Benchmark Electronics Inc (BHE) 2005 Q1 法說會逐字稿

Welcome and thank you for standing by. All of the participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). Today's conference call is being recorded. If you have any objections you may disconnect at this time. At this time I will turn our conference call over to Ms. Gayla Delly, Chief Financial Officer. Ma'am, you may begin your conference.

Welcome, everyone, to the Benchmark Electronics' first-quarter 2005 conference call. I will begin by introducing our team present today. I'm Gayla Delly, the CFO of Benchmark Electronics, and with me is Cary Fu, our President and CEO, and Barbara Sorensen, our Director of Treasury Services. On our call this morning I want to begin with highlighting some points from her first-quarter 2005 results.

Again this quarter the Benchmark team delivered solid operating performance and financial results. This was achieved in the current challenging environment. We had 6% year-over-year improvement in revenues and an 11% increase in net income for the quarter. This was accomplished while ramping new programs along with accommodating the scheduling changes that we encountered during the first quarter of 2005. You will here us refer to these changes in scheduling and mix changes several times throughout our conference call this morning. This is because the effect of the level of changes we experienced during the first quarter is seen throughout our financial statements. It is seen our inventory level, in our receivable balances and in our effect on our overall operating efficiencies.

We noted in our guidance last quarter that we expected revenues in the range of 510 to 530 million based on the indications from our customers. Our actual results were at the lower end of this guidance due to a high level of customer scheduling and mix changes that we did experience. As noted in our last conference call, we also continued to ramp a number of new programs that are in the various stages of their production and our ramping through revenue throughout 2005. Our Q1 revenue from our top customer was 31% and this is on revenues of 510 million. This is consistent with the fourth quarter of 2004.

The higher than normal levels of scheduling and mix changes we experienced this quarter along with the new program ramps and the back-end loading of customer orders had an impact on our working capital metrics. Inventory turns were 6.4 times in Q1 as compared to 7.5 times in Q4, as the inventory levels were impacted by the changes in our customers' order prioritization. Our cash cycle days were 50 days in Q1, compared to 43 days in Q4. While higher levels as scheduling changes impacted our revenues and overall efficiencies in Q1, and the technology sector has shown lessened strength, we are still starting revenue and earnings growth of 10 to 15% for 2005, and this will be a great challenge during the current marketplace.

I would like to read our forward-looking statement before we begin. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We would like to caution you that those statements reflect our current expectations and that actual events or results may differ materially. We refer you to the risk factors and cautionary language contained in the documents we file from time to time with the Securities and Exchange Commission, specifically our recent filings on Forms 10-K, 10-Q, and 8-Ks, which identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update those projections or forward-looking statements in the future. Now I will turn it over to Cary to provide an overview for the quarter. Barbara will then present the financial information, and will conclude with both Cary and I answering your questions in the Q&A session. We will, once again, hold this conference call to one our.

Good morning. Thank you for joining us today for our Q1 2005 earnings conference call. Even with the significant level of the mix changes and soft markets we witnessed during the first quarter, we once again accomplished a solid performance of 6% year-over-year improvement in revenue as well as an 11% improvement in net income. In the first quarter, with the many new programs in various stages of production, we experienced high level of scheduling and the mix changes. We also witnessed an overall soft market especially in the test and instrumentation sectors. The overall success in our new program win, did allow us to beat the low-end of our expectations and also allowed us to project a stronger revenue and profit growth for Q2.

We have continued to realign our resources to accommodate the changing business environment. I am pleased to report our new (indiscernible) system integrated facility was operational by end of the first quarter with production to be started this coming quarters. We also closed on (indiscernible) facility in Q1. Our target 2005 operational margin remains consistent with the target range of 4.5 to 5% which explains the margin pressure during the first-quarter related to the inefficiency associated with the mix changes and the back-end loaded customer orders. We're hoping these improvements to the (indiscernible) order continue to ramp. We are able to employ efficiency in the production. Now I will turn the conference to Barbara to provide more detail on our financial performance for the quarter.

Thank you, Cary. As we reported this morning in our press release we completed the first quarter of 2005 with revenues of 510 million, a 6% year-over-year increase from the prior year. Our diluted earnings per share were $0.40 per share on a GAAP basis. For the same quarter in the prior year, our diluted earnings per share were $0.36. Net income for the first-quarter of 2005 was 16.9 million on a GAAP basis compared to net income for the first-quarter of 2004 of 15.2 million on a GAAP basis, an 11% increase. For the first quarter our cash flows used by operations were 9.8 million. Our inventory level was 295 million, an increase of 39 million from Q4 with inventory turns at 6.5 for the quarter compared to 7.5 in the previous quarter.

