Benchmark Electronics Inc (BHE) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Benchmark Electronics Second Quarter Earnings Release Conference Call. At this time all participants are in the listen-only mode. Later we will conduct a question-and-answer session. If you have a question, press “*” then “1” on your touch-tone phone, you may remove yourself from queue at anytime by pressing the "#" key, if you are using a speaker phone please lift-up the handset before pressing the numbers. If you should require operator assistance during the call, please press “*” then “0”. As a reminder this conference is being recorded. I would now like to turn the conference over to our host CFO of Benchmark Electronics, Gayla Delly. Please go ahead.

Good morning. Welcome everyone to the Benchmark Electronics second quarter 2005 conference call. I would like to begin introducing our team with me today. I am Gayla Delly, the CFO of Benchmark Electronics with me is Cary Fu, our President and CEO, and Barbara Swanson, our Vice President of Finance. First I would like our forward-looking statement. During our 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 in the cautionary language contained in the documents we filed from time-to-time with the Securities and Exchange Commission, specifically our recent filings on Form 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 obligations to update those projections or forward-looking statements in the future.

Now, I like to begin highlighting some point from our second quarter 2005 results. We are excited that Benchmark has delivered record revenues to the second quarter. Our second quarter 2005 revenues were $561million up 14% year-over-year improvement and a 10% improvement from the first quarter. This organic increase in revenues was driven by increased revenue to cop all industrial sectors for the second quarter. The breakdown of our increase in revenues quarter-over-quarter was as follows: computers, 6%, industrial controls, 18%, medical, 6%, test and instrumentation, 23% and telecommunications, 20%. Our teams also delivered a 7% increase in net income from the same quarter in the prior year. This 7% increase includes charges of approximately 600,000 that we incurred for the streamline and align – realign our operations. On a year-to-date basis our revenues were 1.1 billion for the first 6 months of 2005, and this is a 10% improvement over 2004. We have achieved these results by ramping many new programs some of which launched in Q2 and some which were scheduled to launch during the second half of this year. Our diluted earnings per share for Q2, was 44 cents compared to 40 cents for the first quarter of 2005, a 10% increase, diluted earnings per share on a non-GAAP basis was 45 cents and this has been excluding the realignment cost incurred during the second quarter of 2005. We noted in our guidance last quarter, that we expected revenues in the range of 525 to 550 million based on the indications from our customers. Our actual results exceeded this guidance. In Q2 our operating margin was 4.1% and it was 4.3% when excluding the realignment costs of approximately $600,000.

Our operating margin targets remained in the 4.5% to 5% range. Our near term goal for the operating margin is 4.5% which includes consideration of the impact of the current market pricing trends, new program ramps and product transitions. This 4.5% target includes the increased level of opportunities from our customers to support production into lower cost geographies. These product transitions do cost inefficiencies in our operations for startup time and expenses and impact our overall operating margins in the near term. Our longer term objective remains to gain efficiencies and achieve our target to 5% operating margin. We anticipate in our guidance for the third quarter includes the improvement in our operating margin to the targeted range near term of 4.5%. We are pleased with the increased levels of activities that we are seeing across all industry sectors and again we are focused on gaining the efficiencies as we have many new projects starting up and programs ramping. Our Q2 revenue from our top customer was slightly below 30% and this is on revenues of 561 million. This was a slight decrease from Q1 2005 and for Q4 2004 and in those periods our revenues from our top customers represented 31% on revenue and the fourth quarter that was on the revenue of 524 million and for the first quarter of 2005 that would be on revenues totaling 510 million. We currently expect revenue from our top customer to remain in the high 20% range for the remainder of 2005.

During the second quarter, we again had solid booking activities as we booked six new programs with the range of 50 to 75 million in the annual revenue. We continue to see a good mix represented in our program wins with new programs in industrial controls, medical and telecom. We are still ramping through revenue several of the new programs which were awarded last year and in the earlier part of this year. The market trends have become more stable during the past few months and we continue to see a good level of activity in the outsourcing opportunity. The high planned quotations and outsourcing activities is strong and highly competitive and we continue to see some aggressive margining efforts by some competitors.

Our revenue in earnings growth is expected to be in the 10% to 15% range for 2005, we are progressing well towards achieving this targeted range. We also anticipate that we will generate positive cash flows from operations for the year 2005.

Now, I will turn it over to Barbara to present the financial information for the quarter. Cary will then provide a summary of the quarter and an overview of the marketplace and then we will conclude with Cary and I answering your questions in the Q&A session. Barbara?

