Okay. Appreciate the color. Thanks, guys.
Jeff Benck: Yes. No worries.
Operator: The next question comes from Anja Soderstrom with Sidoti. Please go ahead.
Anja Soderstrom: Sorry and thank you for taking my question. Congratulations on a good quarter despite the environment. You are talking about the high single digit growth for 2021, so taking that up a bit. How should we think then about 2022 actually with projects being pushed out? And you're working more closely with your customers now on lead times and stuff? So I assume you have a little bit better visibility into 2022. Do you foresee 2020 to be stronger than 2021? Or is it too early to talk about that?
Jeff Benck : Yes. We -- this is Jeff. I'll start. We have good momentum right now in the business and we felt comfortable with the visibility through second half to call the ball higher in terms of revenue growth this year. It's a bit early for 2022. I mean, it's great to see the momentum and we certainly think some of that will carry into next year. But we feel good about the mid-term model we put out that looked really out through 2022. I think you'll see us come back as we get a little further into the year and give you more color on what that looks like. And some of the things that have to factor in there is -- Semi-Cap's going through tremendous strength right now. We think that continues into 2022. We'd love to get a little further along and see, what that profile looks like. And then also what if anything are we not able to fulfill through the end of the year? Is there going to be demand that rolls into next year, that isn't perishable and that we still may be dealing with this constrained environment, which looks like it could go on. Right now, we're saying from our visibility it looks at least through first half of 2022 that could be tough. So directionally, I would say, we feel good about where we are against the model. But a little bit too early to really call the growth rate for 2022 yet.
Anja Soderstrom: Okay. Thank you. And I'm sorry I jumped on the call a little bit later you might have addressed this. But in Medical, what do you see there in terms of ramping of elective surgery procedures related productions?
Jeff Benck : Yes. So elective surgeries, we are seeing recovery there but it did come a little bit later than some of the other segments that bounce back I would say maybe a little bit quicker. And so we're probably seeing a little more supply constraint in there because that demand kind of came back later in -- really even in the first quarter we weren't totally calling you yet. So now, we're in kind of a lead time crunch. So we've got a number of new ramping programs that we're excited about.
Anja Soderstrom: Okay. Thank you .And then in terms of new contract wins can you just give us some color on, whether those are with new logos or expansion with existing customers?
Jeff Benck : It's a great question. We had kind of initiatives that we want to go deeper with the customers we have but at the same time we want a set of new logos every quarter. I would say, it was a healthy mix of both. About half of the deals that we highlighted were from existing customers and half are new logos. And we talked about the power storage solution, Solar Storage. That's a great new customer we're super excited about. We've got some industrial customers that are brand new that are going to be meaningful down the road for us. But we also saw some Semi-Cap and A&D customers that are repeat that we're kind of going deeper with. So, it's a healthy mix as you go kind of across the sectors that we highlighted this quarter.
Anja Soderstrom: Okay. Thank you. And also just because given you're sort of increasing the revenue guidance for this year but you're maintaining the gross margin target? Is that due to the supply chain constraints that's putting a little bit of pressure on the margins.
Jeff Benck: Anja we apologize. You kind of broke up just a little bit there. Would you mind asking your question one more time?
Anja Soderstrom: Yes. So you're taking up your revenue guidance a bit for this year, but you're maintaining the gross margin target. Is that due to the supply chain constraints that are putting some pressure on the gross margin?
Jeff Benck: Yes. So really it's a combination right? As you know we are mix dependent. And one of the things that we have forecasted in our comments is that we expect to see some growth in the high-performance computing sector or computing sector with the high-performance computing programs that we'll be executing in the third and fourth quarter. So the mix of the traditional markets will be a little heavier and those margins tend to be a little bit less than our corporate averages. So when you think about the mix that's affecting it. The other side of that is -- the constrained market is affecting some of the higher-value markets like in Medical to Jeff's point just now in delaying some of the ramp and growth there. So it's kind of the mix of both that's -- that we're not able to fulfill some of the demand on the higher-value markets because of the constrained market. And then the higher computing revenue that we expect to see in the third and fourth quarter.
Anja Soderstrom: Okay. Thank you. And then one last question. How much of your revenues derived from Malaysia approximately?
Jeff Benck: Right from -- I didn't catch the end of that question. How much is our revenue...?
Anja Soderstrom: Yes I'm not sure your revenue is originated from Malaysia. How much of your business is...?
Jeff Benck: Malaysia? Yes. It's not something we've disclosed publicly overall. And remember we've got both EMS and precision machining. If you think about our footprint maybe as a proxy which isn't exact but we've got about 10% of our footprint in Malaysia. And Malaysia has been challenging due to the COVID restrictions and also disruptions where we've had temporary shutdowns and the like. But our team has done a phenomenal job over there. I just got to do a call out. They -- we saw risk. I think our analysts saw -- highlighted the risk in the quarter with some of the disruptions, some of our peer group preannounced because of it. They've done a phenomenal job working feverishly and carefully to stagger the teams and work over time and be able to deliver for customers. So while COVID is really silvering that the rest of the world is not as far along. I know we're seeing rates spike up a little bit in Americas too. But both Malaysia and Thailand continue to be a key watch for us. And working closely with our teams and encouraging vaccination events and trying to get through that. But team did a great job in Q2.