Our inventory levels were impacted by the scheduling and mix changes and new program ramps during the first quarter. Gross margin for the first quarter was 7.4% of sales, compared to 7.6 for the fourth quarter of 2004. Our gross margin was negatively impacted by the high levels of scheduling and mix changes that occurred in Q1. SG&A in whole dollars was 15.2 million, which represents 3% of revenue, consistent with the previous quarter. We continue to maintain strong cost controls and continue to drive to gain efficiencies in our operations to reduce operating expenses.

Our operating margin for the quarter was 4.4%, a decrease from 4.6% in Q4. Our pretax margin was 4.5% in Q1, compared to 4.7% in Q4. Our ROIC was 13.8% for the first-quarter of 2005. Interest and other income was approximately 1.8 million for the quarter. Interest expense was 67,000, and other expenses primarily foreign currency related, were approximately 1.1 million. The tax rate for the quarter was 26%. Overall, taxes continued to be favorably impacted as we expand our Asian operations. Weighted average shares outstanding were 42.7 million.

Our cash and short-term investment balances at March 31st totaled 344 million, a decrease of 24 million from the December balance. Receivables were 267 million, an increase of 16 million from the fourth quarter of 2004. Again our receivable balances increased primarily due to the back-end loading of the quarter based on our customers' delivery dates. Our Days Sales Outstanding was 47 days compared to 43 days last quarter. Inventory was 295 million, an increase when compared to 257 million last quarter. Inventory turns were 6.4 times, compared to 7.5 times in Q4.

During Q1 our inventory levels were once again built up in support of the new program ramps and product introductions. They have also been impacted by high levels of scheduling and mix changes. Cap cycle days were 50 days compared to 43 days in Q4. Again cycle days were impacted by the scheduling and mix changes experienced during the quarter and the back-end loading of customer sales, which resulted in higher receivable and inventory balance at the end of Q1. Current assets were approximately 935 million and the current ratio decreased slightly to 2.6 to 1 in Q1, compared to 2.7 to 1 in Q4.

Capital expenditures for the first quarter were approximately 14.8 million and depreciation expense was 6.7 million. In March 2005, we purchased a building housing one of our current facilities for 5.9 million. This building was previously being leased by us. As we have indicated and anticipated, our capital expenditures have been increasing in support of our increased opportunities and new programs. We have no debt outstanding at this time. Again cash flows used by operations were approximately 9.5 million for the first quarter of 2005.

Our revenue breakdown by industry for this quarter approximates as follows. Medical, 12%; telecom, 13%; computers, 59%; industrial controls, 12%; test and instrumentation, 4%. Revenue from our top customer was 31% this quarter which is consistent with last quarter. We anticipate the range of revenue to continue to be in the low 30% range for our top customer during 2005. Test and instrumentation was weaker than anticipated during the first-quarter even with one new program beginning to ramp in this sector.

During Q1 our teams continued to effectively support and manage the ramping of new programs from sales through to production. We are pleased with the operating performance of our teams that continue to show solid results in this current challenging environment. Now I will turn it d over to Gayla to discuss our new program wins and guidance for next quarter.

And you, Barbara. During the first quarter, we again had solid booking activities and we booked six new programs with 60 to 85 million in annual revenue potential. We continue to see a mix represented in our program wins with new programs this quarter in industrial controls, medical, and telecom. Some of the new products and/or the new programs do not meet the customer or our expectations from time to time. Many of the new programs that we announced last year are still in the early stages of ramping to volume revenue.

While the overall technology marketplace has shown some signs of weakness recently, we continue to see strength in the sales pipeline and we are pleased with the effectiveness of our teams to manage the program ramps currently that are in various stages. The pipeline of the quotation and outsourcing activities remain strong and highly competitive, and there is a fairly aggressive marketing efforts by some of our competitors. We do continue to focus on our cost controls and realign our resources as considered necessary to gain continued efficiencies in our operations.

During Q1 of 2005 we closed our Manassas, Virginia facility as part of this ongoing effort. We will provide specific guidance for the second quarter and our guidance will be based upon information we have available at this time, and as always is subject to the market and our customers' changes. We currently expect revenues for the second quarter of 2005 to be in the range of 525 to $550 million based on the indications from our customers. The corresponding GAAP earnings per share is in the range of $0.41 to $0.45. We also continue to target our operating margins to trend gradually upwards toward our target range of 4.5 to 5% as we ramp to volume the new program and we continue to gain efficiencies in those programs, and we also continue our focus on our operating costs and our overall cost structure.