Thank you Gayla. As we reported this morning in our press release, we completed the second quarter of 2005 with revenues of 561million, a 14% year-over-year organic growth increase from the second quarter of 2004. Year-to-date revenues of 1.1 billion showed a 10% year-to-date organic growth over 2004. We saw this increase in revenues across all of our industry sectors. Our diluted earnings per share were 44 cents per share on a GAAP basis. Diluted earnings per share on a non-GAAP basis was 45 cents excluding the realignment cost during Q2. For the same quarter in the prior year our diluted earnings per share were 42 cents. Net income for the second quarter of 2005 was 18.7 million on a GAAP basis compared to net income for the second quarter of 2004 of 17.6 million. Our inventory turns improved to 6.7 for the quarter compared to 6.4 last quarter. Of course, with increased revenues and increased forecasted revenues our overall inventory level did increase by $17 million to 313 million.

We still target improvement in our turns to 7 turns by year-end as we ramp more of our programs to volume and achieved increased philosophy in our inventory turns. Our operating margin for the quarter was 4.1%, inclusive of our realignment costs of approximately $600,000 and 4.3% if calculated excluding this realignment cost. This is a slight decrease from 4.4% in Q1. Our pre tax margin was 4.5% in Q2 consistent with Q1. Our [inaudible] was 13.1% for the 2nd quarter of 2005. Interest and other income was approximately 2.3 million for the quarter. Interest expense was 85,000 and other expenses, primarily foreign currency related, were approximately 335,000. Our effective tax rate is 25.8% for 2005 resulting in a tax rate for the quarter of 25.6%. Overall, taxes continue to be favorably impacted as we expand our Asian operations. Weighted average shares outstanding were 42.7 million.

For the second quarter of 2005 our cash flows used by operations were 53 million. Therefore our cash and short-term investment balances decreased to 287 million at June 30th. This decrease reflects the use of cash primarily associated with an increase in inventory of 17 million and an increase in receivables of approximately 43 million. Inventory levels were increased with the expectation of a greater linearity in customer shipments throughout the quarters then we actually experienced. This is not unusual with new programs but does impact our working capital. We do expect improvement in Q3. Our day sales outstanding was 50 days compared to 47 days last quarter. Inventory was 313 million, an increase of 17 million when compared to last quarter. Inventory turns were 6.7 times compared to 6.4 in Q1. We are targeting turns again of seven for the next quarter. Current assets were approximately 942 million and the current ratio increased slightly to 2.821 in Q2 compared to 2.621 in Q1. Capital expenditures for the second quarter were approximately 5.7 million and depreciation expense was approximately 6.5 million. We have no debt outstanding at this time. Our revenue breakdown by industry for this quarter approximates as follows; medical 12%, telecom 14%, computers 57%, industrial controls 12%, test and instrumentation 5%. Revenue from our top customer was slightly below 30% for the quarter. This was a decrease from the last quarter. We do anticipate the range of revenues from our top customers to be in the high 20% range for the reminder of 2005. Our top two customers represented in at 47% of second quarter revenues.

During Q2 our chains continue to effectively support managed [deranging] of many new programs from sales through to production. We are pleased with the operating performance of our team with the increased levels of activity over all industry sectors. Now, I will turn it over to Cary to provide a summary of the quarter and an overview of the market price.

Thank you Barbara. Good Morning. Thank you joining us for our Q2 earning conference call. We're pleased with our Q2 operating results with [represherment] and the search for launching of several new programs. Our Q2 working capital increased mainly due to the back end loaded shipment requirement for our customers. I believe this is a one time event and fully expect we will resume our normal performance in the coming quarter. June quarter we have seen revenue increase from every industry we serve and overall end market demand condition for the second half appear to be relatively stable. We expect our second half activity to be strong with a new program ramping in medical sites, computers as well as industry control factors. In addition, we also have seen a sign of market recovery in the test and instrumentation sectors. For remainder of 2005 we intend to further expand our market share by continued focus on new program development efforts, continue our focus on customer satisfaction as well M&A activities. Our business models today deliver one of the industry’s leading metrics. Our realignment efforts and operation efficiency initiatives and new program ramps provides us a good pathway for a strong second half 2005. We now currently expect the revenue for the third quarter of 2005 to be in the range of 555 million to 580 million which is based on, in the case of our customers, the cost fund and GAAP earning per shares to be in the range of 44 cents to 48 cents.

At this time, I would like to open for a Q&A session. During this session, we request you to limit your questions to one question and one follow up question in order to allow enough time for everybody else for questions. Cathy now we're ready for the Q&A session.

Ladies and gentlemen, if you wish to ask a question please press "*" then "1" on your touchtone phone. You will hear a tone indicating you've been in queue. You may remove yourself from queue at anytime by pressing the "#" key. If you are using a speakerphone, please pickup the handset before pressing the numbers. Once again if you have a question, please press "*" then "1" at this time. One moment please for the first question. Our first question comes from Scott Craig with Banc of America. Please go ahead.

Hi, Good Morning, Cary, can you talk little bit around the product pricing issues that you brought up this quarter, with regards to, is it in particular end markets or is it one of your larger customers. And then secondly on the revenue side clearly, nicely above expectations this quarter. Was that the ramps just coming in faster, the new programs ramps or was this more of an end market issue. Did the customers [just saw] a better demand? Thanks.

