Benchmark Electronics Inc (BHE) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal second quarter 2003 earnings conference call.

During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time, if you have a question, please press the one, followed by the four on your telephone.

As a reminder, this conference call is being recorded Tuesday, October 29th of 2002.

I would now like to turn the conference call over to , Executive Vice President and Chief Financial Officer.

Please go ahead, sir.

Thank you for joining us this afternoon. With me is Al , President and CEO.

Before we start I will preface our remarks with a Safe Harbor Statement. This call may contain forward-looking statements. These forward-looking statements, including statements made by Mr. , may contain statements of intent, belief, or current expectations of , Inc. and its management.

Such forward-looking statements are not guarantees of future results and involve risks and uncertainties that may cause actual results to differ materially from the potential results discussed in the forward-looking statements. These risk factors are listed from time to time in SEC filings, including but not limited to Exhibit 99 of the company's annual report on Form 10-K for the fiscal year ended March 31st, 2002; and the quarterly report on Form 10-Q.

With that I'll turn the call over to Al.

Thanks, Greg.

I'd like to welcome our shareholders and others who follow our company. As many of you already know, we recently elected Greg CFO to lead Pemstar's financial organization. We're excited to have him on our team and will benefit from his 28 years of financial and management experience.

Our agenda today is to review the September quarter performance in depth, provide an overview of our business and operational highlights for the quarter and briefly discuss our outlook and initiatives for the December quarter, which is Pemstar's fiscal 2003 third quarter. Afterward we'll take your questions.

By this time most of you have seen the release that we issued at market close. I'm pleased to report that our net sales and the (lower) DPS for the fiscal second quarter are consistent with prior guidance, however we all know that Pemstar's financial performance is not where we want it to be and we're working hard to return to profitability.

While today's economic environment continuous to be challenging, we are making progress. We have taken restructuring steps to align our cost structure in capacity to current business volumes and are beginning to realize substantial savings on a quarterly basis. I'll outline these steps and their impact as well as talk about other initiatives later in the call.

Yet, (definitely), we're continuing to leverage our engineering and manufacturing strengths to build businesses with existing customers and attract new ones. First, however, I'll let Greg discuss our financial results in more detail and then I'll cover operations.

Thanks Al. Let's start off with sales. For the September quarter Pemstar reported net sales of $176.4 million compared to $173.4 million for the prior year period. For the six months net sales totaled $329.5 million verses $340.6 million in the year ago six months.

The increase in net sales for the quarter included $13.7 million of excess raw material inventories billed to the customers in accordance with contract provisions. The decrease in net sales after excluding these billing of raw materials was due to volume reductions in the sluggish communications sector and flat end market demand worldwide. The sales level was slightly better than our prior guidance.

Breaking down our sales mix for the quarter, Pemstar's engineering business was 16.4 percent of total revenue, up from 14.1 percent in the prior year period. This growth is attributable to our acquisition of Pacific Consultants, partially offset by a decrease in the more cyclical historic engineering business.

Sales to the communications industry accounted for 38.6 percent of total sales in the September quarter, reduced from the year ago period when communications industry revenue totaled 51.5 percent. As we've indicated previously, this is both a reflection of the tough conditions communications companies are facing and Pemstar's goal of diversifying our business base by focusing on developing initiatives and our other strategic industries.

The remaining 61.4 percent of sales were to the following industries. Computing 31.3 percent verses 22.7 percent in last year's September quarter. Industrial equipment, 17.1 percent verses 12 percent last quarter. Data storage, 8.3 percent verses 11.6 percent and Medical, 4.7 percent verses just 2.7 percent in the prior period.

From the geographic perspective, 73.6 percent of the fiscal second quarter revenue was derived from products manufactured in North America, with 17.3 percent generated in Asia and 9.1 percent in Europe.

