Benchmark Electronics Inc (BHE) 2020 Q1 法說會逐字稿

Good afternoon, and welcome to the Benchmark First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Lisa Weeks, Vice President of Strategy and Investor Relations. Please go ahead.

Thank you, operator, and thanks, everyone, for joining us today for Benchmark's First Quarter 2020 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. And we've 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 GAAP to non-GAAP 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 2 in the presentation. During this call, we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical facts 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, 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 the framework of our COVID-19 emergency response protocol and providing a current status of our global operations. Roop will then discuss our first quarter results, including a cash and balance sheet summary. Jeff will wrap up with a rundown of demand outlook by market sector and our near-term guidepost before we conclude the call with Q&A.

If you will please turn to Slide 3 in the presentation. I will turn the call over to our CEO, Jeff Benck.

Thank you, Lisa. Good afternoon, and thanks for joining us. I'd like to start off the call by offering our heartfelt condolences to all who have been affected by the COVID-19 crisis. I would also like to recognize the courageous health care workers and first responders who are taking care of those impacted by the COVID-19 virus.

For the past 3 months, we've been working very hard to maintain operations against the global spread of the pandemic with 2 priorities in mind: First is the health and safety of our colleagues and their family. The second priority is to sustain the output of our operation so that we can continue to serve our customers during this critical time. Since the early outbreak and direct impacts to our Suzhou, China operations, the senior leadership team have met daily and created a task force to centralize employee and operational safety protocols and to establish a global communications cadence. We receive a daily report on employee health and the status of our global manufacturing and engineering operation. We also established a critical work stream to deal with the ever-changing government requirements and regulation and to maintain alignment between the local authorities, our operations and our customers. I want to give tremendous kudos to our team for all they have accomplished. This is a 24 hour a day, 7 day a week, day in and day out effort to stay aligned, productive and coordinated. Our teams have approached this challenge with incredible resolve and a sense of responsibility to our employees, customers, shareholders and local communities.

Please turn to Slide 4. As the global COVID pandemic has evolved, Benchmark continues to follow guidance from the World Health Organization and the Centers for Disease Control and Prevention as well as working with national, state and local governments to determine the best operating status for each of our global locations. While some employees are being asked to work from home, this is not an option for many directly involved in the manufacturing or design of critical products. For our employees working in our facilities, we've added new protocols for extensive and frequent disinfecting and cleaning, spacing of personnel and more. For those employees who could work remotely, we have invested in tools and equipment to allow them to continue to be productive. We are pleased with the results and creativity these teams have shown as they have found new ways to collaborate and to communicate with each other and our customer.

As the coronavirus began to make its way around the world, we saw challenges imposed by governments from various forms of stay-at-home, shelter-in-place and lockdown orders and some imposed by our own health and human resources teams to ensure we are maintaining safe facilities. Benchmark provides critical infrastructure products and essential services in each of our locations. However, government policies and implementations have still impacted operations.

I'll start with our Suzhou site, which was impacted after the Chinese New Year. We were given early approval to reestablish operations to support critical medical products and we ramped back to full capacity by mid-March. Our China plant continues to operate at full capacity today. In mid-March, there were new decrees that caused significant disruptions in our Penang, Malaysia operation, which includes our largest precision machining facility. Unfortunately, local restrictions remained in force, and we were only operating at 30% of capacity to start the quarter. This is now changing where we can move to full capacity starting this week. We worked hard to minimize the impact by staggering shifts, extending coverage and modifying our workflow, but we have not been operating at optimum levels. Our European operations in the Netherlands and Romania have had some limited interruptions but continue to operate near full capacity. In the last few weeks of March and in early April, we saw all states in the U.S. implement some form of shelter-in-place order. We were hit particularly hard in our California facilities, where we have 5 operations, 2 in the Bay Area and 3 in Southern California, which are not yet back at full capacity. As we sit here today, we're still working through a major disruption in our 2 Tijuana, Mexico operations, which were shut down practically overnight by the Baja state despite previously passing an inspection and given the authorization to operate by the Central Mexican government. These 2 locations currently remain closed with 0 manufacturing output. Our Guadalajara facility is also not operating at full capacity due to government restrictions.