Generally, and I know you addressed that peculiarly, but I'll take this one. I think, generally what we've seen is a competitive marketplace across all industries, I don't think it's industry specific and we see the some of the product transitions that are taking place as we mentioned in the call, call those some inefficiencies. So, the combination of driving through our improved metrics on the behalf of the up down or customers, drive this to ultimately into the pricing pressures that we have.

And on the revenue side, the revenue question?

On the revenue ramps, again as we've noted in several of our past calls, it's a little bit hard with a high level of accuracy to anticipate the exact date on which some of the programs will ramp and as you can see from some of the working capital metrics we did start some of the programs in the backend of the quarter and they ramped very nicely and in pretty good fashion towards the end of the quarter. So we are pleased that they did ramp and yes in some cases they exceeded our expectations.

Thanks.

We have a question from Carter Shoop with Deutsche Bank. Please go ahead.

Thank you. First of all, I just wanted to clarify that is there a reiterating your 10% to 15% EPS growth for '05?

Yes.

Okay. And then if look at the low end of guidance for September quarter of 46 cents, that would imply that you [alluded] to, roughly 54 cents at the low end of the range for December quarter? And so you get to a comfortable [inaudible] for kind of low end of the range?

I think that as you can see it also anticipates good revenue growth. So, I guess we have reiterated the guidance and feel comfortable with the information that we have available from our customers along with the realignment and efficiency programs that were driving there, we had plans to get there.

Okay, great. And then in last quarter there was a lot of questions about pricing pressure, and you had suggested that that was not one of the main factors in regards to the disappointing margins. Can you talk about what happened since last quarter, it seems like you guys are talking a lot more about the pricing environment?

As we continue to transition programs to the low cost geographies. I think you will see that there are inefficiencies associated with that, and we -- ultimately the drive for the low cost geographies is to drive lower cost and then you get the efficiencies after you have made the transition. So it's kind of a -- they come hand-in-hand if you will.

It seems like the pricing pressure was a bit of a surprise to you all. I mean [assuming] the margins came in your expectations but when you agree on a new program ramp, isn’t it usually several quarters in advance where you agree on actual price?

I guess in a competitive marketplace, your acting and reacting and planning are on an ongoing basis. So you don't have a roadmap necessarily that takes you out for a year or two years and in some cases with the environment in order to be successful in the marketplace, you are constantly adjusting and addressing what needs to be done to be effective.

Thank you.

Our next question comes from Brian White with Kaufman Brothers. Please go ahead.

Yes. Good morning.

Good morning.

Could you talk a little bit about -- you know margins in terms of what percent of that -- the decline we saw sequentially, 50 basis points is related to pricing? What percentage is related to mix? And then if you could talk a little bit -- I missed the breakdown in the other income -- interest income category? Could you go through that, because it seems like it was a little bit higher than people had anticipated?

Gayla, can you give the breakdown [inaudible].

The break. Our other income -- other expenses are 2.3 million for the quarter. That’s interest in other income, interest expenses were 85,000 and other expenses were 335,000.

Okay. Well I -- so 2.3 million in total. Where did it breakdown? Because I think typically each quarter, I think the net number was like just over 1.8 million.

Right.

I think people had modeled maybe 600,000, 7000,000 net number. So what’s the difference, is that foreign currency has or that's --?

Yes. The improvement would be in the foreign currency category. And the improvement in the interest rates on the investments. So we really saw improvements in both of the --

Right

Okay. And just -- the question about margin if you can [delve] into. How you would break it out, between pricing and mix?

I don’t have a clear way to delineate between those. I think the easiest way to think of that is we incurred in excess 1.5 million on what would consider ramping and startup type costs that are -- whether you want to call it pricing pressure, whether you want to call it mix. There -- the type of costs that go at the front-end throughout the programs that were above and beyond what I would like to see and what we plan of gaining efficiencies on going forward.

Okay, Thank You.

We have a question from David Pescherine from Smith Barney. Please go ahead.

Thank you good morning. Cary, you just talked about you are having some negative impact on margins for a couple of quarters now. Can you just give us a sense of how much of your capacity is going to be -- is in Asia right now, and then how much of your actual business is being produced in Asia?

Well, as we indicated in past we'll continue expanding of Asian capacity. Just for the time being, the overall [new] relation of the company is still in the high 60%, that will continue increase our Asian capacity. [To think about] in the Asian stage is definitely the significant movement of the production from the US or Europe's into the Asian market. The -- for the last quarter were approximate and high 20ish in the production comes from Asian [territories]. I think one of the interesting point is that the effect of ramp is probably seen in the programs and in the revenue but we've seen increased revenues in all geography. So, while we've seen increase in Asia, we've also seen increased revenues in each of our geographies, Europe is still the one that is weakest for us but it has shown improvement as well as Asia and in the America.