Looking at our cost structure, our SG&A expenditures rose by $4.3 million over the same period one year ago. This increase is due to restructuring charges of $.9 million, new or acquired operations in Pacific Consultants, MPS and/or Israel, of 1.1 million. Additional accounts receivable reserves of 2 million, and higher insurance, legal and audit costs. We continue to implement actions to reduce SG&A expenditures. For the September quarter, the company recorded a net loss of $10 million, or $0.27 per diluted share. Compared to net income, up 3 million, or $0.08 per diluted share for the last year's fiscal second quarter. This performance is consistent with our guidance. For the six months Pemstar recorded a net loss of $29.8 million, or $0.81 per diluted share, compared to net income of 5.5 million, or $0.16 per diluted share for the year earlier period. As indicated, the outlook of our fiscal first quarter results release, fiscal second quarter performance includes impacts of restructuring charges and reserves, primarily for inventory and accounts receivable, totaling approximately 3.9 million, or $0.10 per diluted share. This too is in line with our guidance. And backing out the $0.10 of restructuring charges and reserves, Pemstar nets a first call consensus estimate of $0.17 lost per share. With our restructuring program nearly completed, we are beginning to realize sizable savings of approximately 3 to 4 million per quarter. While we believe the majority of our restructuring is behind us, we will always continue to assess our cost structure and capacity for consistency with our revenue outlooks. During the quarter Pemstar successfully reached agreements with our senior secured lenders, to amend its credit facilities for the duration of fiscal year ending March 30, 2003, and extends agreements to December 31, 2003. Turning to the balance sheet, cash flows from operations for the second quarter - fiscal second quarter was $15 million, representing the fifth consecutive quarter in which Pemstar was operating cash flow positive. Let's now look at specific performance improvements gained this quarter on balance sheet items. Net inventories were 82.6 million, down 12.9 million from the June quarter. With the turn rate of 8.2 times improved from 6.4 times at the June - at June 30. Accounts receivable decreased $6 million while sales grew in the quarter, with days sales outstanding declining from 71 days at June 30, to 58 days at September 30. Bank debt, including capitalized leased obligations was 83.9 million at September quarter end, down from 98.5 million in June quarter end. Debt of capital was 33.4% at September 30, down from 35.8% at June 30. At September 30, book value was $4.49 per share, with tangible book value, which excludes good will of intangible assets, at $3.37 per share. With respect to guidance, economic uncertainties make it difficult to project future results, and the following statements are based on current expectations. Pemstar expects net sales in the fiscal 2003 third quarter of $165 to $170 million, with a break-even to net operating loss of 3.5 million. This compares with net sales of 171.2 million, and a net loss of 12.5 million in the year earlier December quarter end.

With that I'll turn it back to Al.

Thanks, Greg.

The major challenges that we face in our fiscal 2002 fourth quarter and fiscal 2003 first quarter behind us, the economy and market have been less than cooperative and conditions remain tough. Yet we did well in what we control, cutting costs and running new business. The Pemstar you see today is a cost structure and capacity to compete effectively. We've nearly completed our restructuring efforts and we're beginning to see positive results.

First, we've met expectations for the quarter while our results have matched historic levels; we've contained costs, narrowed our net loss, and grew net sales in a year-over-year basis. Let me reiterate: it's our main goal to return to profitability and we're doing everything that we can to do so as quickly as possible.

Second, we're now beginning to realize cost savings of approximately three to four million per quarter. We've reduced the company's work force by more than 400 people worldwide, and have consolidated facilities or organizations in three locations. We'll continue to drive efficiency and adjust our work force to current business levels.

Finally, we approved our balance sheet. As Greg said, net inventory, accounts receivable, and DSR were all better than at June quarter end, resulting in the continuing improvement in cash flow.

Looking at revenues, and this is nothing new for us or anyone else in the EMS industry sector, flat end market demand persists in many of our industries, with the notable exceptions of medical, industrial equipment, which were both up for us for the quarter.

There's a positive in all this. Pemstar is becoming more diversified. We're establishing a sizable presence in the medical industry with clients like the course division of Johnson and Johnson, and Imaging. In addition, we've been successful in growing the industrial instrumentation segment, with clients like Honeywell, , MTS, and .

I continued to be encouraged by the fact that Pemstar is winning customers at rates similar to prior periods. For the second quarter we won 12 new engineering and manufacturing customers. During the quarter, Service, a branch of extended their engineering and manufacturing agreement with Pemstar for the creation of new Prime Test Two Automotive Diagnostic device. is one of the world's leading automotive supplies in both original equipment and after market segments.

Pemstar has been designing and manufacturing diagnostic tools for the automotive air conditioning systems for Service since 1999. We start producing branded models with the client test two, which related accessories of the Pemstar facility in and .

In addition we can continue to advance our efforts with course division of Johnson and Johnson, Land Warrior, Imaging and Motorola as we previously announced. We expect these existing customers to be part of Pemstar's growth in the future.