This has been and remains a highly dynamic environment, and through the collective efforts of our incredible employees, we are managing priorities to meet and fulfill as much demand as possible. Our estimate today is that we are operating approximately at 75% to 80% of productivity. We are hopeful that shelter-in-place orders do as intended and the infection curve peak and starts to decline so that normal operations can resume in all locations.

Please turn to Slide 5. We've been recognized around the world as an essential business supporting critical infrastructure, and we're proud of the integral role we're playing in the frontline fight. Benchmark began its journey as a medical device manufacturer more than 40 years ago and has maintained partnerships with some of the largest medical technology companies in the world. We are working with medical customers and governments to get life-saving equipment where it is needed most by providing critical design services and expediting manufacturing capacity, even doubling or quadrupling production volumes for some customers. Demand has increased for diagnostic imaging products, including mobile x-ray and MRI products and handheld ultrasonic devices. We are supporting multiple ventilator projects with new and existing customers, which are in high demand to support those who need the most critical support in hospitals around the world. On the diagnostics front, we are supporting point-of-care devices, including a rapid 1-hour COVID-19 virus tester and a rapid sepsis testing device. I want to say a heartfelt thank you again to our extraordinary teams for their flexibility in supporting our customers when it matters most, not just in medical but across our portfolio, where we are supporting critical infrastructure.

Next, I'll turn the call over to Roop to discuss the first quarter results. And following his commentary, I will share further insights regarding our business and view of future demand by sector. Roop, over to you.

Thank you, Jeff, and good afternoon, everyone. I hope everyone and their families are 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 to deliver our first quarter results. As we manage through the COVID crisis, our priorities remain centered on: one, the health and safety of our employees; two, retaining the critical resources and capabilities to support our customers; three, maintaining a healthy balance sheet; and four, ensuring the financial flexibility to run our operations through uncertainty. I would discuss these priorities and our actions to support each as we step through our results.

Please turn to Slide 7. As a reminder, on March 16, 2020, we announced that the COVID-19 outbreak would negatively impact our first quarter results relative to the guidance that we had provided on February 6. Our first quarter results were below our February guidance, driven by direct costs associated with labor expenses, personal protective equipment, supply chain inefficiencies and under-absorption, all caused by the disruptive impact of COVID-19.

Even considering the challenging environment, we achieved revenue of $515 million in the first quarter, which was supported by strong demand in our semi-cap, medical and A&D sectors. Our gross margins for the quarter were 8.4% and non-GAAP earnings per share were $0.22. Our non-GAAP earnings reflect revenue changes as well as costs associated with employees who are restricted, quarantined or otherwise affected by the COVID-19 condition. We also incurred higher overtime expenses, and we paid labor premiums to those employees working in our China factory as they worked to recover from the shutdown. As a result, we estimate that our China factory inefficiencies impacted our global EPS by approximately $0.08. As the impact of COVID-19 conditions expanded globally, as Jeff mentioned, there were further inefficiencies in other operations beyond China, which were reflected in our reported non-GAAP EPS. Our cash conversion cycle for the quarter was 81 days. We used $3 million in cash flow from operations, and free cash flow was a negative $16 million as a result of $13 million spent on CapEx. Originally, we expected to spend approximately $50 million in capital expenditures in fiscal year 2020. We now expect that our capital expenditures for fiscal 2020 will be reduced by approximately half and focused primarily on new product introductions and associated rents.

Please turn to Slide 8 for our revenue by market sector. Medical revenues for the first quarter increased 15% sequentially and were up 14% year-over-year from volume increases across several customers for new and existing programs. Demand through the quarter remained strong with, in some cases, increasing demand for products such as x-ray and scanning devices, controls for hospital equipment, including ventilators, and diagnostic devices that are critical to support the COVID-19 pandemic. Semi-cap revenues were up 2% in the first quarter and up 25% year-over-year for increasing demand across the majority of our semi-cap customers, along with the ramp of new customers to our portfolio. This sector was most significantly impacted by labor constraints related to aggressive shelter-in-place protocols in our Penang, Malaysia and California locations, which began in mid-March. A&D revenues for the first quarter increased 13% sequentially and were up 15% year-over-year from new program ramps for defense satellites, munition and security. We did receive signals late in the quarter of demand decreases in commercial aerospace segment, which is less than 30% of our A&D sector revenues. Industrial revenues for the first quarter decreased 4% sequentially and 12% year-over-year. The industrial sector was lower and had the largest experience of any sector as compared to our original Q1 expectations from COVID-related impact. Overall, the higher-value market represented 82% of our first quarter revenue.

