Benchmark Electronics Inc (BHE) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Benchmark Electronics second quarter 2014 earnings call.

At this time all participants are in a listen-only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. (Operator Instructions)

I would now like to turn the conference call over to your host, Lisa Weeks. Please go ahead.

Good morning, everyone. I would like to welcome you to the Benchmark Electronics earnings call for the second quarter of 2014. I am Lisa Weeks, VP of Strategy and Investor Relations. Thank you for joining us today.

Earlier today we issued a press release highlighting our financial performance for the second quarter of 2014. If you did not receive a copy, you may obtain it from the Investor Relations section of our website at www.Bench.com.

This call is being webcast live and a replay will be available on our website following the call.

Gayla Delly, our President and CEO, and Don Adam, our CFO, are with me this morning. After their prepared remarks we will open the call for your questions. For your information, Gayla and Don will be using a slide presentation also available on our website.

The Company has provided a reconciliation of our GAAP to non-GAAP measures in today's press release as well as in the Appendix of the presentation slides.

During our call we will be discussing forward-looking information. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements and involve certain risks and uncertainties which are disclosed in the Safe Harbor section of our earnings release and SEC filings. Actual results may differ materially from these statements and Benchmark undertakes no obligation to update any forward-looking statements.

Please turn to slide three and I will turn the call over to Don Adam, Benchmark's CFO.

Thank you, Lisa and good morning to everyone. We appreciate you joining us for today's call.

Second quarter revenue and earnings exceeded our expectations and we are very pleased with the efforts of our team. We generated revenues of $717 million which was above our guidance of $665 million to $700 million.

The upside was primarily associated with exceptionally strong demand in the telecommunications sector, driven by robust market acceptance of our customers' new products coupled with successful new program ramps.

Quarterly revenues increased $78 million or 12% from the first quarter of 2014 and increased $109 million or 18% from the same quarter last year.

Our non-GAAP income was $23 million for the quarter compared to $17 million last year. Net income was $22 million for the quarter compared to $8 million last year. Our non-GAAP earnings per share were $0.43 versus $0.31 in the second quarter of last year, a 39% increase.

Our GAAP earnings per share were $0.41 in the quarter compared to $0.16 in the same quarter last year. Our non-GAAP operating margin was 4.1% compared to 3.5% during the second quarter of last year and up sequentially from 3.6% in the first quarter.

The increase in operating margin reflects the leverage in our model, driven by increased demand levels, solid productivity improvements, and effective cost controls.

During the second quarter of 2014 we incurred approximately $1.9 million of integration related costs as we continue to integrate the sites we acquired in 2013.

The second quarter non-GAAP effective income tax rate was 20.3%. Our expected tax rate for the third quarter is expected to range between 20% and 21%.

The diluted rate of our shares outstanding for the second quarter were $54.4 million.

Please turn to slide four to review our revenue by industry sector.

Computing represented 21% of second quarter revenues and was up 13% sequentially and down 16% year over year. Computing was slightly above our forecast across multiple customers and products. Revenues from our largest computing customer were 10.5% of total revenue in the second quarter which is consistent with the first quarter. For the full year 2014 we expect computing to remain at approximately 20% of revenue.

Industrial control revenues were 29% of quarterly revenues which is consistent with the first quarter and up 21% year over year. Industrial controls were up 14% sequentially but slightly lower than expected due to the timing of new program ramps.

Telecom revenues were up 21% from the first quarter and 49% year over year. Five of our top six telecom customers exceeded their forecasts in the second quarter. We saw strength from the middle to the end of the quarter as we supported new product launches for our customers' end markets. Our top customers support a variety of end markets including cellular infrastructure, wireless, and optical networking.

Our medical revenues were up quarter to quarter and up 13% year over year driven by increased sales to existing customers.

And finally, test and instrumentation revenues were down sequentially as we expected based on the softening in some points of the semi-cap equipment space.

Now turning to slide five, our cash balance at June 30 was $402 million with $75 million of this in the U.S. During the quarter we generated $25 million in cash from operations. Capital expenditures were $15.7 million and depreciation and amortization expense was $11.4 million. We anticipate capital expenditures for the full year of 2014 to range between $45 million to $55 million.

Our accounts receivable balance was $499 million, an increase of $34 million from last quarter and our accounts receivable days were 63.

Inventory at June 30 was $421 million, an increase of $22 million from last quarter. Inventory turns were 6.3.

In the second quarter, we repurchased 314,000 common shares at a cost of $7.4 million and have $35 million remaining in our authorized share repurchase program which we expect to complete over the next six to nine months.

Please turn to slide six to review our guidance. We expect third quarter revenues to range between $670 million and $700 million which is reflective of normal seasonality. At the midpoint this represents an approximately $85 million increase over the same period last year. Importantly, the strength of new product introductions in the second quarter did not appear to be a pull-ahead from the third quarter demand levels.

Diluted earnings per share excluding restructuring charges and integration costs are expected to range from $0.38 to $0.42. Estimated restructuring and integration costs of approximately $2.5 million to $3 million are excluded from our guidance. At the midpoint, the guidance reflects a total percent operating margin which we expect to maintain throughout the remainder of 2014.