Anja Soderstrom: Thank you. That was helpful
Jeff Benck: Thank you, Anja.
Operator: The next question comes from James Ricchiuti with Needham. Please go ahead.
Tyler Bailey: This is Tyler Bailey filling in for Jim. Hey everyone. How’s it going?
Jeff Benck: Hi Tyler, how are you? Thanks Tyler.
Tyler Bailey: Congrats on a great quarter. It seems like -- I guess it's rare to see some companies come out on scale. And obviously you guys are missed out on some demand, but really came out strong despite all the headwinds you guys are facing. So -- but yes, so one -- maybe just one question. I'm just kind of looking at, given what you guys talked about sort of the market verticals and what you're forecasting for the rest of this year, it looks pretty strong especially what you're seeing in the Semi-Cap and Medical. I'm wondering just thinking about Q4, I mean historically we've seen a bit of a slowdown in Q4 relative to Q3. But just based on your guys' guidance and kind of what you're seeing and some of the demand being pushed out. Is there a chance that Q4 comes in a little bit stronger than what we've seen in the past?
Jeff Benck: Well certainly, I think we kind of directionally was saying that we're going to see we're shifting high single-digit growth for the year. We would anticipate being able to grow sequentially from Q3 to Q4 which I think is not always something that we've seen to your point. So I think we do have some strength in the back half. And as we've talked about the Compute sector with some of the high-performance computing projects, did move from the first half to second half and that helps us. But certainly, Semi-Cap. We got some temporary constraints there that are limiting us some of the sub-tier suppliers and disruptions in Malaysia that were not in our own house. So, we look to clear some of that and that should help in the fourth quarter as well. So, we've got pretty good momentum going into the fourth quarter. So, we'll see how it plays out. But directionally, I don't think your thinking is off.
Tyler Bailey: Okay. Appreciate that. And I guess one thing too, I know you talked a lot about this but because there are some spikes, I know you seemingly or hopefully have navigated the worst of it. But is there some hesitancy with customers? Are they pushing out ramps maybe into 2022 just because of little bit of I guess apprehensiveness from these delta spikes?
Jeff Benck: No, I wouldn't say that customers -- I mean the demand is strong and customers if they can get it sooner. And obviously, with what we left on the table in Q2 and what we are projecting, we potentially could have on the table. Customers would like to get the product as quickly as possible. So we're not seeing pushouts as a result of some of COVID spikes or anything like that at this point in time.
Jeff Benck: If anything I think, Customers are excited to get going on new projects and we got more people wanting to visit our facilities and engage with our engineering teams. And I think, people are trying to get things done that maybe they put off a little bit, but it is challenged by component constraints. And even in development projects, if you've got engineering prototypes and samples you're trying to build. The component constraints are not immaterial. So, that's making it tough, but there's certainly -- I have not seen one project push because they're worried about COVID and they're going to wait at this point.
Tyler Bailey: Okay. That's helpful insight and I appreciate that. And then one last question. You mentioned the solar and storage win I believe. And just wondering, if you could talk a little bit about that potential there because obviously, growing segment really across the world. You see a lot in the US, the emphasis, the sun runs. But just wonder, if you could kind of just talk and speak to that potential a little bit for you guys.
Jeff Benck: Like any new booking for us right, it typically can take -- it could take 1.5 years, two years just to get into revenue and then ramp from there. We are excited about participating with one of the market leaders here that's in the space. I think it's an exciting space. People have leveraged generators for a long time and this is an alternative right to be able to -- with all the storms and increase in the storms across certainly in the US. Power brownouts are more and more common. So be able to have that energy back up and be able to run and store energy during the day and be more and feel efficient. I think is an exciting market. So, I think we're really optimistic, but it's a bit early to say what it could be. We're -- because of the new customer and a market leader as I said kind of see it being a meaningful contributor, but not really -- we're going to get into it probably in '22 and we'll see where it goes from there.
Tyler Bailey: Okay. That's helpful. Appreciate it. That’s it from me. Thanks again, and congrats on the great quarter.
Jeff Benck: Thanks, Tyler. Appreciate it.
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 wanted to put in a reminder that Benchmark will be supporting the Needham Industrial Tech Conference on August 9, the Oppenheimer Technology Internet and Communications Conference on August 10, and the Lake Street Best Ideas Growth Conference on September 14 and we look forward to engaging with all of you at these events. Please have a great afternoon and we look forward to speaking with you on our third quarter results call in October. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