Although if we move more business to Asia, which has less complex products and higher material costs with lower value-add, it will be increasingly difficult to achieve the top end of the operating margin range, and we do expect our teams to continue their diligence in this effort. As a general note, we want to let you know that we are going to discontinue the practice of providing updated guidance immediately following each quarter end.

And now we would like to begin our Q&A session. During this session we do ask that you limit yourself to one question and then one follow-up question, so that we allow enough time for everyone's question.

(OPERATOR INSTRUCTIONS) Michael Walker, First Boston.

Good morning, guys. The question I have is first on the guidance. I want to make sure I heard correctly that you said you expect both top and bottom line to grow 10 to 15%. The reason I ask is because I think that's the same thing you said last quarter, and that is despite having coming in at the low end for March and kind of taking a penny or two out of June as well. So if you're still saying kind of $1.84 or $1.85 for this full year, that implies a very substantial ramp in earnings for the September and December quarters. So I want to make sure I heard that correctly.

Yes, I guess, Michael, what we see is yes, the marketplace has shown a bit of softness and we did see a high level of scheduling changes, but we continue to see good level of program ramps and overall demand. The scheduling changes were, in fact, that changes, not cancellations, not significant pushouts, but prioritization of the schedule by our customers, which probably shows some of the overall challenges in the marketplace today. But we have not seen any significant overall demand changes for 2005. Again, we do point out that if the market continues to be soft or gets softer, that could provide challenges. But at this point in time, we did not see that there was much more than some March changing primarily in a lot of the schedules.

So to follow-up on your last point there, you've talked several times during this call about the softer market. Have you seen the market soften over the course of Q1, or are you saying just in general since the downturn in the last year or so?

Well, I think in general what we saw at the back end of Q1 and also with some of the earnings releases that have come out in technology recently, it seems to point to some softness that we otherwise did not see at the end of last year or even early in the first quarter.

Okay. My last question is, historically, you have given us the top two customer percentage. Do you have that?

We will have that in the Q. I do not believe I have that handy with me here. Overall, I believe we see the computer concentration on high-end computers was about the same for Q1 as compared to Q4 and the top customer. So I don't think there's any significant change in the other computing customers.

The top customers I would say is the 31%, and the second customers are the 16%.

Thomas Dinges, JP Morgan.

Real quick, I'd like to follow-up a bit on the prior question on new programs and so forth. Have you seen any change at all from programs that you had previously won in terms of expectations from your customers that these programs, if it was originally supposed to maybe be a $20 million program, that they're scaling that back just a little bit to be a bit more conservative, or is this just simply in your mind that you have got some programs that are shifting around but you haven't really seen any change in the overall size of those programs or the expectations from your customers of yet? Then I have a quick follow-up.

As of yet, I don't believe that we have seen significant changes, although as Barbara pointed out in her comment, test and instrumentation is a bit weaker. So I don't know that that has had a prolonged outlook change at this point in time, but it is currently weaker than what we had expected at this same point in time.

Okay, and very quickly, first quarter has historically always been, or at least the last couple years, has been one where you guys have consumed a little bit of cash and then been able to generate some cash as you get throughout the year. Is there any reason to think it is going to be different this year, notwithstanding any changes there might be on programs over, say, the next quarter or so? Do you expect to turn this around and generate some good cash for this year?

Then any update an any expectations for what you are actually going to do with the cash there? Is there any kind of pending acquisition that you think you've got over the next quarter or two, or any chance that some money will be returned to shareholders over the next couple of quarters? And that's it.

I guess answering this question is kind of in order. The first question was with respect to the fact that in the first quarter, we typically are a user of cash and then at the later portion of the year we generate cash from operations. I do not see any indications at this point in time that would indicate that 2005 would be any different from other years in that respect. Again, what we do see and we saw last year is that as we go into ramping new programs, we typically are users absorbing cash, and then as the programs ramp we are able to get the velocity and the throughput on that cash such that we provide cash from operations. So it will probably continue to ebb and flow as we ramp some of the more sizable programs.

And in regards to the use of cash or our actual application of cash in the business, we do continue to see some good M&A opportunities out there. I think one of the key things to point out here is that in support of our customers and the new programs, it is very important in our industry that we do have a very solid, strong balance sheet as customers look to outsource and need support for managing the ramp-up of new programs. It is important that we and others in our industry have solid, available cash on hand to support the ramp of those new programs. Above and beyond that, no, we have nothing at this point in time that we have announced or are prepared to announce at this point in time on the M&A front, but again, the opportunities that are presenting are a bit more interesting today than what we have seen over the last couple of years. And as you can see as we have grown our revenues in Asia and as we have some other opportunities to expand our geographic footprint and our technology and support in other areas of the globe, we see some good opportunities there.

