Benchmark Electronics Inc (BHE) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Benchmark Electronics first quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chief Financial Officer Don Adam. Please go ahead.

Good morning. Welcome to the Benchmark Electronics conference call to discuss our financial results for the first quarter of 2012. I'm Don Adams, CFO of Benchmark Electronics. Gayla Delly, our President and CEO will begin the call by providing an overview of the state of our business, our performance during the first quarter and outlook for the second quarter. I will then follow with a review of our financial metrics. After our prepared remarks, Gayla and I will take time for your questions in our question and answer session.

We will hold this call to one hour. During the conference call we may make projections or other forward-looking statements regarding future events or future financial performance of the company. We would leak too caution you that those statements reflect our current expectations and that actual results or events may differ materially.

We also would like to refer you to Benchmark's periodic reports filed from time to time with the Securities and Exchange Commission including the company's 8-K, and quarterly filings on Form 10-Q and our annual report on Form 10-K. Which 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 the call over to Gayla.

Good morning, everyone. Thank you for joining our call today. First I would like to take a moment for a Q1 review. We are off to a great start this year. Both our revenue and our earnings were above the high end of the guidance we provided last quarter. Our revenues were $593 million, compared to our guidance of 550 million today's $590 million for the first quarter. And our EPS excluding restructuring and the Thailand flood-related charges were $0.25 and this compared to our guidance of $0.17 to $0.23.

We were happy to see that some of the programs our new programs began to ramp during the quarter. These were program wins from over the last 12 to 18 months that are beginning to translate into revenue. Now, let me share some of the highlights related to our operating margin improvements and our Thailand recovery. On the heels of our recovery from the flooding in Thailand the first quarter showed improvement in our operating margin from 1.2% in Q4 to 3% in Q1.

The increase in margin was achieved through revenue growth driven by the new program ramp, the Thailand recovery, and the diligent focus of our global operations team. Although the recovery from the Thailand flooding is ongoing and not all portions of our operations in Thailand are completely back to business as usual we made good progress and continue to work on the rebuilding plans internally and with your customers.

With the recovery and new program ramps we are at pre flood levels in revenue in Thailand. We continue to see year-over-year improvement in revenues in Thailand. Although we recovered on the revenue side there are significant challenges and inefficiencies which remain impacting our financial results. The margin impact of the Thailand flood includes duplicative costs in addition to program Tran section and reintroduction costs for Thailand. As we noted last quarter, we are working toward achieving our operating margin of 4% by the end of 2012.

Achievement of this target will be dependent on the usual and ordinary factors that affect margins such as our revenue mix and growth in revenues. In addition we will continue to have an impact by the effects of the Thailand flood to a lesser extent as we progress through the year each quarter. Throughout 2012 we will continue to focus on our recovery and our operating efficiencies as well as the diversification of our customer base and the expansion of our customer base to utilize our PT capabilities as we focus on improving our margin performance.

Now, moving on to our revenue and market sector performance. Overall, we saw increased demand during the first quarter of 2012 in three out of the five industry sectors we serve. When comparing Q4 2011 to Q1 2012 we saw revenues from the telecommunications sector were significantly up by 36% as this sector continues to rebound primarily made possible by the recovery in Thailand and also impacted by new program ramps.

Revenues from the medical sector were up 3%. Going forward we believe recent wins will help maintain this sector's growth although customers in this sector continue to have concerns regarding some of the changes in their industry and sluggish spending overall. Revenues from the industrial control sector were up 1%. Revenues from test and instrumentation sector were flat and revenues from the computing sector were down 5% which was as expected as Q1 is generally a seasonably lower quarter for this segment.

We continue to see stable demands from all of our business sectors in the first quarter and expect this to continue through the second quarter. The macro economic environment is not providing a strong foundation for underlying growth but even with the overall economic conditions our customers are generally optimistic albeit cautious. On our revenue and new bookings during Q1 we booked 37 new programs and this includes 10 engineering projects. We currently estimate annual revenues from these new bookings to be between $100 million and $120 million.