Turning now to our traditional markets. Computing was down 71% year-over-year from the completion of the legacy computing contract in 2019, and 18% sequentially quarter-over-quarter from lower data center storage and commercial printing product demand. Telco was down 16% sequentially and down 37% year-over-year from lower demand for infrastructure build-out-related products. Our traditional markets represented 18% of first quarter revenues. Our top 10 customers represented 42% of sales for the first quarter.

Please turn to Slide 9. Our revenue of $515 million reflects an increase on a quarter-over-quarter basis. Our GAAP earnings per share for the quarter was $0.10, and our GAAP results included $2.9 million of restructuring and other nonrecurring costs in Q1. These costs included $1.9 million of costs related to a previously announced site consolidation effort and other restructuring type activities around our network and $1 million for an impairment related to a building that is now being classified as held for sale. Our previously announced San Jose closure is on track to be completed in Q2. As a reminder, there were no GAAP to non-GAAP adjustments related to COVID-19.

Turning to Slide 10 for our non-GAAP financial information for Q1. Our non-GAAP -- our Q1 non-GAAP gross margin was 8.4%, a 100 basis point increase quarter-over-quarter and 30 basis points year-over-year. Q1 2020 results were impacted by labor inefficiencies due to the government-mandated shutdown in China and shelter-in-place requirements throughout the rest of our global network and the incurrence of incremental expenses for personal protective equipment. Our SG&A was $31.6 million, an increase of approximately $7 million sequentially. Q4 2019 SG&A was lower due to reduced variable comp, including stock comp. Additionally, in Q1, we have the restart of payroll taxes. SG&A was flat on a year-over-year basis. Operating margin was 2.3%, a decrease from 2.6% in Q4 due to the lower-than-expected revenue and inefficiencies related to COVID-19. In Q1 2020, our non-GAAP effective tax rate was 19%, which was lower than expected for the quarter due to the distribution of income across our network. We expect that for Q2, our non-GAAP effective tax rate will continue to be in the range of 20% to 22%, again, because of the distribution of income around our global network. Non-GAAP EPS was $0.22 for the quarter, and ROIC was 7.1%.

Jeff will provide more detail shortly about the strength we are seeing in defense, medical and semi-cap, but we're also seeing a challenging supply chain environment and labor constraints due to the COVID-19 virus. As a result of these inefficiencies, we are proactively taking a series of actions to lower our cost structure and reduce capital expenditures. Our CEO, the Board and our senior executive team will take a temporary 10% salary cut, while the rest of the senior leaders in the company will take a 7% salary cut through Q3 2020. Additionally, we expect to reduce variable compensation and other discretionary expenses such as travel. The cost reduction actions in our U.S. factories will consist of employees taking rotating time off depending on the factory loading levels. Cost reduction actions in our non-U.S. locations will depend on the local law requirements. In summary, we're being vigilant and very much appreciate the support of our entire organization as we navigate the current environment.

Please turn to Slide 11 for an update on cash and our debt structure. Our cash balance was $412 million at March 31, with $223 million available in the U.S. We have continued to repatriate cash from our foreign locations and we will continue to repatriate in future quarters while balancing our foreign site cash flow requirements. Our cash balances include $95 million of proceeds from borrowings under our revolving line of credit. We borrowed against our revolver proactively to support navigating through the current environment. We will continue to monitor our financial covenants and ensure compliance. We do expect our net interest expense to increase by $500,000 in Q2. Overall at the end of Q1 2020, we are in a positive net cash position of approximately $170 million. We believe we have a strong capital structure and our liquidity position provides flexibility to manage our business through the current environment. Our accounts receivable balance was $318 million, a decrease of $6 million from December 31. Contract assets were $160 million at March 31 and $161 million at December 31. Payables were up $13 million quarter-over-quarter. Inventory at March 31 was $338 million, up $23 million quarter-over-quarter due to mix changes from customers late in the quarter and bringing in inventory to support long production cycles for products in our semi-cap and medical sectors. We continue to make proactive investments to secure the critical components needed to support our customers while managing inventory balances.