Amit Daryanani, RBC Capital Markets.

I was hoping if you could maybe help us quantify the costs associated with the ramps and maybe the scheduling changes and how that impacts your margin structure. On a quarter-on-quarter basis, gross margins are down about 20 basis points. Is that all primarily attributed to those two sources?

I do not think there is a specific line item type of cost or a group of costs that are specifically identifiable or carved out to quantify that. Generally, the impact is it affects the overall efficiency or creates a greater amount of inefficiency in the overall operating margin and the operating model. In essence, what you anticipate it building and shipping on behalf of customers' changes, such that now you must procure, manufacture, and ship a different set of products and, therefore, it has inefficiencies on the timing and the overall throughput on your inventory.

Just a quick follow-up on that would be the SG&A line, I would suspect, would start to inch up a little given the ramps you have, but that held in pretty well this quarter. Could you maybe talk about how you are able to do this, and do you expect it to remain around that 3% level going forward?

Well, our SG&A level is clearly one in our industry that we find and others find is -- you are able to leverage fairly well some of the costs that are included in there such as professional fees and whatnot. Thank goodness those don't rise with each dollar of revenue that we produce, so we have good control there. Also, as we have indicated, we continue to align our footprint. So as we have more and more production done in the lower-cost geographies, I think that rings through throughout the financial statement. But in general, it is just maintaining strong cost control.

Thomas Hopkins, Bear Stearns.

I think it would help the stock quite a bit if you could give us some detail on how you expect to grow this 5 or 6% sequentially. Just looking at the revenue guidance next quarter, 525 to 550, it's about up 5% quarter-to-quarter. So maybe if you could just talk in terms of the computer market or the storage market or the medical market. I know you don't like to talk about customers, but where specifically is the 5% sequential revenue growth going to come from next quarter?

We announced quite a bit of program in 2004 and even in later 2003. Some of those programs get started (indiscernible), and you can see from even on Q1 to Q2, you will see a major medical customer started to kick in, and several of the computer customers and telecom customers as well as the medical customers were coming in the second half of the year. And that is why we still are not changing from our yearly guidance. We still feel that this is not revenue coming in in the pipeline of the new program ramped to accommodate that particular projection we are making.

So we feel very comfortable with the new program ramp. Of course, that is subject to the market changes, and if the market continues deteriorating we may have some issues there. But at this point in time, as Gayla said earlier, we stick with our guidance and it is not going to be easy. Our team has worked very hard to it, and that's what we are saying indicated the projection will be staying intact at this point in time.

In general, Tom, I do not see that we will have a significant shift in the mix of revenues, which may be kind of in line with your questioning. I think computer will remain strong. I think the medical will be strong. If you were to look at it, industrial controls may stay more flattish, and test and instrumentation would be the one that will probably continue weak, although as we mentioned in our call mode, we are ramping a program there. I'm just not sure how quickly or if it will continue to size up against some of the other areas.

Just a follow-up, how do you feel about -- you guys have grown very rapidly over the last few years. And I just want to see if you feel that you have added enough new bodies to the management team, because it seems that there are a number of attractive acquisition opportunities out there, especially some of the valuation levels we've hit over the last four or five months. And I know your margins are higher than everyone else's, so you have to be careful what you pick. But do you feel like you have enough people dedicated to the M&A effort? Do you feel like you have added enough new people to the management team, given the amount of rapid growth you have had?

I believe we have, Tom. I think we have clearly expanded our team and have a good team of talent onboard now. I think as we look at the M&A activities and maybe why it takes a little longer, first of all, as you looked at some of the global opportunities over the past couple of years, the valuations were a little bit out of control. Now that they have come into control a little bit better as to the valuations, I believe it is your ongoing challenges with completing a global transaction, identifying the risk and the challenges associated with those and getting a comfort level. And I guess maybe that boils back to do we tend to be a little bit more conservative and should we take on a little risk? That's always a balancing act. But as we look at some of these global opportunities, we do address the appropriate level of diligence that we must undertake.

As to the question from the management side, we have a very focused effort working on the M&A side on the -- we are adding quite a bit of people in the corporate staff, as well as on the sales and marketing side. And hope the (indiscernible) markets (indiscernible) to continued growth of the Company. And you are right, as we continue to grow, we'll have to have additional (indiscernible). Also we are being very, very focused on.