Right so, if 20% of your production is being done in Asia today, roughly how much will be done there a year from now or two years from now or what kind of, what's your target? And then, if we are going to go from 20% to 30% or 20% to 40% over the next 1 to 2 years what's giving you confidence that the margins are going to snapback in one quarter?

I guess and let me make clarify the point, I think the – our production from Asia is where the high 20%.

Okay.

Okay and we anticipate that it will continue goes up probably 2006 should be in the mid-to-high 30% from Asia between next years.

Great. So, then -- so, what's giving you confidence then that margins are going to snapback if you are saying you’ve got these realignment costs as you move over to Asia and that’s impacting the June quarter in your prepared remarks you said, we think it's just a one quarter issue and margins will come back next quarter what's giving you the confidence that you are going to see that next quarter given that you had such a nice improvement in revenues here that you saw a margin still so compressed?

Well really there's a margin issue you think you being coming out to transitional issues. In all, when you started new project a brand new project, you have a MPI cost associated with the new project. And one of the projects established before December in US then we started moving half of the project to the far east, we now go through the another transitional costs, okay, and that will give you the viewing efficiency and it's startup cost area. So, that’s what we are saying so once those products established in Asia then we see the efficiency putting it will be gained in the margin percentage that we are looking for

Okay, great thank you.

Thanks

Next question comes from Steven Fox with Merrill Lynch. Please go ahead.

Hi, good morning. Can you talk about how much of your revenues say, in this past quarter and in the next quarter are from new programs that ramped inside the last year or so?

I don’t think we have that specifically in dollars that we’ve always struggled with identifying what was qualified at new but I think in terms of, when we sit down and look at the number of new programs, that we’re ramping in this new quarter, in the second quarter that were new in terms of still being inefficient we are expecting to gain efficiencies they were in excess of 8 programs, so I think since that can give you kind of a level of magnitude of the types of thing that we believe were impacting our overall efficiency, that give us a confidence to say, that we expect improvement in the next quarter so, I don’t expect that same number and same size of programs still impact to the next quarter.

Out of the six, eight of them, two is the nice deducting yet, and other six in the various stage of the -- probably good ramps. So, this is viewing inefficiency in this start-up phase of the programs that will be anticipate the operational margin will improve as we are getting better and we had a better knowledge of handle this new program.

And then just a question on capacity, I think you’ve talked about maybe needing the added capacity towards the end of the year Greenfield maybe an acquisition, and where do you guys stand on that and what's your capital spending plan for the full year look right now?

Well we are – we’ve spend approximately 20 million bucks for the fist half and we projected for the year above 40 millions for the capital expenditures, and most of those are related to upgrade our equipment and they also increase in over capacity.

Any plans for Greenfield expansion towards the end of the year, early next year that could increase with CapEx?

Not the CapEx is the forecast not including any kind of a M&A activity and that we’ve talked earlier with the continuing trend of moving the business from U.S. or Europe into Asian markets we will have to increase our capacity in the far east and the -- it does fill in the plans, and we are working very hard to get there, and as we indicated earlier the Asian productions will be increased on you know fund at high 20% to the 30% range, that’s a significant capacity we will have to break, but it will not be into Asia side so.

Cathy?

Next we will go to Thomas Hopkins from Bear Stearns. Please go ahead.

Yes, good morning. Again I think you said your largest customer was down both year-over-year and quarter-over-quarter slightly, is that right?

It isn’t in the year-over-year comparison placed on so it

Okay.

It did there quarter-over-quarter and they were down slightly of percentage of revenue, our percentage was just below 30% on revenue of 561 for this.

Okay, so the question, I just wanted to understand still better for this actual quarter for June, of where the strength was, if it was actually in computing, and also was in store door, or it was in medical, given the new ramps?

So, what we thought it was an increase in each of the industry, so, industry wide we saw computers increased 6% quarter-over-quarter, and industrial controls increased 18%, medical increased 6%, test and instrumentation increased 23% and telecom increased 20%. So, it’s really very broad-based increases and you know kind of I got speak to the, what we’ve said our new program wins or industry you know across all industries.

Well just to clarify your second largest customer is definitely in your computer and storage, or you are just calling it computer?

We loved all of that together, yes.

Okay. That’s one to be clear. Then secondly, Cary can you talk about sort of benchmark specifically in for EMS in general, what you think the China currency revaluation today it means?

I really don’t have a good handle that one yet, I really don’t see this significant impact there. Okay? So, when we look at the total content of the -- our production. There you see have developed our materials of labor and overhead and the slightly increase in labor is not would be a significant impact on all type of customer, however we are in consumer product, then it may have some impact on the cost sides. Okay? From the overall because of our labor content is such small, for our total production cost, so the impact for us is probably lessened for then being consumer products.

Alright and then, you are being pay just to be clear most to yourselves, you are being paid in Dollars, Euros and Yen or mostly Dollars and Euros?