Also in our pipeline we have several positive opportunities that are currently in the final decision-making phase and we are excited as we progress on these. These bookings for Q1 were in each of the industry sectors we serve. They represented bookings from new and existing customers and, of course, these are subject to the risks of timing and the ultimate realization of the new estimated revenues.

To provide you a specific update on some of the larger computer programs that we booked and discussed in prior quarters regarding the computing program we announced during Q4 of 2011 this is ramping and started shipping in Q1 and we are pleased with the progress made and the speed with which this program is ramping.

Related to the larger computing program that has been delayed from our 2010 booking we still anticipate this program to launch during the second half of 2012 and remain excited as we continue to work with our customer on this program. However, there was no meaningful ramp reflected in Q1 revenues and there is no meaningful revenue included in our Q2 guidance for this program. Looking to the future, we see a strong pipeline of opportunities and positive momentum in our bookings opportunities at Benchmark.

Our sales team is focused on our target markets and customers and continues to focus on the utilization of our expanded Asian PT capabilities. For our second quarter guidance for Q2, we are seeing stability and strength in demand levels from our customers. Although the overall macro economic does not -- does give us reason for caution. Based on this, and the information that we received from our customers, we currently estimate our second quarter sales will be between $595 million and $625 million.

Note that our guidance for Q2 reflects strength driven by our new program ramps from several of the programs booked over the last few quarters and this is offset by the macro economic environment headwinds. Our diluted earnings per share for the second quarter excluding restructuring and Thailand flood related charges are expected to be between $0.26 and $0.30 per share.

In summary, our business teams are executing well. And they had outstanding performance to achieve our Q1 results. Our focus will continue to be on driving operational excellence globally. We will continue to support the ongoing efficiency and returns to normal operations in Thailand. It would be unfair, though, to say that we have put this matter fully behind us with so many of our staff and their families having been affected by this tragedy. They will feel the impact from this for some time to come.

We are pleased to continue with our strong bookings and look forward to a number of the new programs continuing to ramp throughout the remainder of this year and beyond. We are excited about the new opportunities and the future opportunities that we are currently evaluating. At this time I would like to turn the call back over to Don to discuss our Q1 financial metrics. Don?

Thank you, Gayla. First I want to comment on the first quarter revenues and EPS. And Gayla mentioned, we were pleased to complete the first quarter of 2012 with revenues of $593 million, these revenues exceeded the high end of our guidance for the first quarter of $550 million to $590 million and were up sequentially from the last quarter of 2011 by $34 million or 6%.

Our earnings per share excluding restructuring and Thailand flood related charges for the quarter were $0.25 and our GAAP earnings per share was $0.10. This compares to $0.24 for both GAAP and non-GAAP EPS last year.

The revenue breakdown by industry for the first quarter of 2012 was as follows. Computing at 31%. Industrial controls at 27%. Telecom at 25%. Medical at 9%. And testing instrumentation at 8%. Included in our financial results for the first quarter are our Thailand flood-related charges of $10.2 million. Note that we did not record any additional insurance recoveries this quarter. Upon settlement recoveries for these and other items including lost profits will be record and may result in gains to Benchmark.

As of December 31, we had recorded a receivable for insurance recoveries of $56 million. During the first quarter we received $20 million of these insurance proceeds leaving a balance of $36 million as a receivable on our balance sheet as of March 31 this year. We continue to work with our insurance carriers on the claims and recovery process which will be ongoing for the next several quarters. To provide a more meaningful comparative analysis I will present certain financial information excluding our restructuring and Thailand flood-related charges during this call.

We included a reconciliation of our GAAP results to our results excluding these charges in today's press release. Our operating margin for the first quarter was 3%, excluding restructuring and Thai flood related charges compared to 1.2% for the fourth quarter of 2011. Although the revenues ram top recovery from the Thailand flooding has been quick and successful, we still see the margin impact on our financial results.