So the balance here is really a balance between realigning resources to the changing environment. On the one hand, we are adding additional headcount and to accommodate all the different regulatory (indiscernible), M&A activity and the sales generation effort. At the same time, we had to be sure we had our (indiscernible) in line. That's why throughout 2004 and even last quarter, we continue to align our resources to accommodating this changing environment. And that is the reason we can continue for the (indiscernible) control and, at the same time, we need to upgrade our team. So that kind of balance we try to do, and I think our team did a great job by doing that, not only increase our revenue but also upgrade our own relation at the same time. That is a very, very critical focus we have been for last couple of years.

Patrick Parr, UBS.

Good morning. I was wondering if you could comment on the component environment that you experienced in the quarter, whether there any major changes in component pricing and were there any shortages of note that impacted your ability to ship product?

We really don't see any major changes in the environment for components. (indiscernible) change probably a little more favorable to us. The challenge you have at this point in time is the capacity of the large supplier was so low, and wherever we have an upside, it becomes a challenge for them to be able to ship the product according to our schedule. And that is one of the reason we have been struggling a little bit last quarter and try to do all the inventory within the leadtimes and accommodate the customer change.

So, in overall, component market has not been changed that much. The challenge is really the supply base, the capacity to such a level that any major changes would give a lot of headache to the supply chain situation.

Then a quick follow-up. I know you'll get asked this anyway, but the press release yesterday indicating the Board rejected a onetime dividend. Do you care to comment as to what the current thinking might be on the use of cash on the balance sheet at this point? That's it, thanks.

Like we indicated earlier, we feel it is very critical for us to maintain a strong balance sheet, to provide a good working capital to the continued growth of our business, and that is probably number one thing. At the same token, we are looking at the overall mix business change and more business shipping to the low-cost area, particularly in the Far East side and even for the Eastern Europe locations. We have been very modest here, able to expanding our capacity, even (indiscernible) to the greenfield, (indiscernible) to some sort of acquisition to expand our capacity to accommodate market niche.

From my personal standpoint of view, I think that the Benchmark is very successfully achieving a lot of new business in the last two or three years. Our strong balance has a lot to do it, in addition to our good service level and very flexible model. And the customers at this point in time feel it is very important for us to have a strong balance sheet supporting their upside. You can see with the second half we have a significant potential on the revenue increase that we are looking at. Those require working capital to accommodate that. So for our this point in time, as we indicated in the letters, we are going to focus on our cash use, on the working capital M&A activity, and that is exactly what are saying. Of course, if the environment change, we will revisit the issue one more time.

Steven Fox, Merrill Lynch.

Good morning. Couple questions. First of all, when you look at what has been a very consistent new business win, how much would you say is related to layering on new business with existing customers versus adding new customers when you look at the last couple quarters? And then when you talk about some of the trend builders (ph), I'm not quite clear. Are you implying that it has to do with end-demand issues with some of the products, or is it just sort of some bad luck tied to how they're rolling out?

The last part of your question was a bit garbled. Could you repeat that?

Sure. I'm just wondering with all the manufacturing pushouts, etc., whether that has to do with end demand, or is it related to a lot of product-specific issues that may not be related to end demand for those products?

The changes are related to end demand and prioritization. And now I forgot your first question.

When you look at the last couple quarters, Gayla, with all the new wins you've had, can you give us a sense of how much is new wins with existing customers versus adding new customers to Benchmark?

We will extend the new programs by two ways; one is on new customers, a second are based on a new project or a new product we won from our current customer base. And I would say -- I really don't have all the number on handy, but I will say 50% come from -- half the revenue comes from the new program of the current customer base, and half will come from the new customer base.

However, I think one of the things that has been asked before that probably warrens repeating here is that if it is a generational change and not incremental business wins from existing customers, we do not announce those as new programs. So if it is just a generational change and not the expansion of a business relationship with the customer, we do not announce those.

That is very helpful. Then very quick question. Is the 26% tax rate good for the rest of the year, or how would we think about that?

Based on our current outlook and forecast, that is our annual rate. Again, we will continue to look at opportunities and as the geographic mix of business changes, that is always subject to change, but that is what we see at the current time.

Kim Duncan, Smith Barney.

It's Kim in for Dave Pescherine. Just a quick question. I think you've answered most of mine. Can you maybe talk a little bit more about the margins you expect to come from your new programs once they're ramped? Are they higher or lower than the corporate average? And do you expect them to, I guess, rise? And can you talk about the metrics that you look at when selecting whether to take on a new program, and does it vary by segment?

In general, going backwards on your questions, no, we do not have a differentiation specifically on the metrics that we use on a specific industry or type of business. We look at all the normal metrics, I believe, in the industry; return on net assets, return on invested capital. In general, I don't see a significant differentiation. It is in the overall margins for the type of business. It is more based on the type of services. I will call it al a carte that customers are looking for. And it really is driven by the types of services they look for in order to reduce their costs such that they are turning a portion of their costs from fixed cost to variable cost, and tapping our resources, and what do they want to avail themselves of. So the more service-oriented and the specific type of services that we provide, that is what dictates how much value add we have in the product.