Dollars.

Dollars.

Most of being dollars.

Okay. Great, thanks.

Thanks.

We have a question from Amy Yunker from Robert Baird. Please go ahead.

Good morning. I have a clarification question on the realignment charges or costs, yet on the past and specifically last quarter you highlighted that you generally don’t break those out because they're an ongoing part of the business. So I'm curious this quarter you highlighted that 0.6 million, was there something unusual in this quarter? Was it significantly greater than it has been in the past or were actions different than what you've done previously?

No, I think that it is as we have talked to various people and as others in the industry highlight it, I think people wanted to have some visibility with dollar reporting, GAAP but we do want to indicate that we are continuing to focus on improving. We have one of the best models in the industry but we still see opportunities for improvement and we think that kind of helps give visibility to the fact that we are trying to continue to realign our footprint as need to.

But can you at least give us a sense of, if this was greater then say last quarter or last year. Do you expect it to continue at these levels going forward?

No, and that is why we would highlight it. It is more significant then you would typically have in a quarter. It was something that we identified and acted on very quickly, so probably most importantly the reason is because we did not have it incorporated into our guidance and we identified the need to take an action after our guidance and did it, so it was not included in our guidance numbers.

So was it one specific event that kind of caused this, the increased costs or was it nearly just continuing to shift business over to Far East.

What is [seeing] our efficiency improvement is definitely something we have to be very focused on and as the product move from region to region we had to make some adjustments for our resources even from capital -- from people or equipment and those kind of thing is come at the request of our customers or in the event of the trends for the product, so it's kind of hard to judge but the overall trends definitely continue to adjust resource to the market demands.

Great, and just a follow up question, a bookkeeping question on the other income that you talked about. Should we expect going forward that will remain elevated at that level or is this kind of a one quarter event in your best guess?

Okay, I mean that's the trouble because I -- foreign currency continues to be a bit elusive as how it looks. We use natural hedging for the most part and typically do not forecast it to be significant, about significantly different from quarter-to-quarter but it was this past quarter, so a lot of it is trending from the prior quarter and adjusting from there but no, I don’t expect it to have the types of flings that we had this quarter on a quarter-over-quarter basis.

Okay, thank you.

Thanks

We have a question from Thomas Dingess from JP Morgan. Please go ahead.

Hi, good morning. Just a couple of quick ones for you guys, most of them have been answered. You made the mention that you expect to see some positive cash flow from operations for the full year which assumes that you're going to reverse some of obviously the consumption of working capital that you’ve got. One of the items that seem to stick out in my mind here was, you did have an increase in inventory but you had a decrease in payables, was this more so around the timing that you finally consumed some inventory you've been building over the last couple of quarters ahead of some program ramps or did you take advantage of maybe some discounting that suppliers did to move some product or to accelerate their cash cycle, and then I have a quick follow up on the income statement.

Primarily what you said and as Barbara indicated in the notes, the linearity, the timing of the shipments on the new program ramp were more backend loaded whereas the inventory was positioned to support those ramps earlier than they actually took place so, in that case we did not get the level of velocity on the inventory but we still honored our responsibilities to our vendors and paid them, so we did see that impact. We don’t expect to see that going forward so yes, our cycle days should improve back to a more normalized level.

Okay and then finally on the income statement, obviously with the level of component costs that are in the gross margin, efficiencies should help a bit in the second half of the year there, but one of the things that obviously is well within your control on the operating margin line is controlling the overall level of operating expenses. You grew revenues at a double digit pace year-on-year, operating expenses were barely unchanged, what's the expectation going forward over the next couple of quarters? Do you think you're going to hold even as revenues are going to grow as you said to get the numbers you've thrown out for the rest of the year? Are we going to see some growth in actual dollars there or do you think you can hold that relatively steady and is that one of the primary reasons why you think you're still going to hit the 10 to 15% EPS guidance?

Yes, I think we will -- we expect to see that remain relatively flat. We have a good infrastructure in place to support our revenue growth and do believe that that number will, although it may change slightly in dollars, it will not change at the same rate that our revenue growth will take place.

Okay, thank you.

Next we'll go to Michael Walker from First Boston. Please go ahead.

Hey, Michael.

Good morning guys. Just one question, a few quarters ago you talked about a major new computing win that I think it was north of $200 million annualized revenues. Is that still on the plate and if so, what is the time frame for that to begin ramping?

That target's still online -- still on plan and we anticipate the revenue coming in Q4.

The original ramp date was Q3 and it looks like it will potentially be in Q4.

Do you think it hits the full run rate in Q4 or is it still--

I don’t think key program hits out full in the first quarter, I mean it could surprise us but it maybe still early to see if it hits another and if that means October 1st, it starts off at a good [cliff].

Okay, thanks a lot.

Thanks.

We have a question from Amit Daryanani from RBC Capital Markets. Please go ahead.

Go on Amit.