As Gayla mentioned, these are various costs related to Thailand that impacted our margin for the quarter and may provide some headwinds for the next quarter or so. Our net income excluding restructuring and Thai flood-related charges was $14 million for the first quarter of 2012 as well as 2011. GAAP net income for the first quarter of 2012 was $5.6 million, compared to $14.5 million for the same quarter last year. We had interest income of approximately $378,000 for the quarter.

Interest expense was $325,000 and other income was $366,000. The effective income tax rate was 21.5% for the first quarter excluding restructuring and Thai-flood related charges. This rate was slightly higher than expected due to the geographic mix of pretax profits that we experienced. The diluted weighted average shares outstanding used in the calculations of earnings per share for the quarter was 57.9 million. Our cash and long-term investments balance was $282 million at March 31 of which $25 million were option rate securities classified as long-term. The unrealized loss on the securities of $2.7 million is reflected in shareholders equity.

For the first quarter we used $24 million cash flows from our operation. This use was primarily due to an increase in our accounts receivable levels. As I mentioned earlier, we did collect $20 million in insurance proceeds during the first quarter related to the Thailand flood and continue to work with our insurance carriers on the claims process. Capital expenditures for the first quarter were $11.9 million and depreciation and amortization expense was $.5 million for the quarter.

Of the capital expenditures, $3 million was related to our Thailand recovery and rebuilding efforts. Repurchases of common shares for the first quarter were $3.9 million or 256,000 shares. I would like to point out that since the in sentencing of our share repurchase program in July of 2007 we have repurchased approximately 294 million or 17.4 million shares. We currently have $31 million remaining under our approved share repurchase program. Our accounts receivables were $476 million at March 31 an increase of $50 million from the last quarter. This increase was related to the increase in revenue as well as the timing of those sales within the quarter.

Inventory was $404 million at March 31 and a slight increase of $12 million from December 31 primarily due to inventory that we have positioned for program ramps and transitions. I would like to point out that our inventory turns did improve to 5.5 times for the quarter compared to 5.4 in the fourth quarter of last year. Current assets were approximately $1.2 billion and the current ratio was 3.3 to 1 in the first quarter.

Finally as of March 31, we had $10.9 million in debt outstanding which is primarily related to a long-term capital lease on one of our facilities. At this time I would like to open it up for the Q&A session. During the session we request that you limit yourself to one question and one follow-up. Thank you.

(Operator Instructions). Our first question is from Ramsey Roman from Bank of America Merrill Lynch. Please go ahead.

Yes, hi, good morning. Your guidance is about 3.3, 3.4% operating margin at a revenue level you previously thought could drive about 4% and Gayla, you mentioned in your prepared remarks duplicative costs so you ply I chain expediting and other factors that account for the 60, 70 basis points margin difference. Can you help us understand which of these are the largest buckets of cost and maybe perhaps size them for us in some way so we can understand how these should evolve through the course of the year?

Yes, I think the key is that they probably all get captured under the heading of inefficiencies as we return to normal as you might appreciate we have very rapidly brought back the revenue level and this has been done amidst facility rebuild and the repurchase and replacement of any affected and impacted materials through expediting. So I don't have a specific breakout to be able to capture each point of variance other than as I call it just inefficiencies.

I think one of the other points that would be important to bring up, though, as you reference our goal and previously mentioned target of achieving 4% -- going back to 4% so there is two pieces that are important. First of all, as we remove the inefficiencies associated with rebuilding the Thailand and getting back to a normal level of efficiency there by the end of the year we expect to get back towards 4%. The other impact which I noted in our prepared remarks would be mix. We all see in our industry the impact of various mix changes within our revenue base.

In our revenue base there are two industries which are currently at lower levels which have more value add, more complicated business models which when those are higher allow us to achieve a 4% operating margin closer to a $600 million revenue range. With the current mix with the industry's of medical and test and instrumentation being lower we would expect there would be a some what higher level of revenue with the current mix of business so take that, too, and I believe we saw it back in 2010 even but we will take that up to about a $625 million, $630 million level per quarter to achieve the 4% with the current mix of business. So hopefully framing both of those assists you in your model there.