In general, the deficiencies that we gain are related to the fact that there is a lot of startup cost, upfront cost in new programs, new relationships, and this is probably much the same in any business as it is in our business. But you do not have a profitable relationship typically in the first year, at least, of the manufacturing experience, just as you get started up and have all the upfront costs in getting going on the project. And all of those costs are hitting the P&L up front and oftentimes even in advance of having any revenue generation.

Just lastly, how does your 4.5 to 5% goal for operating margin for fiscal '05 differ from your long-term goal?

Again, our long-term goal, of course we have stretch goals out there, but in general our long-term goal would be dictated more by the opportunities in the industry. And at this point in time, I would say that both our near-term goal and our long-term goal are pretty much the same, given the state of the industry currently and as we are one of the top performers in the industry.

Jessie Pichel with Piper Jaffray.

First question is, did you have any severance charges related to the plant closure in Q1? I know you only report GAAP but that would be helpful and will any hit in Q2?

We do not really separate those costs. Throughout the year 2004, we did quite a bit alignments of resources and I don't really have it handy. We can get back to you on that.

In general, yes there are costs any time you shut down an operation. Again our view on that is unless it is a restructuring plan that is an overhaul, I guess, of the organization or the business, that in fact doing a restructuring or not a restructuring, if you're doing just a realignment of your footprint and having to shut down or do some layoffs that are an ongoing nature of the business that in fact is an ongoing operating expense and not an overhaul, not a restructuring plan that is more day-to-day than it is, stop what we're doing, we need to rethink.

Do your competitors know that, Gayla? Let me ask you a second question. You won $550 million worth of new business in 2004 and that was kind of the midpoint of your quarterly statements in your conference call. And you won another 230 million in the second half of '03. So add them together, that is 800 million of new business that I would expect would start ramping here in '05.

I think part of what we're seeing is in fact that amidst the scheduling changes and amidst some of the potential softnesses that came in in March, because of the level of program wins that we have had, that is why we continue to see the opportunities that we see in front of us. And yes, it is a bit like drinking through a fire hose because we have got such a high level of new programs ramping up. So it is a lot of challenges for us, but that is what is continuing to allow us to see the type of growth even with some of the softness that is out there today.

Would it be fair to say 500 to 600 million of that business ramps in '05, offset by about 300 million of end of life?

You know, I think the end of life is what gets difficult to specifically quantify, but that seems about reasonable but I don't have a specific quantification to say that it in fact is the right number. As always you do have a trail off of mature business that you're having to backfill and that is what we see.

Greg Wyrick (ph) West Caps (ph) Investors.

As kind of a follow-up to the question on the MMI proposal for you to distribute cash to the shareholders. If I do some simple math on the Company, after you back out the cash Benchmark is currently trading at about eight times earnings based upon the consensus numbers for 2006. It seems awfully low considering the stock used to trade at a multiple twice that when you did not have the balance sheet you do now. So my question is, in the absence of a cash distribution, what does the Company intend to do other than operate as successfully as you have, which I congratulate you on, to drive shareholder value and to get a decent multiple on the stock going forward?

Well, what we said earlier is being the management of the Company our most important job is to enhance the shareholder value of the Company. And Benchmark is always looking at overall options we have either in whatever will maximize the shareholder value. I go with you. Our stock traded at a discount (indiscernible) times. The book reality of $18 a share. We will continue to explore all opportunities and all options and situations to maximize the value of the shareholders.

Scott Craig with Banc of America.

Gayla, in the context of the 4.5 to 5% operating margin goals, last conference call you suggested you could get to the 5% by the end of the year 2005. Is that still doable? And the second question, still around the margins is, if you do happen to reach that 5% at some point, what is going to be the makeup of the gross margin and the SG&A? I know last time you had around 5% operating margins. You had gross profit margins closer to 8.4% and SG&A at 3.2. So has that changed?

The gross margin mix will probably differ a little bit than it did last time around when we had the 5% just given the mix of programs that we currently have. And the Asian footprint that we currently have, I would say the SG&A would be slightly less than that. You see in the industry probably, it has trended down maybe 2.8, 2.9, somewhere in there is probably best in class right now and I think we will continue to see leverage on that number.

In general is it reachable by the end of 2005? As we said earlier, that is still our target. It is going to be a challenge. We do not see any reason that we won't take that challenge on at this point in time, but we will continue to strive for it. It is really going to be determined by the overall ramp of the new programs and the efficiencies we gain as well as the timing of those. So is it by the end of 2005? I really wish I could affirmatively say, yes, that is -- it will depend on the ramp of the new program.