Thank you. Just a question, actually a clarification of the yearly, you spoke about 1.5 million in charges, a bond beyond the normal transition costs you have. Does that include the 600,000 restructuring or is that two different ideas.

And I'll them call charges, that would indicate that they are restructuring. No, those are starter type support costs, so those are internal costs that I see the type of costs that, I hate to use the word non-recurring since that seems to out come financial meaning, but I don’t want to imply that they are the type of costs that are not ongoing throughout the life cycle of a program.

You know Amit, in a lot of program; you start off with the lot of training section, a lot of travel costs, a lot of engineering upfront cost both are the costs that we will talk about here.

So, maybe not [calling] it non-recurring. But you only had about 2.1 million [growth] at your cost, which should not happen very often. Is that reasonable?

And as such what you see is other little type of costs that we do not expect to be ongoing and how we feel comfortable being able to get improved guidance for the next quarter, yes.

All right. And then Cary, I know last quarter, you were talking about some of the valuations for some acquisition candidates in Asia coming in at attractive levels. Could you really talk about that a little and if -- you know, how close you are to doing something there?

Well -- we have been talking about this project. It is a very focused area of the company today, as we anticipate the production and the revenue in Asia will continue to grow. [There is a lot of alternatives] we will look at and the challenge that we have [with us] is trying to get the target company, we are going to sit down and talk about but there is a lot of parties we are looking at today and the -- we have nothing to announce at this point of time, but we are very focused on how to get there.

Thanks a lot.

We have a question from Jim Savage with Wells Fargo Securities. Please go ahead.

Yeah. I actually have a couple of questions. You talked about ramping these programs late in the quarter which was the real driver of the upside for the quarter in terms of revenues.

Right.

Now are they as -- are you finished with that ramp and are you therefore now going to have lower levels of production for them because your guidance for the third quarter is you know, essentially the mid range of it is 1% to 2% sequential growth. Can you discuss that a little bit as to how we can look at those ramps particularly, since obviously this was a backend loaded quarter because of the ramps.

Well, with the -- [inaudible] backend load again was -- we really [needed the] shipment day over the product and if you look in all, the main attraction, [we'd probably want] the backend range of the production. What you shouldn’t have thought within the last 40 days, the quarter, the payment turns to 45 day. The new basic hasn't reviewed [inaudible] to their cash. Okay. That’s what we talk about -- both from the ramps [stand] point of view. But this is a pretty significant ramp for the company and we took the revenue from Q1 from 510 to 560, that’s a $50 million with out increase. And that we would still see a continued ramp in couple of quarters, in Q3. That's why we are giving a guidance above the 555 to 580, and the total cost, we think projected of the revenue growth of 10% to 15%. We still anticipate a pretty solid Q4. This is a timing issue, I guess.

Alright. I know you are expecting particularly the computing program to be the driver of substantial growth in Q4. But in terms of Q3, you are looking at it as essentially a flat quarter. Is that --?

I mean it is fair not to allude, you know, [as a little company] though, you know, bulk of the revenue, that's right. If you go at the high end of the quarter, the guidance would be --

Right. If you are high-end, if you are at the mid range, it's essentially flat.

Right.

And, I guess one other question which is troubling me because for a while you've been talking about how the ramps are causing a sort of the disruption in your working capital. In the last six quarters despite, you know, pretty good profitably, your cash has declined by about $70 million and your quarterly revenues have increased, but only by about an equivalent amount. Why do we now feel that we are going to have this reversal and we are going to start getting some strong free cash flow deals, which we haven't been getting for a year and half?

Well Jim I guess it's a -- I kind of feel like I'm in the way A students, and they [inaudible] expect everybody gives an A+. You know, when you are raising all the production, you use the working capital, no doubt about that. And of course you are looking for the sixth quarter in the ramp, but I am going to give you some statistics from 2001. From 2001 to 2004, from a cash burn operation, we generated close to $440 million from cash. So we have to tackle it to continue to [inaudible], to this entry overtime, our revenues will go up by almost 60%. And the -- I guess if you look at [inaudible] situations, excluding the ramp for this quarter, we continue on track again to generally put a decent cash and the -- from a cash flow standpoint of view.

So you were in negative cash flow for the previous five quarters, from the of 2003 to the end of the first quarter of 2005 and there was not a lot of topline growth in that period. But there was a lot of profit, so I’m just trying to get a sense as to why you have not more consistently generated cash and why we should feel that you are going to go back to where you were in 2001 to 2003 and not where you have been in 2004 and thus far in 2005?