Yeah, Gayla, that is very helpful, thank you. As a quick follow-up, where is your current capacity utilization and do you see the need for incremental CapEx as your new programs ramp? Thank you.

No, Hamzi, as I mentioned previously I believe last quarter we have in place utilization of both of our facilities again in Thailand and somewhat fortuitous it looks like we need both of those as we are ramping some new programs there quite rapidly as well, we have recently over the last 15 to 18 months implemented our capacity in Asia for our precision technologies business. With those two incremental levels of capacity that are already baked into our model we feel comfortable that our footprint and capacity is in place to support the growth for a reasonable period of time.

Okay, great. Thanks a lot.

Thank you. Our next question is from Sharice Scribner from Deutsche Bank. Please go ahead.

Thank you. I was hoping to get an update on your precision mechanical business. You talked a lot about it in the past. And also some detail as it relates to that equipment on the semi -- to that segment on the semi cap equipment market have you seen a turn in that market is, that improving because it is a significant piece of your business.

Yes, it is a significant piece of our business and we do -- we see mixed signals if you take a total read across the industry. But do not see that there has been immediate growth. Most of that is captured in our segment sector called test and instrumentation. As you can see that has remained flat. So no real improvement there. I believe there are some pieces if you read that indicate that 2013 will be a strength and then it may vary as to what the readings will indicate the second half of 2012 will have in store for us.

At this time I don't see much growth in that sector for 2012. Maybe a little bit of movement. With that we are expanding some programs and bringing up some new programs and as such the precision technology business is, I would say, growing in base but on volume we are down on some volumes just given the nature of some of the business states. But we are expanding the industries and the customer base that are served by precision technologies so we are very excited about that and continue to see that as a very strong opportunity. It isn't at a size yet where we would feel it is at a level we would capture that in our filings or segregate that currently but hope to achieve that level in some future periods.

Okay. Super. And then I just wanted to circle back on the second compute customer that you announced in 2012 and the slow ramp of that product. I'm just trying to understand in terms of what is going on there. And I know we have talked about it a little in the past but it seems like in technology for a product to wait for over a year that it essentially might become obsolete. I'm trying to understand why is that ramp taking so long and is there any risk that the OEM decides not to move forward with that product? Thank you.

Thank you, Sherry. That is an interesting differentiation I guess from most of the programs. The key there would be that it has not become obsoleted technology because we have been investing very heavily along with the customer in the ramp and during the course of this there have been continual upgrades, modifications, changes to the program and the product as it is -- I guess the best way I would capture it is it is a bit ahead of its place in the marketplace and therefore when the rest of the markets catch up with what the technology offering is for the product it will be ready.

So it would be improper to say that there haven't been upgrades and changes. We have been constantly working with the customer and there have been a number of revisions and changes. It is just that the market is not quite ready for the solution that is there and when that is paired up properly then we believe that is when the launch will be announced and ready to go.

Great. Thank you very much for the detail.

Thank you. Our next question is from Jim Silva from Citi. Please go ahead.

Thank you and congratulations there to you and your team at Benchmark. Now that it appears that hopefully a lot of the natural are disasters hopefully are behind us and the economy overall is starting to recover or see some normal signs there, can you just kind of update us at Benchmark, it has been a long time since we have had what normal has been. Can you maybe just update us by quarter of kind of what normal at Benchmark we should see from kind of top line sales growth and the normal demand environment for live the June, September, December and March quarters?

Well, we don't really indicate that there is a specific seasonality. We do see seasonality within some of the sectors we support. So if I were to think of what we may characterize as normalcy typically Q1 is flat to maybe modestly down depending on the strength often of Q4. So it if there is a very, very strong Q4 especially in computing then typically Q1 is a little bit off from that. Q2 is traditionally normalized a little bit of an increase more of what we see now for Q2. Q3 is typically flattish or down but that has been in an environment where Europe has been strong and we have already seen quarter over quarter 34% decline in Europe.