Please turn to Slide 12 to review our cash conversion cycle performance. For Q1 2020, our cash conversion cycle was 81, which was within our expectations at the beginning of the quarter and was achieved even considering the challenging environment. This is consistent with our expectation. As discussed previously, after the completion of the legacy computing contract in the third quarter of 2019, our cash conversion cycle will be between 78 and 83 days.

Turning to Slide 13 for our capital allocation update. In Q1, we returned approximately $25 million to shareholders. This included $5.5 million as part of our recurring quarterly cash dividend, which we recently increased to $0.16 per share and announced on February 3, 2020. We expect to continue the recurring quarterly cash dividend. We also repurchased approximately 724,000 shares for $19 million. As of the end of March 2020, we had approximately $210 million available under the current share repurchase program after an increase approved by the Board in February 2020. We are prioritizing cash usage for operational needs, and as such, we are not planning to repurchase shares in Q2.

Because of the uncertain conditions related to COVID-19, we will not provide our usual detailed level next quarter guidance. Jeff will provide a detailed view of demand in our end markets by sector, an overview of recent new business wins and an update on our key strategic initiatives. Jeff?

Thanks, Roop, for that update. Turning now to the impact of the pandemic on Benchmark on Slide 15. I want to provide some insight into what we're hearing from our customers by sector. I would like to focus on 2 dimensions: the current visibility of demand by each market vertical; and our ability to translate that demand to revenue based on operational and supply chain constraints. In summary, the second quarter will be less about demand than our operational and supply chain capability to support it. Our supply chain team has been proactively managing parts supply during this pandemic since the early days of the outbreak in China. The team is assessing risk areas with our suppliers every day and taking preventative steps to ensure our critical supply lines remain open. However, the global supply base remains subject to the same ordinances and decrees that affect our operations and are causing inevitable interruption in our suppliers, ultimately impacting our output.

In the medical sector, demand remains strong for the medical products we produce, our medical design services and new program ramps. Furthermore, as I discussed, we have been engaged by existing and new customers in helping produce medical equipment to help fight COVID-19, and in some cases, this has meant a significant increase in demand. This demand and our ability to support medical customers will result in sequentially higher revenues in Q2, and we expect our second half 2020 revenue in this segment will be higher than the first half.

In semi-cap, the demand recovery for semiconductor capital equipment continues based on the current forecast from our customers. However, operations and supply chain challenges that exist in our California and Malaysia operations are impacting our ability to fulfill all of our demand backlog in Q2. Our competitive position remains strong in this sector, where we have won new programs and expanded our penetration in key accounts over the past several years. We also expect increased revenue in the second half of the year in this area based on strong semiconductor capital equipment demand.

Demand in the industrial sector is mixed, and we expect some subsectors to be impacted more than others. Approximately 20% of our industrial customers support the oil and gas industry, and we expect demand to be softer throughout the balance of the year. We also expect weakness in industrial, transportation and infrastructure. A bright spot could be the automation and robotics subsegment, where we have a number of new wins. As a result, we expect the industrial sector to be down in the second quarter with some recovery in the second half.

Similar to industrial, the traditional markets of computing and telco are mixed. At present, satellite-communication-related products are increasing, but data center and telco infrastructure build-out budgets are expected to be under pressure. In Q2, impacts to our Tijuana and Malaysia operations and supply chain are impacting computing and telco revenues as well, but output should recover to demand in the second half. We also expect an increase in high-performance computing projects and associated revenue in the back half of the year.

Our A&D sector is comprised of approximately 70% defense-related products and 30% aerospace. Demand remains strong for defense products, but we are challenged at this time to fully support these programs in our California location, including critical subcomponent shortages that are manufactured in Tijuana. As these issues improve, we expect higher defense-related revenues. For our commercial aircraft programs, we have seen a significant decline in demand, and we anticipate much lower demand through the rest of the year, barring any major improvement in commercial aviation.