We're pleased to tell you that Pemstar has received a partner of the year award for the - for 2002 with cardiac surgery group for speed to market. Further, Sienna Corporation, an existing customer and leading provider of intelligent optical networking systems and software, recently gave Pemstar a supply of recognition award.

In the September quarter, as Greg said, our engineering revenue was 16.4 percent of total revenue. Engineering is a Pemstar strength. It's what sets us apart from our peers. It enables us to continually win new customers and ultimately deliver a comprehensive concept to customer approach. That is taking the product from an idea through design, engineering, manufacturing to fulfillment and after market support.

Our capabilities include providing ODM support. Pemstar has delivered ODM solutions in automation tests for more than five years. We're currently developing ODM solutions to cover the wireless, mobile computing, and medical sectors.

We believe that the strong engineering capabilities are the foundation of future growth and success.

In closing, Pemstar's a leaner company than it was six months ago. We still have the same capabilities, global reach, and reputation for advanced engineering as before, but we're now sized for current business conditions. Reaching profitability is our number one goal concurrent with providing our customers superior service. The two go hand in hand.

At some point the technology economy will rebound. And while we're not banking upon it for success, we will be well positioned for growth when it does. Once again, I believe in the EMS opportunity long term, our prospects, and Pemstar's ability to compete.

With that I'd like to thank you for your time and now we'll take any questions that you have.

Ladies and gentlemen, if you'd like to register a question, please press the one, followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you'd like to withdraw your registration, please press the one, followed by the three. If you're using a speakerphone, please lift up your handset before entering your request.

One moment please for the first question.

from JP Morgan, please go ahead with your question.

Good afternoon. Few questions, first of all, the segment and the geographic breakdown that you gave us, I presume that that is on a as-reported revenue basis not pro forma for the inventory put back. Is that correct?

That's correct.

OK. And can I assume then that that is in the - your communications number, the inventory put back that is?

Yes.

And also the North American number?

Yes.

OK. Thank you. A few other questions. Could you talk about your top 10 customers as a percentage of sales and any greater than 10 percent customers?

This is . We have two greater than 10 percent, IBM and Motorola.

Could you tell me what percentage of sales those customers are?

IBM is approximately 22.1 percent and Motorola's 12 percent.

OK. OK, great. Turning to the balance sheet. I don't mean to be too granular, but I noticed that the other current liabilities went up by $10 million quarter-on-quarter. Could you tell me what's going on there?

Just a minute.

Yes.

We - it's gone by - it's gone up by two major specific things. The first one is we have an accrual for a Pacific Consultants ...

OK.

... which is about half of that. And we have a reclassification of the delayed payment on Pacific Consultants from long-term to current liabilities.

OK. I understand. OK, thank you.

Oh, my last question had to do with the geographic breakdown. I saw that Asia was down, at least by my math, by about maybe 12 percent quarter-on-quarter. Is that accurate and what's driving that? I was under the impression that Motorola specifically was doing quite well there.

The number's accurate. It's a product transition in both our China and Thailand facilities. So it's a normal end of life in one product and ramp up of new projects. So we expect that to be - it's a cyclical product transition.

OK. Would you expect this quarter to be a low watermark then, at least in the - in the short term for Asia?

Yes.

OK. OK, thanks so much.

Lou Miscioscia from Lehman Brothers, please go ahead with your question.

Hi. This is actually in place of . I was wondering, could I get a capacity utilization rate and also I think I missed the depreciation in capex, could I get that please?

Capacity utilization is in the 50 to 55 percent range and our depreciation ...

Depreciation is $5,000,000. Our capex is about $3.4.

OK and I think (briefly) you metioned that you had $3.9 million in restructuring and inventory related -- I was wondering are -- does that include the $900,000,000 that you show on your income statement or is that separate?

Yes.

So then that would mean that the inventory (later) charges with $3,000,000.

Inventory reserve is $1.8 and accounts receivable is $1.2.

$1.8 and $1.2?

Yes.

OK and could I also get a headcount and square footage at the end of the quarter?

The counts approximately 3,600.

OK

Square footage is about a 1,400,000.

Alright, thanks a lot.

(Kevin Kestle) from (Bear Sterns), please go ahead with your question.

OK, in terms of your computer segment it looked like it grew 20 -- just a little in advance of 20 percent this quarter, was that -- could that be attributed to some of the ramping of Logitech that continues to go on in Guadalajara or is that from other customers?