So would not expect necessarily that Q3 would demonstrate that given the fact that Europe is already incorporated into the model pretty severe decline. So that changes what I might consider normal. And then Q4 just again traditionally has some pretty good strength behind it. So a lot of moving parts in there specifically with some of the dynamics in the marketplace today and the way Europe seems to be unfolding.

Great. Thank you. Then just a quick follow-up. I think you mentioned Q2 or the June quarter is normally you see a little bit of an increase. And I think if I do my math right, your June quarter sales guidance is flat to up 5%. Is that just kind of normal or I would think with the ramping computing customer it would kind of be a little higher end or maybe it is just kind of rounding differences?

I would say that it is probably normal to have a slight increase in Q2. Again, I don't -- I wouldn't say that there is a really good way given the mix of programs and changes in the macro environment to be able to depict what normal really looks like in the current environment because there are so many changes ongoing and with the newness of Europe still being very weak.

Great. Thank you. And again congratulations to you and your team there at Benchmark.

Thank you. Our next question from Brian Alexander from Raymond James. Please go ahead.

Hi, Brian.

Hi, Gayla. Hey, Don. Just a follow-up on Ramsey's question. I'm still not clear to get back to 4% how much of the delta versus where we are now is the removal of the inefficiencies in Thailand and how much is mix? I'm just trying to get a sense for relative size there.

I would say that we will -- we expect to exit Q4 and get back to 4% at our current mix we would expect that excluding Thailand we would need to be probably around the 620, 630 level to achieve that versus a 600 level if there is a more balanced mix with medical, testing instrumentation involved.

And then just on the new programs. They continue to be strong both in dollars and in terms of the number of wins. If I look at the average program size it continues to come down versus historical levels. I think you are running closer to $3 million to $5 million per win today versus historically $10 million to $15 million. I'm just trying to understand that better. Is that smaller average program size mostly a function of the end markets you are winning in where maybe the deal sizes in general tend to be smaller or is there some other explanation here? Maybe that is part of your new strategy to go after smaller programs? And I'm wondering related to that what are the margin implications for the company long term as these new smaller programs ramp versus the larger ones historically.

So it is none of the above. What it really relates to is we have incorporated the engineering and you see that of those wins 10 of the wins are in engineering. By definition and the way we have captured engineering is really the engineering revenue and to the extent that those are to be manufacturing we are not incorporating the manufacturing revenue in advance of the product being ready for release.

And that comes back to I guess adding a bit more discipline and certainty around the ramp given that we have had some elongated ramps that were questioned and backed by the analyst community of when they are going to ramp so the longer the ramp the more it kind of seemed to impact the model so we wanted to tighten up on that and so our engineering revenues are included only as engineering. As such, we believe in what we see and what I will call the top of the funnel the front log for new business not a significant difference in the types of margin or the types of business we are going at nor are we seeing a significant difference in the size of the programs that we are going after. We are just putting it in a tighter time frame as when we expect it to ramp so as to give a greater understanding and certainty.

Great. And then one final one on Don on working capital. If I look at the receivable base around 70 they have been rising steadily for the last few years. They used to be 50 to 60 day range and currently they are above the other EMS companies out there in sort of the 30 to 50 day range. If I also look at the payables for Benchmark they are in the 40 to 50 day range while your peers are at 50 to 60. On both sides it looks like your working capital is less favorable than your peers and I'm just wondering what are the drivers of that? And then more importantly, what can you do to bring down the working capital per sales dollar? Thanks.

In terms of the receivables, I know there is a number of companies within our industry that have secured AR, essentially borrowing against it so that will bring down their AR base considerably. To doing an actual comparison is -- you are not -- it is an apples to oranges comparison. In terms of our days this quarter, you know, we are at 72 days. Again, that is more a function of timing. You know, I would expect typically that our receivable days are going to -- they are going to be in that 65 to 70 days and in terms of the way you measure the days. But kind of going back to the comparison to others within the industry, I think again we are not borrowing against receivables which has a very favorable impact.