Despite the challenging global environment and disruption to our normal customer engagement workflows, we are pleased with our continued design and manufacturing win momentum accomplished in Q1, as shown on Slide 16. In our medical sector, we were awarded programs for a portable ultrasound and a mobile imaging device both with existing customers. We also received a design win for an automated drug freezer with a new customer, which we expect to convert to a manufacturing win in the future. The new ventilator programs that we were awarded will appear as new business wins in Q2. In semi-cap, we were awarded a precision machining program for a next-generation, in-chamber tool focused on wafer elimination, along with a design and manufacturing award for an EUV electronics controller, expanding our participation in this cutting-edge technology. In aerospace and defense, we received additional awards for munition electronics and a flight recorder in which we will perform process design and manufacturing. Our pipeline in the defense segment is very encouraging, and we have bid on a large number of projects that we expect to hear the results of in the coming months. It's clear this segment has made a serious commitment to outsourcing more of their manufacturing needs, but they require sophisticated partners who can meet their exacting standards. Benchmark is up to this challenge and has continued to invest in this segment. In industrial, we're making progress with new wins for vehicle tracking and diagnostics devices and the design and manufacturing of a new artificial intelligence-enabled LiDAR scanner.

In addition to new business wins, we were pleased to be recognized by our customers for delivering complex products with high quality. For example, we announced that we were selected by Raytheon with an EPIC Award for excellence related to the design and manufacturing of a ruggedized multi-domain router used in critical communications supporting our military. Benchmark Secure Technology has been a Raytheon partner for almost 20 years, and we look forward to supporting this expanding strategic relationship across Benchmark.

Now if you please turn to Slide 17. Given the current environment, we've elected to suspend quarterly guidance for the second quarter. The quarter can unfold under a variety of scenarios, the magnitude of which remains uncertain depending on the timing of government actions to allow the return to full production and supply chain improvement. Instead, we will offer some directional guideposts for now and resume guidance once we have more clarity and predictability.

Given where we are in the quarter and our assessment of our operations, we expect revenue to modestly decline sequentially as we have lost manufacturing time which cannot be recovered. We also expect that the second quarter will be the lowest revenue quarter of 2020, despite the stronger demand outlook in medical, semi-cap and defense. Second quarter margins will be down sequentially, primarily from lower revenues and associated under-absorption, lower productivity levels, incremental supply chain costs and employee-related expenses. At present, many of our operations which are shut down or operating at reduced capacity, payroll costs cannot be mitigated even if employees cannot come to work. Also, given our demand outlook and new program ramps from wins in the past 24 months, we need to maintain critical resource capabilities, which Roop mentioned as a top priority. We also expect gross margins will recover to the 9% range in the second half of 2020.

As Roop covered, we've taken a number of proactive actions during the quarter to manage expenses, including compensation adjustments, merit and hiring delays and furloughs where permissible. We are biasing towards these actions versus head count reductions in the near term to support our long-term growth. As a result of some of the actions, we expect that SG&A will be reduced approximately 8% in Q2. Beyond Q2, we also -- have also run a number of scenarios for the remainder of the year, and we will take appropriate actions to further reduce costs as appropriate if the pandemic continues or demand conditions change. We feel very confident that our experience, disciplined execution and strong balance sheet will allow us to navigate this period of uncertainty while continuing to invest in the future.

Before I turn the call over to the operator for Q&A, I want to close our prepared remarks with a few thoughts on Slide 18. As we entered 2020, we prioritized how we would spend our time this year to build a better Benchmark. Even with the significant challenges brought on by COVID-19, our key strategic initiatives remain unchanged. In fact, progressing these initiatives goes hand in hand with how we are managing the current crisis. One of the greatest testaments on progress has been the multiple calls and e-mails we receive from our customers on our effective and standardized protocols and efficient communication to make sure our priorities remain aligned. These endorsements affirm progress on our journey to be a trusted partner and service provider for our customers. We will continue to work on these longer-term initiatives to prepare the company to capture the growth that lies ahead. Our competitive position remains strong, and I have the utmost confidence in our leadership and our global team.

And with that, I will turn the call over to the operator to conduct the Q&A. Operator?

(Operator Instructions) And our first question comes from Jaeson Schmidt of Lake Street.

I fully understand why you're not providing specific guidance for Q2 given the backdrop. But just curious if you could share what you're seeing from a bookings or order momentum perspective in April compared to the end of March. And relatedly, if sort -- if the Q2 guidepost assume that 75% to 80% productivity you currently have sort of is maintained throughout Q2.

Yes. Thanks, Jaeson. It's Jeff. I'll start and then Roop can jump in if he wants. Our -- the demand is pretty strong particularly as we look out the second half. We did say this current quarter, we saw revenue coming down sequentially, modestly because we know we're constrained really by more supply chain and operational -- the state of the current operations to meet the full demand. That being said, we're not immune to the conditions and the environment, and we have seen some demand come down in the sectors that I talked about, like industrial and some of those areas, compute and telco. We've seen some order load shift but we do feel like second half still looks pretty strong for us. That's why you see us saying that we believe that we will do better than second quarter as you go out to Q3 and Q4 and kind of calling the low point.