Chris Lippincott, KeyBanc Capital Markets.

Just wanted to -- going back to the scheduling shifts, if you could perhaps discuss somewhat where you are seeing most of the shifts, and obviously you were discussing some of the end markets, but also where they were most pushed out. Is it mostly in the second half? I guess that kind of follows into that discussion you're talking about. Are you still looking for that 10% top and bottom line for the year?

I don't see a lot of push out. We are comfortable on the scheduling changes. In a given sample, a customer may be an older ABC (indiscernible) in the quarter. At the end of the day we should be in the (indiscernible) we may accomplish the same revenue base, but did it cost us significantly. We really don't see a lot of push out. Just mix changes and within the mix changes you have a lot of scheduling changes at the same time. So that is probably indicated in -- the overall end markets is probably not as strong as it should be when the customers continue to changing the order pattern to accommodate their end-customer requirement. Not having all the information on hand, it is hard for me to identify exactly what will happen.

But what we haven't seen was a lot of changes, mix changes, throughout particularly in the March quarter -- in the month -- at the end of quarter was the March month, a lot of scheduled changes are from the mix. And that caused a lot of inefficiency within our Company, as well because they were burned from inventory we cannot shift and even some inventory were brought in, tried to accommodate a new schedule. We couldn't get to the production cycle to ship a product. And that is where the impact of the situation is not really a push out. It is more like a product mix change causes a schedule change.

Okay. And I guess despite the challenging environment that you referenced, it sounds like most of the wins that should be ramping perhaps by the end of the year, perhaps that will give you some of the -- at least approach that 10% top line?

Well, the reason we still -- this business have a very, very long selling cycle. And as Jessie talked earlier, we booked quite a bit of business in the past. Those give us a kind of run rate to continue to grow. Because of the long selling cycle some of the new programs will take as long as one year to two years ramped up. So we had to continue getting the new business in the process to be able to continue to grow the Company. Looking at 2005, if I had to go out and book business today for our second half of the year, I would be really in trouble today.

So basically the problem with (indiscernible) in 2004 and even 2003 and would give you the run rate to the growth. That is why we talk about in the press release, the most important task for Benchmark for the balance of the nine months is very focused, bring this new program efficiently. If we can do that, everything will be in great shape. And is of course is subject to the market changes and the major customer or program changes, but that is why we did not change the guidance at this point in time. It is based on the program we have won in the past and in the pipeline and at various stage of the ramping.

Of course as the programs always have some changes, either schedule changes or the end-market acceptance changes, and so on and so forth. But overall the programs in place and the customers are very eager to take their new product to the marketplace. We are very much a participant and that is why you have cost inefficiency at the beginning of the program run because of continued ramping we go through.

So we feel good about the year at this point in time and it's based on the new program we've run in the past. And we will continue to be sure to execute the whole process efficiently, but at the same time we are very focused to bring additional revenue, new bookings, for the following year. That is how the process in this business is all about. You've got to be able to continue to bring in new business in the pipeline to give you the growth, plus to replace the program which reached end of the life, and so on and so forth. That is just the process and we've been going at this for years. We've been successful with that and that is what the whole institution (ph) all about.

Rich Kugele with Needham & Company.

Thanks for taking my question. Just quickly, one thing that would be helpful to me, in the way that the contracts are actually negotiated with your customers regarding such things as mix changes or shifts in the program schedules, do they incur any costs on their own for having done that? And then I guess, secondly, is there any risk of inventory obsolescence as you have gone and pulled different product from your inventory?

There is absolutely no inventory risk. Most of our projects are take and pay projects and you would take the project and if there is any cancellation to inventory, the customers are obligated for that. There is no issue with that. And I'm not sure of your first question.

What was your first question again, Rich?

Just understanding the way the contracts are actually designed, if customer XYZ says we want to make such-and-such amount of one kind of product instead of another, do they have to incur some costs for doing that or do you have to absorb all of that cost yourself?

As you can appreciate, I probably do not believe it is appropriate to discuss the finer terms of the contracts in this forum.

(indiscernible) varies and there's no single uniform way to describe the issue. Some costs we share. Some we have absorbed, and so on and so forth.

Jim Savage, Wells Fargo Securities.

I have just a couple of things. First in terms of your margin structure, you have talked about mix changes. You have talked about higher materials content in Asia. Is there anything that would lead us to believe that because of that shift toward more Asian production and more high materials content, that the margins will continue to be under some pressure?