Thank you. Our next question is from Sean Hannan from Needham & Company. Please go ahead.

Yes, thank you. So the telecom segment has been fairly volatile for or soft for many of your peers. This has also been a period where you have had some other dynamics in the market, obviously the Thailand floods, you commented on the facility being back, you are also benefiting from new wins but you are not up to what you saw in the third quarter of last year. Can you perhaps discuss a little bit of what you are seeing in the segment, the considerations factored into guidance for June in terms of whether this is flattish or how significantly it could be up? And then also was there any business left on the table in the first quarter as you got your Thailand facility back online?

Sean, thank you. We have seen growth in telecom really with a number of new program ramps. I don't believe that the overall environment that we are seeing in telecom over the last few quarters is much different than what any of the other industry players are seeing. It has not been as strong. There have been some deals, transactions that were supposed to come through that didn't and so there is a little bit of struggle in the industry overall there and some spend levels have not been as high specifically in Q4 as would have been expected by many in that industry.

Having said that, we are very pleased with the programs and the ramps that we have had and, yes, we do believe that there would have been opportunity in increased telecom revenues if we had been able to ship a bit more through Q4. I don't think that number is necessarily significant. But we clearly saw that demand levels were strong in the new programs that we have been supporting our customers with. So the information and the guidance provided by our customers does incorporate what I would consider to be some weakness or choppiness in demand and it is primarily dominated by new programs.

That is helpful. Could you provide us with a breakdown of those wins that you had in the quarter just by segment how to think about that?

In terms of -- we don't have the dollars but we have the wins. One second, Sean. Okay, actually and while we are looking that up, just if we could get some color around the super computer project. You mentioned some of that did ramp in the quarter. Was it -- was it much? How much is actually factored into 2Q and does come of that actually trickle into September?

So on the new computing program that did ramp we are continuing to ramp that in Q2. It is progressing as expected. And we will probably see some opportunity for continuation in Q3 at this point.

Okay. Thank you.

Okay. In terms of the wins, Sean, 8 in computing, 14 in just trill controls, 5 in telecom, 8 in medical and 2 testing and instrumentation.

Great. Thanks so much.

Thank you.

Thank you (Operator Instructions). Our next question is from Ryan Jones from RBC Capital Markets. Please go ahead.

Yep. I was just trying to get a sense of to the extent you can measure it how much of the sequential revenue is a function of catch-up production from Thailand? I thought last quarter that you said that Q1 would not see much of a back fill from Thailand and most was due to organic trends? So I was trying to confirm that and see if there is any way you can size that for us?

We took a look at that and it is difficult to actually quantify because in addition to the recovery we actually, the teams were very successful in ramping new programs. So again, congratulations to the team for what they were able to achieve there but it does make it difficult to say how much was kind of if you will recovery revenue to support customers that would have been shipped in Q4 had it not been for the flood. I believe we estimated that to be around $15 million but again that is difficult to do with and without calculation. But probably about $15 million would be my estimate. And that would have been, you know, again at a level that we incorporated into our guidance based on what we estimate.

That's helpful. And then last quarter you also talked, too, about how free cash generation would develop over the course of 2012 and I think you said, on the one hand, if growth does slow down you think you would be free cash positive and if growth picked up you would be the opposite. Just curious based on the acceleration you are seeing now going in the back half is it your expectation that you will be maybe free cash neutral or free cash negative this year?

Going through the next quarter we will probably be anywhere from neutral to maybe up $20 million or so is our current expectation or Q2 and I think beyond that it will really be dependent on sales for Q3 and Q4.

So as I believe it was Ramsey pointed out we will continue to challenge our teams and drive efficiencies and improvements in our working capital management. So we will continue to focus on that, knowing that we do have a number of programs that by their inherent nature are back end loaded for the quarter. We will still be driving our teams for improvement in that area.

All right. Thanks. Congratulations on the quarter.

Thank you.

Thank you. At this time there are no further questions in queue.

Thank you, everyone, for joining us today and we will be available in our offices for any follow-up. Thank you.