I think Jim one of the reasons that when we look a proper landscape, the thing that we need to remember is when you are acquiring -- doing acquisition and acquire revenue base, the way you do that cash flow accounts for it as an acquisition and kind of doesn’t put it on an even playing field. So some of the metricing is a little bit different, when you acquire inventory and receivable and then use that as a starting base for measuring your working capital metrics. All of this revenue growth from 1.8 billion to an excess of 2.2 billion is expected for this year has been organic growth and we are yes -- you are having to fund that growth through the working capital. Yes we do need to see increased velocity on the our receivables and our payables and we have seen that on a given quarter, that when we achieved some velocity on some programs, we are -- as we did in the fourth quarter of last year. We do achieve the velocity, but then as we go back into ramping new programs, we loose that ground so what we are looking at going forward is that we get these programs ramped to more efficient level that we are not putting forward something that we believe is unachievable. We are putting forward the goal that’s basically somewhere around 50 day, cycle days. We've seen that we can achieve that we have plans to achieve that and that really is getting the program ramps under our belt. So, I guess that -- I am not sure that answers your question but on a comparable basis and that industries and the business that we are bringing in on an organic basis, we think 50 days is doable, we have shown that it is doable, now we need to have is sustainable

I guess that the question for me is that unless you are growing 25% to 30% in your industry and that's substantial growth and you are not forecasting that, you are forecasting more moderate growth. It should be -- you are always going to be ramping new programs and I just don't understand why there hasn’t been any free cash flow. I just -- we are now looking at a year and half with negative cash flow.

I am not quite sure when we will [come-up] a year, we will have some negative cash flow.

Our cash flow from operations for the last year were $32 million.

Right. But I am saying now you no have 18 months where there this negative cash flow from operations, substantial negative free cash flow from operations, and moderate top line growth.

I can't see a yield point here that -- as I said in a earlier comment, in Q2 on a unique situation and we shipped a lot of product within last 35 to 40 days of quarters and driving a lot to significant inventory of the, at receivable increase and I said we got to pay our vendors according to the later years of productive projection of their inventory plan. So one time a unique situation and I say I think it should be -- should be fully reselling to the normal procedure -- the situation is. And it's meant to targeting receivable and cash, and you're looking for 15 days in a quarter those are becoming cash which is timing issues. And I have no concern about the cash flow generation and I think the comment about recession could be generally cash -- a positive cash flow for the year.

Okay I look forward to it.

Thank you very much.

Our next question is from Shawn Severson from Raymond James. Please go ahead.

Thank you, good morning.

Hey Shawn, good morning.

-- In the quarter?

I am sorry, you cut out there Shawn. What?

As suppose to your percentage of revenues that would box build a complete system assembly in the quarter?

I still believe we had a significant change there. Just for one second, around 20% I believe.

Okay. And as you move to China, one of core competencies is always been in the final system configuration and custom work for some of the customers that require that. As you go to China is that going to kind of change how things are done? Would you expect to do more PCBA work over there and then ship some to other location for the final system build or you know just how that changes are dynamic there?

What we see is kind of a mix that I can really depends on the a lot of dynamics of the end products where the customers are, what's on those streamlined way is and the most efficient. Of course one of the considerations of the weight of the product rise, fuel costs are not going down. And so I think when you consider the overall production. Yes a lot of the printed circuit board assembly will go over there. In some cases system integration will [exit]. The addressable market seems to be rising in Asia, but not in all cases this will occur over there.

Shawn you know -- we will be looking for the type of production we started in the Far East. We have announced a new System Integration Facility in Bangkok, a couple of quarters ago. And that’s really a trouble accommodating the system -- system integration capacity required by the customer in Asia side. So basically we are not ready to see a significant change from that, and the [inaudible] Asian skill set picking up the part of the doing more -- able to shift more system integration and product in to Asia market.

Okay. And can you tell me how many programs you are currently working on for your largest customer?

No, we don’t get into customers specifics. So I think about as those who have been around in the industry is [inaudible]. Calls recently customers are increasingly sensitive about their vast providers talking specifically to them on their conference call.

Okay. And the pricing pressure you talked about, is that coming from sort of the same old competitors becoming more intense, or is it from new entrance entering the market place and since you've moved to China has that changed it all sort of the competitive dynamics who are seeing from bidding process?

Its really come from the various, you know all of the competitors in the market place. You can see the, we still have some ideal capacity in the industry [inaudible] some say competitors can't be aggressive. But you know the [effort] relocating the product from U.S. or Europe to Asia, facing the pricing pressure from the customer, right. So, and we are confident that by doing -- by doing a product [inaudible] medical aid we shall be able to accommodate customer requirements we've used their product cost, for them to able to sell a product into the market. So it is a long-term customer server project and benchmark are very, very focused what we trying to do. We put out customer service, the requirement as our number one priority, and we think we had a good part of handling our parts of the market place. And we are changing our model that to accommodating be the customer requirements pretty quickly, and that’s why we see lot of those activity happening. So the phase that we are moving the product overseas tend to increase quite substantially for last quarters.

Okay, is that something that related them to the fact that, as you reprise or try to accommodate and drive lower cost this year, you are priced to a certain rate today and then have to deal with the transition over the coming months and yet you are not getting the cost efficiency that you would need, obviously, immediately, and then there a sort of a gap between the pricing and then the actual realizing the cost savings.