The margin is really three things. It is the selling price, your efficiency, and the load-in factors. And as you're ramping up a new program you will definitely improve your efficiency. You're going to definitely get a very improved (indiscernible) load-in factors. Yes, you will have some margin pressure as you move up in the Asian market, but overall you still should be able to see a market improvement with revenue overall continuing increase.

Okay, so that is something that will cause you to struggle to get to your goals in terms of your margin impact?

Oh, yes. It is always the case.

Also in terms of your cash flow from operations, in the last say last five quarters since the December '03 quarter, you have had fairly modest revenue growth and you're free cash flow has been relatively flat. Your cash is relatively flat from where it was five quarters ago, and yet you have had very substantial net income numbers. Why do you not have greater free cash flow and when do you get there? And I guess the question that goes along with that is, what are your expectations for CapEx and depreciation for the rest of this year?

I think that CapEx will still stay at about 40 million as we indicated last quarter and I don't have a depreciation number change (indiscernible).

(indiscernible) 7 million, 6.7 to 7 million as you add incremental assets, depreciation expense would increase. I don't remember if there was another question or not, Jim.

Amy Yunker (ph), Robert W. Baird.

Just to follow up on Jim's question, I think his first question was regarding the free cash flow and why that is not a little better given the net income over the past couple of quarters. And I'm just repeating what he said.

(multiple speakers) You keep in mind we are ramping on a lot of new projects, and when you ramp a new project you have a lot of inventory that is stuck in the pipeline until the project gets released. And that is why we talk about the early stage of the programs, you would see a use of cash. And once the product has been released, you would see a significant cash generation. That is the pattern. When you're looking back in the history, the Benchmark as well as the industry, you see quite a bit of that situation happen. And that is exactly what happened for Benchmark today.

But isn't it fair, though, to assume that since you continue to ramp new programs that we would expect probably cash flow to remain fairly flat? It is not as if you're stopping ramping programs.

Right. I mean, it ebbs and flows, and that's what I said. If you look back, I recall September quarter we had too much inventory. In December, we got good throughput as we ramped some of the programs. And then this quarter once again, our inventory level is up in advance of ramping programs. So it is a nice, smooth line that it goes through. It is typically very lumpy, if you will.

Just a quick clarification question. Gayla, you had indicated that really your caution in terms of end market weakness is in regards to recent press release that you've seen, and it sounds like you have had no major changes in your orders. So what is your expectation given your second-quarter guidance, given your year-end guidance, exclusive of the programs you are ramping; I understand that. But what is your expectations for the end market? Are you expecting those to remain relatively flat? It sounds as if you're not actually seeing weakness there, so are you anticipating a slowdown?

Well, I think our outlook has not changed in general for the year as compared to what we saw in our fourth-quarter press release. In other words, we have not attributed to what we've seen in the last couple or three weeks at the end of March to the full year. But as we exited 2004 and had our fourth-quarter conference call, it was more a flattish type of an outlook rather than a down or an upward type of significant increase in overall spending levels for the type of equipment that we support. So no, we have not seen significant changes from our customer base specifically, but overall when the marketplace showed some of the signs that we have, we do have to remain cautious to see if our customers too will be impacted by some of the challenges that are presented in the overall marketplace. And it is just that it has not come through all of the channels yet. So we want to make sure that we remain aware of what is going on around us, I guess.

We are going to take one more call, operator, and then I think we need to close up. We have actually gone a little over.

Jerome Lande with Millbrook Capital.

Thanks for taking the call. I guess I just made the cut. Your largest customer had some comments on their conference call where they referred to their ability to leverage outsourcing, particularly with regard to I guess should be understood as final assembly work, where they're deferring to products being shipped directly from their outsourcers. The bidding activity you are seeing, are you seeing a shift towards more final assembly work of that sort, and what is the implication of that for margins if that is the case? My presumption is, or I believe that that is lower margin work, and what do you expect on a long-term basis with that issue?

What we did see is continued outsourcing of the systems integration and final -- it takes several different names, whether it is a Direct Order Fulfillment or basically the final delivery to our customers' customers, their products or subsets of products. So we do see incremental opportunities for us in that area, and once again, it depends on the complexity of the service level that you're offering, whether it has a blended margin that is consistent with the overall margin that we have or if it is a little bit lesser. But ultimately, if it is a simplified service, yes, it would be lesser, but it depends on the overall level.

So then I should not construe your answer as saying that you're seeing a higher proportion of that type of work being bid? It sounds like it is historically consistent.

Again, I don't see any major changes on that, no.

At this time, ma'am, I show no further questions.

Okay.

Thank you for the call.

At this time, that does conclude today's conference call. You may disconnect.