Our assumptions with those guideposts were kind of looking at where we are today, right, with that 75% to 80%, knowing we've got a fair amount -- we talked about Tijuana sites being, unfortunately, completely closed. We're anticipating being able to do some return to work there in the coming weeks. We're kind of looking at where it is now in those guideposts. It can change, which is really why we were uncomfortable. We've seen things where -- Malaysia, as of Monday, we weren't able to operate 100%. And just as of today, I can report that it's going to 100% and we were at 50%. So that was a really positive thing. But 1.5 weeks ago, and I told you about Mexico, and that was a negative. So it's a pretty fluid environment. I think the team has done a great job. We have justification certainly for the critical infrastructure and the sites we operate. And that's allowed us to maintain production around the world in all of our facilities. But local jurisdictions still rule the day, and we want to be safe. So we're taking all the precautions we can. But I hope that it provides a little more color.

No. That's helpful. And I know you outlined some constraints in other product lines, but are you seeing any capacity constraints in the medical business just given the inbound momentum you're seeing?

Yes. In some -- as you can imagine, I mentioned in one case related to some of the products fighting the COVID fight, we've seen demand more than quadruple. When the demand goes up 10x, of course, you're going to see short-term constraints while you go get parts to be able to build products. So we're certainly capped there. But in some of the scenarios, we also notice this in demand that it may not be sustained for the long term, but it's a great opportunity to do more for the customers we support, get a few new customers in the mix and delight them and continue to do business with them. But I can't say we're not constrained in some cases in medical because we're on a lot of customer engagement calls and communications really daily on some of these most critical products. So there are some areas that are tight.

Yes. And maybe, Jaeson, if I can maybe just add. Remember that the labor constraints we have are across our global network, right? And so when you think about the medical sector, as all sectors are somewhat impacted, the good news is we've got higher demand that we're seeing in some of these medical products in upside, which as Jeff said, we're chasing components and making sure we can deliver on those.

Okay. And then the last one for me, and I'll jump back into queue. I know you guys have been pretty disciplined about what programs you bid for. But just given the current backdrop, are you seeing any of the bidding process pricing become increasingly competitive given the backdrop?

Our space is competitive at the go. So most of the bids are competitively contested. I won't say that it's been necessarily more aggressive. We're in a pretty high-value space now with approaching 80% of our revenue, which not -- there's a limited number of people that can do it. We know the usual suspects, and we know kind of where we need to be competitively. I will say given the lack of -- we can't have people on site necessarily. It's really difficult. We're doing actually literally FaceTime, walk through the site to give people tours and stuff. I've been really encouraged by the pipeline of new business and we have weekly checkpoint where we look at that. And I got to say even through the March quarter and into April here, I've been sitting on those weekly. I don't always participate necessarily, but I've been really wanting to see what the deal flow looks like.

And it's been pretty encouraging and we're winning our fair share. We went through a whole host. There's a chart in the deck about all the wins. And in fact, we just got an award in '20 from an industrial customer that's pretty sizable that will probably roll up into our Q2 numbers. But we're still -- a lot of it with existing customers doesn't require a site visit or checking us out, which is just a great complement to the work we're doing for them already. But I'm also seeing new customers want to engage. So I'm anxious to get people back in our facilities and all that. But I got to say that has me very encouraged. While it takes time, as you know, can take 18 months in some of those design wins or awards to get to production, but it's good to see things continue to happen.

Our next question comes from Anja Soderstrom of Sidoti.

So I just have a follow-up on the previous discussion here about -- you said -- Jeff, you said you were encouraged about the pipeline of new business. So where would you say the new business comes from? Is it more from competing with in-house production? Or is it from competition?