Now if you will turn to slide eight I will turn the call over to Gayla.

Thank you, Don and good morning everyone. In addition to our solid operational performance, I am pleased to share with you another excellent quarter of bookings.

We continue to see healthy follow up new business opportunities for design and manufacturing solutions in both our traditional and non-traditional markets.

During the second quarter of 2014 we recorded bookings in 39 new programs and this included eight engineering projects. These programs have an estimated annual revenue run rate between $120 million and $150 million.

Now, turn with me to slide nine so we can discuss our perspective on the markets we serve.

Beginning with computing, we expect to see a mid-single digit decrease for the next quarter after a better than expected Q2. Our third quarter forecast reflects normal seasonality in computing and as Don stated earlier, we currently expect our computing revenue to remain around the 20% level of our revenues for 2014.

In industrial controls, we see a mid to high single digit growth rate for the upcoming quarter. This growth is being fueled by new programs in industrial automation and controls which supports the transportation, refining, and building industries and these are continuing to ramp new programs into Q3.

In medical, we expect Q3 revenue to remain flat with stable demand. The manufacturing demand for OEM medical companies with Class 2 and Class 3 registered products remains high and we continue to have differentiated service offerings in this area.

Consistent with our comments earlier this year, we anticipate our medical programs, which are new, to begin ramping following the expected regulatory approvals in early 2015.

In the third quarter we expect a decline of approximately 30%, or $20 million, from Q2 levels for the test and instrumentation segment. This decline is a result of some softness in demand in the semi-cap equipment space as well as a program refresh which we do not anticipate until the first half of 2015.

Also, as you will recall, test and instrumentation typically reflects a higher demand variability than other industries and this is indicated by our third quarter guidance.

Following the robust second quarter in telecom, we expect low to single digit decrease in demand for Q3. Almost exclusively, our telecom growth this quarter and for the full year is coming from new products versus increased demand from existing products and programs. As Don stated earlier, we saw five of our six top telecom customer exceed their revenue forecasts this quarter based on broad market acceptance of their new products.

We can't isolate one single factor for the year over year growth but our customers are indicating that the increasing connectivity needs for data transmission for devices and apps using internet (inaudible), the increasing demand for digital video and LTE build-out for improved mission critical applications and securities are driving their demand.

In summary, please turn with me to slide ten. Our excellent performance continued in the second quarter of 2014. We achieved our 4% operating margin target ahead of schedule, driven by increased demand, effective and timely integration of our acquisitions, and leverage from our operational excellence activities.

As Don referenced in our guidance, we are expecting normal seasonality in the upcoming quarter. During the third quarter we typically experience softness in European sales given the summer holiday period and softness in computing. For the year, we still expect year over year growth in all segments except computing where we anticipate this to represent approximately 20% of revenue for 2014.

Based on the current forecast from our customers, we expect operating margins to remain at our targeted 4% as we finalize integration of our newest sites in 2014. We see continuing growth opportunities from our new and existing customers and we have the right system, talent, and infrastructure in place to be their solutions provider of choice.

To reiterate, our top three priorities remain portfolio management, operational excellence, and customer focus. We have refined our focus on our portfolio management.

As I highlighted last quarter, we are focused on the higher growth outsourcing segments in the industries we serve. In the non-traditional markets of industrial, medical and test and instrumentation, we see continued opportunities for incremental outsourcing growth.

In the traditional markets of telecom and computing, there are some flex programs which benefit from our strong technical and supply chain solutions and we are continuing to win new business and execute in each of our chosen markets.

Secondly, we remain relentlessly committed to our operational excellence. Operational excellence amidst the backdrop of satisfying existing customers and new program ramps is the key to delivering consistent results and operating margin improvements. While growth always presents challenges and headwinds, our initiatives are enabling us to achieve more cost effective and efficient ramps of new programs.

We have an aggressive pace of new program introductions remaining this year and we have the infrastructure in place to manage this.

Our acquisition integration activities plans for 2014 remain on target and the entire Benchmark team remains focused on operational excellence.

Finally and importantly, customer focus ? our customers are winning in their chosen markets and we are excited to be aligned as their design and manufacturing partner. We continue to invest in customer focused programs that support creative solutions related to design, manufacturing and delivery.

As our customers' chosen outsourcing partner, we are fanatically committed to their success and our strategy is working. We achieved our 4% operating margin earlier than expected and have a positive outlook to sustain these margins through the second half of 2014. We continue to deliver consistent and reliable results and are well positioned to meet the future challenges and opportunities in our industry and our pipeline of opportunities remain strong and we look forward to serving our new and existing customers.

In closing, I want to express our sincerest thanks to our customers, shareholders, and employees in their support of Benchmark.

With that, Operator, I would like to open for Q&A.

Thank you. (Operator Instructions)

We will first go to the line of Sean Hannan with Needham. Go ahead, please.