Yes, it was both Logitech and our land warrior program.

OK, so is the land warrior program now, I guess, in volume production at this point because I think it's been in design for awhile?

Because of our current agreements with the Government we don't disclose the specifics on land warrior relative to test verses production.

OK, but you do put it in the computer segment.

Yes, we are continuing with land warrior.

And I think, if I heard you correctly, you were saying that the networking increased this quarter sequentially is basically all attributed to the inventory put back of $13,000,000 or $13.7, I believe?

That'd be part of it, not the entire amount.

OK, so some of it is coming from new customers like (Pink Engine) and some of those ones you've mentioned in the past quarters.

Yes.

Yes.

OK, but overall that segment still, in terms of your customer basis, is sluggish as you guys mentioned.

Yes.

OK, in terms of (Elao), is that something you've put in your industrial segment?

Yes.

And would that be the primary reason for the 11 percent growth this quarter or is it more broad based with ...

It's more broad based than that with the combination (through) MTS and Honeywell.

OK

We've got -- we've actually got a real nice mix of business in the industrial. It's all coming on at similar levels.

OK

And one point additionally we did is we -- as we indicated last time, we are continuing with companies in the semiconductor equipment space, which is in our industrial category. That -- they are obviously not shipping in volume now, but we are continuing to look at that as a good future potential growth area for the industrial sector and are having good success in winning those customers.

Was Applied Material a prior -- that was a prior customer one of yours, wasn't it?

Yes.

Yes it was?

Yes.

And for what product are you guys involved there?

We don't disclose -

Oh, you don't. OK. And in terms of - if I look at what the proforma gross margins would have been if we excluded the charges, I believe you said. You took two reserves, inventory and receivables for 3 million, and the other 900,000 was in restructuring? So your booking - I imagine the reserves are going into your SG&A, or are you breaking up - you are putting inventory reserve in cost-of-goods-sold? I am trying to get some historical -

Inventories and costs , in receivables is AMS G&A.

OK, so proforma gross margins are around 5.5% then?

That is correct.

OK. And it looks like for the guidance's to be clear, this is a net - net income number you are guiding to, not an operating income?

Right .

OK. And the last question is in terms of SG&A and absolute dollars. Where would you - how much would you expect that to be able to decline? I know you mentioned again this quarter, there were increased costs for IT, legal, as well as - I believe - there were also in the June quarter for December, do you expect those same type of costs to be recurring or would you expect that to potentially go down a couple million dollars -- ?

Yeah I would say - I would say we are in the $11.5 to $12.5 million range in SG&A.

OK, perfect. Thank you very much.

from please, go with your question.

Good afternoon guys, how are you? Just first, what was the - what were the inventory sales back last quarter?

Inventory sales last quarter were 1.4 million.

OK. you talk about the 3 to 4 million in saving per quarter, where do you see - can you break that out between SG&A and cost-of-goods-sold?

Well, we haven't at this point. You know, we flow through to the bottom line. We haven't taken a look at it between gross margin and net income.

OK. And could you just talk a little bit more about the 12 new customers in the quarter? Are you - just for example, are you classifying , which I think, is kind of a replacement program? Is that a new program, a new customer, is that in the 12? Could you just give a little bit more description around that?

Sure.

The actually was not in the 12, because as I have indicated, we have been doing business with for several years. The class of customers is a combination that goes across the four of the five industry sectors, so it is fairly well balanced with a good mix -- and -- across the board, and it is a - the majority of them would start out as either engineering or an automation and test - test opportunity for us, and are currently in the process of being launched in - on various engineering centers around the world for Pemstar. So we are pleased that our sales activity and our ability to continue to attract customers into Pemstar is staying strong.

Is there any kind of revenue number you can give us for when these programs are fully ramped?

We haven't - have not been able to - or just aren't' in a position we have to to be able to put a specific revenue on it. We would - our - since it is a combination of engineering and manufacturing, and some of the manufacturing projects are are dependent on successful release and, or FDA approval. In the case of medical projects, they're tough to pin specific numbers. You know, 'cause obviously consistent with our, you know, our strategies they continue to grow Pemstar and continue to drive revenue in solid projects in spite of, you know, a weak communications market.

Right. OK. Thank you.

, please go ahead with your follow-up question.