I mentioned in my remarks that it's been -- I think they're more committed -- some of our largest defense customers continue to want to move to outsourcing. Some of that was capacity the last several quarters. But I think in a tough cost environment and where everyone is pressured, you're going to look at who can do things most efficiently. And I feel like that commitment in the defense area is there to stay. And many times, to your point, we're competing with in-house production in that segment. Medical is a little more outsourced. So that -- typically, they might have already been outsourced. So we're competing more with folks that do work in that space. That's where our strong U.S. footprint, our FDA capability, the fact that we do category 3, 4 products that we can do life-sustaining things, gives us a good leg up, and our history in medical allows us to do well against the competition. So it kind of varies a little bit by segment. I would say we're seeing more outsourcing in the defense and industrial. I think medical is kind of the same complexion that we've seen. I still think it's a long-term secular trend. We know we're not at a majority of people being outsourced. So that -- compute and telco, yes, the majority is outsourced. But in the other sectors we're in, it's not. So I think there's a lot of good first-time opportunities there, but it's also -- oftentimes, there's competitors involved.

Okay. And talking about the industrial, so it seems like that's going to be slowing down more than others. But then given your outsourcing model that might help you because the industrial production that needs to take place still might be outsourced, is that sort of a fair estimate or...

Well, what's interesting with industrial, you have to kind of dig down a level with industrial. You've got to go to the subsectors. And we do have a footprint in oil and gas, which -- it's maybe 20%. I think we stated 20% of that sector. We know that, that market is going to be tougher in the coming months and quarters given the oil, the whole -- everything going on in oil pricing and everything. But then you look at robotics, which is also industrial, and there's great opportunity there. We've got some new design wins in that segment. Automation continues to be stepped up. But then we don't do a lot in transportation, but we have some industrial transportation business, but we anticipate that might -- that, that might be a little bit certainly flatter to a little bit of pressure there. So we kind of have to kind of play it out, but I think it really depends by segment. That being said, we -- it won't have the snapback that we expect with medical and semi-cap given the position -- and defense, but we are anticipating that we'll see some improvement from Q2.

Okay. And then talking about the health care. So you have the surge now of the COVID-related products that you're helping out with. But if we go back to the more elective product -- related products, have they been pushed out? Have you seen cancellation in those? Or how should we think about that coming back again?

Yes. Elective surgery is the one category in -- products in that segment, the one category, I would say, there's some softness. But overall, it's not enough to drag the medical segment down for us. In fact, we're pretty bullish given the upsides on some of the COVID-related products or some of the diagnostic and some of the things that we're doing. As you see, we've tried to be articulate about just the kind of things. I mean everything from a 1-hour tester for COVID one of our customers is developing that's got great promise, I mean that's exactly the kind of products that are needed. We play in the ventilators and those things. So there's a lot of demand across a broad set of products there. The elective surgery, I would say, is more a pushout, but we're not seeing like we want to cancel things. It will be more like, "Hey, we think if we can't fulfill all the demand in 2Q, that's fine." We may see some orders move to the right but not wholesale cancellations. But I think you're right in that that's hurting hospitals that they're not able to do elective surgery. And I know there's a lot of pressure on our government officials to enable that to start picking back up, and we'll watch how that plays out. But for that -- from that standpoint, I think it's more of a shift.

Okay. And what did you say about the tax rate for the second quarter was expected to be? I'm sorry, I couldn't tell what you...

Yes. We expect it to be 20% to 22%, Anja, in that range.

Okay. And how about currency headwinds? Do you see any currency headwinds or...

We are seeing a little bit of currency headwinds. We had some FX impact especially from the peso. We continue to monitor that. It's persisting a little bit in Q2. So we'll look to manage that proactively as well.

Our next question comes from Mike Cikos of Needham & Company.

First, just a housekeeping item. I think there was a comment made during the script that you guys are looking to take down SG&A expense 8% in Q2. I just wanted to make sure. I was thinking about that. That is on a sequential basis, correct?

That is a sequential basis, correct.

Okay. And if I'm thinking about those cost reductions that we will be seeing, is this more, I guess, on a temporary basis to help align the cost structure with how the revenue profile is changing in these uncertain times? Or is there anything more to take away from these cost-cutting measures?

Yes. So I'll break them up into 2 pieces, Mike. Specifically around the cost actions that we articulated in the call today with our prepared remarks, those are temporary in nature and associated with kind of the demand profile we're seeing and the current environment, if you will. Separate from that, if you remember, last summer, we did announce broader consolidation of some sites, one of which was completed through a transaction in the fourth quarter and the other one, the San Jose site, which I mentioned in my comment, which is on track to be closed by the end of Q2. So the cost actions we've taken are a result of the current environment. Separate from that, we -- as part of our announced consolidation of certain sites, we're on track with that action as well.