Absolutely.

So we are, we really have a NTR cost start over again. When you've relocated the project today to low cost areas. So but once you establish that’s should be regain your efficiency and the margin percentage. This is unique for benchmark, since have been the -- then we'll have insight to our competitors and everybody probably facing the same issues.

Great. Thank you .

Thanks

We are about to run out of time. I am glad do we know that there's probably a number of people in the queue. If your question hopefully have been answered, if you will remove yourself from the queue and then we will try to take two more questions -- two more people and then we will have to cut off. Hopefully we won’t run over too much -- I know there is other calls to that.

We have a question from Chris Lippincott from KeyBanc Capital Markets. Please go ahead

Good morning Chris.

Good morning Gayla and good morning Cary. Just had one quick question kind of going back on to the December part of ramping the -- your $200 million program and also to your EPS guidance. If you are ramping that program by the fourth quarter surely that's going to be having additional startup cost, ramp costs in addition to whatever other programs you are working with. Yes suggest to your guidance that certainly going to be sort of an aggressive quarter still there is some seasonality but help me understand how you can counter the startup costs etcetera against your margin and EPS guidance with all these costs that are going to be there ?

We have incurred a significant cost on those new projects already for last couple of quarters and we will continue to do that throughout the year. So it's not something you incur all the startup cost for the quarter, the cost has been build up significantly such as the supply chain and the startup and the quick production runs. Those are the ongoing hard aches, so we have most of the costs out of the way by the time we launch a new project.

For something like a major $200 million program they will begin ramp up. Most of these calls already out of the away, that one of the enablers to get the margins moving by the fourth quarter?

Once when we get there of course we are going to get full benefit of the leverage of the product, but we should see an improvement from what we have right now. Basically what we have now is an increasing cost and no revenue.

And I guess the other mover would of course be cost control on SG&A line, perhaps some leverage there?

No, really basically our SG&A line is pretty flat right now, sounds like being running somewhat in 15 to 5 level for last three or four quarters, and we don’t anticipate a significant cost in the areas and we just have to drive efficiency in the [inaudible] operations.

Right. So perhaps, keeping the SG&A pretty flat.

Yeah, actually that’s the outcome, and may be I will slide it, but this is a very important featured focus to not increase that significant ratio.

Alright thanks.

We will take one more question.

Our final question from Jessie Pichel from Piper Jaffray.

Hi Jessie.

Yes, hi, good afternoon. Could you review in on the margin issue, it looks like the margins issues has impacted your gross profit right about 2.1 million incrementally versus Q1. Now you say that NPI was 1.5 million, is that an absolute number, or is that incremental NPI verses Q1?

That was the incremental, that's what we are trying to say, that's why when we got our tours next quarter or Q3, we are not saying it doesn’t have any NPI but we think the peak amount that we have this quarter that was incremental was the one and half and then 600,000 it was associated with realignment cost.

Okay, and then where does the pricing fit into that? That’s' within the NPI?

That is part of the start-up cost, that are not being borne by the customers.

I am confused, if I look at that 40 basis points sequentially, that declined, it amounts to 2.1 million, wouldn’t that - you are saying 1.5 of that decline was due to these NPI start-up costs?

Right.

And I am trying to find out how much is due to pricing, specifically?

The pricing is in there and doesn’t go away, so we think we have included in the forecast for next quarter also.

So this is pricing on new program ramps versus existing?

On all programs. But -- that pricing that is incorporated in to this quarter doesn’t change for next quarter what we are try to highlight to be informative was the things that we expect to change. Does that make sense?

Dose it make sense there?

Yes, more clear. And maybe just a little bit clarification, could you talk about where pricing erosion is most pronounced in terms of an end-market?

Electronic products?

Electronic products. Are you able to pass any of these issues on to some of your vendors?

You do and it is the challenge here obviously in this current pricing environment is that, you had to do all the right thing, you have got to be really working supply chain, be sure you get a maximize efficiency in your supply chain. You got to be a visual limit that you will start up cost, you have got to be gaining efficiency to compensate the pricing issue. So this is -- it's not unique, but this is a continuous situation, that’s why you can buy a PC today for 350 bucks, you know.

And my last follow-up question is, so, if the incremental NPI flash pricing was 1.5 million versus Q1 what's the total absolute number and how should we think about that number coming down and helping your margins as we look into '06?

Well I think as Jim Savage was trying to indicate in there, you are going to have some level to have kind of normal growth. So I don’t have a specific dollar that says, this is how much it is, but we consider that to be normal levels to support the level of organic growth that we have that has been more industry normalized, I think what we again try to do was highlight the part that was over and above what we expect to be ongoing in normalized.

Great. Thank you very much.

Thank you very much.

Thanks everyone for being patient. We know we went over a little bit and hopefully you found it very informative. Thank you.

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