Yes, just a quick follow-up for restructuring. I think the last quarter you had mentioned that there was going to be four million roughly split between reserves and the actual restructuring. It seems like obviously slight to a little more towards reserves this quarter. How much additional restructuring do you expect to take in the December quarter?

As we - as we announced in our release, we believe that the majority of the restructuring is behind us. So we're not anticipating any significant amount due to just restructuring. But as we always end up that statement with, we continue to look at revenue projections and will always attempt to balance our capacity and costs levels to that revenue projection. But, for what we see right now, we're not anticipating major reserves for restructuring.

OK. And in terms of inventory put back, do you see that continuing next quarter or was the majority of it completed this quarter?

We always - we always have some, but I don't anticipate seeing anything to the magnitude that we saw this quarter.

OK. Engineering as a percentage of sales, can you just go through what that was last quarter? I think you said 16.4 percent this quarter and you gave last year's number there.

Engineering as a percentage of sales last quarter was 22.4.

OK. So it was down sequentially.

Yes.

A little bit. And the last thing is you had mentioned earlier in the prepared remarks, a supplier agreement to work from Sienna. And I think when we last spoke, the status of that merger in terms of what was going to happen with was still kind of up in the air. At this point, I guess, given the fact that you just recently won an award, would you say that or Sienna as a company is a secure customer going forward and that there doesn't seem to be much risk around that program moving anywhere?

We are pleased with the transition to Sienna and will work hard to, you know, keep them happy as a customer. Yes.

OK.

Are comfortable with them as a customer.

OK. That's good. And had you said earlier, I don't know if I missed this, that you were expecting Motorola, in terms of December quarter, 'cause there's been - I know they've made comments themselves that they expect handsets to be at 20 percent sequentially in the December quarter. Would you guys expect that these, you know, similar type of strength in that area of your business? 'Cause I think it was down this quarter, around eight percent.

Yes, Motorola is obviously a seasonal, cyclical business and we anticipate that we will, you know, parallel what Motorola's already said and, you know.

OK.

Expect a strong December quarter.

OK. Very well. Last question here is on . I believe they just got, did they just get FDA approval for North America, I think that's something they didn't have prior and I believe you guys were involved in - on the European side. Is this something that could potentially be an opportunity going into next fiscal year or do you see it happening sooner or can you say?

Number one, they're in, and I actually won't speak for , they're in the process finishing approval for North America.

OK.

So I'm not - I don't know the exact status of that.

OK. So it's - I thought it was done, but I guess not.

But we're - yes, we're again pleased to be a supplier of Coors and we'll work hard to, you know, deploy our services wherever they're needed.

OK. Thank you very much.

Yes.

Ben from JP Morgan, please go ahead with your follow-up question.

Hi. Could you provide maybe a little color behind what's happening in your data storage segment? I show that it was down maybe 30 percent quarter-on-quarter?

That's a combination of product transition in both our projects that support components and our products - projects that support the automation and test site of storage. So we see that as just normal product cycling phenomenon.

OK. Would you anticipate up revenues in that segment next quarter?

Tough to predict. It would be next quarter we expect that over time that we certainly could - that you would, you know, bounce, you know, plus or minus two or three percent within that - you know, within the range and then I mean it's historically been in 10 plus or minus a couple. And we see it - certainly see it in that - staying in that range.

OK, thanks. And to follow-up on the question, could you maybe help us to understand a little bit better what type of an opportunity represents for PEMSTAR? And specifically my question is, how much of the overall manufacturing for that product, let's say in North America you would expect to - PEMSTAR to participate in?

We're not in a position or not able to disclose specifics on . Part of this is obviously just that no one knows what that market - total market opportunity is and we're - in our agreements with we don't - we don't disclose the specifics on that.

OK. But broadly speaking, you expect to continue manufacturing for them on an ongoing basis, not just the capital equipment.

Yes.

Is that accurate?

Yes. As we announced, we are providing both the equipment and manufacturing services.

OK. Very good. Thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press the one, followed by the four on your telephone.

I am showing no further questions. Please continue with your presentation or any closing remarks.

Let me reiterate that our fiscal second quarter results came in as we expected. We've made solid progress in working capital management and we continue to track new customers and projects.

Thanks again for your participation this afternoon and please call us if you have any other questions.

Ladies and gentlemen, that does conclude the conference call for today. You may all disconnect and thank you for participating.