Okay -- yes?

Maybe I'll just add -- I was just going to add the fact that, Mike, we really -- given the demand in the second half and given the projects we've been working on, we really are biased towards protecting our capabilities and the resources. And so that's really why we've taken a -- we've been proactive, but we've really tried to look at this from a temporary -- how do we help us weather this current -- where we've got such a disruption in our site around the world in second quarter.

No. That makes a ton of sense. And I guess another question I had for you. And good news on your ability to open up those facilities over in Malaysia, right, and getting them ramped back up. But just curious what that involves and how long it would take to get that ramp back up. And I'm just trying to get a gauge, too. I imagine every facility is different, but let's say Mexico gets the green light in the next couple of weeks, would it be able to follow a similar track? Or how should we be thinking about that?

Yes. So I mean it's complex, as you can imagine. When Malaysia went under a shelter in place, the first thing you have to do is appeal to the government that, "Hey, we're building critical medical products. We're building semiconductor infrastructure. We're building -- or semiconductor capital equipment. We're building a number of products that are deemed critical in industry and critical infrastructure." And then you get an approval, "Okay, we'll let you operate with certain guidelines," and those guidelines initially when we got approval, we actually were only shut down fully for a short period of time, less than a week. But then we went back to 30%. And then we operated at 30% for, let's say, a month or 3, 4 weeks. And then we were able to step up to 50% because we met the guidelines. We might have had an inspection. We were able to distance. We were able to reconfigure the factory. We're able to switch shifts to get to 50% and increase our production correspondingly. Now with the progress that the country has made and their comfort level with containment, we're able to get to 100% and it's still meaning socially -- social distancing, keeping people apart, protective equipment like masks and things in the facility, cleaning multiple times a day, doing health checks and all of that.

So it does -- it is the kind of thing where it takes time to get back. I would say, like in our California facilities, that's been an elongated process that might take 4, 5, 6 weeks to get to 100%. But everyone really want to deliver for customers. And while we stay safe, my -- our teams around the world recognize the importance of what we're doing. And so there's motivation to get there. It just -- it's just not something that's necessarily a light switch. And Mexico is a little bit different because our Mexico site, we already had federal approval and certification to continue producing. And then the Baja state said, "No, we're going to over -- we're going to go on top of that, and we're going to say even though federal approved it, the state is not going to approve it. So we're going to shut all operation. And then we're going to certify independently and then we work through that." So again, there's a play by play here, as you can tell. There's -- we have a very large team working on this daily, along with the folks in the region. And I think we've been proactive. That's what allowed our Suzhou site to open up really early. We were probably reopened 3 weeks in after the closure in China when a lot of other factories were down 5, 6 weeks. But it does feel looking across the EMS landscape that we just -- coincidentally, we have facilities in Tijuana, we have a bigger footprint in California and we're in some areas that were hard hit. And we're confident we're going to get through it, but we are dealing with a little bit more disruption operationally, I think, than some of our competitors.

Right. Definitely a little bit of a moving forward when you can't get the federal and the state government to line up.

Yes. Does that sound familiar?

Right.

Happening in the U.S., too.

One other question that I had for you, and it was more around the semi-cap. I wanted to make sure that I heard you correctly. So it sounds like Q2 might be slightly down from Q1, but if anything, it's going to be due to your inability to fulfill some of the demand coming in based on the shelter in place in the Malaysian facility, I guess partial utilization you're currently at now. Where is this...

Yes. Semi is not a demand problem. We have plenty of demand. It is really our ability to fulfill it. We're going to work hard to continue to grow that because the demand is there. But as you said, both Malaysia and our stronger footprint for precision technology in the Bay Area is making it a bit more demanding, a bit more challenging to get there. But as we look at it, if you go to our Chart 15 in the presentation, we kind of tried to do this guidepost where we said -- we kind of had a side arrow on semi-cap saying that we see it flattish. It could be up if we could fulfill all the demand.

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

Yes. We'd just like to thank everyone for joining our call today. If you have any follow-up questions, please don't hesitate to reach out. We certainly look forward to providing you an update on our second quarter 2020 results in our next earnings call and hope that you and all of your families stay well. Thank you.

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