First question I have here is really in terms of the win environment so wanted to see if we can get some color from your folks number one, on the level that was accomplished in the quarter. It is a little bit ? the rate is a little bit lower than what we have seen in some recent quarters. It doesn't look like it is really concerning but just wanted to see if we can get some detail around what comprised those numbers and then also how you characterize the environment today and so forth, thanks.

I think, Sean, generally we are pleased with the level of both the ? especially in context of the ongoing activities so sometimes it relates to signing, when we actually are able to close on the bookings but really, overall the pipeline of opportunities, we are very pleased.

And then as you noted, in our comments and in our performance, one of the things that we are intensely focused on is the conversion rate to ensure that our bookings as we are reporting them and the conversion of revenue, that we are seeing that come into focus in a more rapid timeframe so if the programs look to be longer out and they exceed a two year ramp, we are making sure that we look at those programs as the opportunities come into focus rather than anticipating what customers believe a run rate in three years might be, for instance. I think we have really tightened up what we identify as a program ramp in discussion with our customers not anticipating the growth that we don't have evidence of in the regional timeframe.

Okay, that's helpful, and just to follow on that, it looks like still at least for your trailing 12 months for the wins that you have here, you are still certainly above $600 million. That is kind of in the low-20%ish range versus your trailing revenues. It sounds like with your expectations, we would still have a pretty good conversion rate as well as maybe there is some acceleration in being able to realize and bring some of that into rev-generation into market. Is that the way I should interpret some of that?

Yes, that is what we are looking to do is to ramp the new programs and then get them into the revenue stream more efficiently and effectively.

Okay, that's helpful and then next question here, I just want to see if I can get some clarification. I thought I heard from Don as part of the guidance. It doesn't sound like you have pulled in any business from the third quarter into the second quarter results. Is that accurate?

Yes.

So based on what we saw from customers before they had an increase in demand as an outlook for Q3 and what we saw kind of after that increase, it did not appear that there was any pull forward of opportunities but rather it was this market reaction to the new programs and new products that were introduced.

Okay, so naturally it just ended up being a very strong quarter.

Right.

Gotcha, alright, thanks so much for the detail.

We'll next go to the line of Brian Alexander with Raymond James. Go ahead, please.

Maybe just to dive a little bit more into the communications business, it sounds like most of this is new programs versus demand. I just wanted to clarify that because it is obviously a very, very strong result, much stronger than what we are seeing in terms of overall spending out there in the communications market. There is some concern that carrier CapEx could be frontend loaded this year so how should we think about this segment going forward and how confident are you that there isn't a bigger decline coming beyond the low single digits that you guided for Q3?

I think, Brian, as you've seen, we have grown probably for the last two years in this area, probably more significantly than the marketplace and maybe others specifically in our industry and part of it is the cellular [end] approach structure that I believe is being built out and the demand for data transmission, if you will.

Again, we look to our customers for their forecast and do not see or expect that it would be a more significant fall off but we have seen growth primarily from new programs and addition of new customers so don't have any greater granularity into the specifics. If you recall, it's been, I want to say more than two years ago, that the expectation for some of the build out was pretty significant and that was delayed but don't see any dynamics at this point that would cause the change to be radical. Clearly, there will be fluctuations as new programs ramp and are introduced that they will have more significant growth up front than they do in the latter portion of its lifecycle but I don't see anything beyond that.

Okay, and then maybe just one for Don. On the share buyback, I think you said you have about $35 million left and that you would look to deploy this over the next two to three quarters. It seems a little bit more aggressive than maybe what you have spent the last couple of quarters which is good to see so is that a function of your confidence in the business trajectory or perhaps U.S. cash flow generation? Just curious what is causing you to step that up which of course is a good thing.

A couple things, I think first cash flow generation in the U.S., we had a pretty notable increase in cash in the U.S. over the last six months and I think it's coming off the heels of integrating the sites and rationalizing the new acquisitions that we had last year. Again, cash in the U.S. is up and let's get that done, completed sooner.

We'll go now to the line of Sherri Scribner with Deutsche Bank. Please go ahead.

I wanted to ask about the industrial segment. You guys have seen strength there as well as in the telecom segment. Is that primarily based on new program ramps and along with that question, can you give us some sense of what you are hearing with customers in terms of their view of end demand? Are things improving or still not a lot of visibility?

In terms of the growth that we are seeing, a pretty good quarter in industrial controls, a little bit less than we expected really because of the timing of new ramps but you are correct in terms of the growth that we are seeing is from new programs that we are ramping. In terms of demand, I think it is stable and any growth that we are going to see there is going to be driven by new programs and I think that is evidenced as we will see some increase, we are expecting to see an increase in Q3 from our Q2 levels.

So I guess, Sherri, to add to that, I don't believe customers are seeing a significant improvement in the demand environment per se but they are seeing that the solutions that they are bringing to market are being well accepted in the marketplace as well. In industrial, we serve a pretty broad market as we indicated in our notes so a pretty broad range of solutions being brought to market that do not see what I will call units of production increases on some of the traditional products that we may have served, bringing as much to the revenue increase as we see the new programs. So once again, new programs are carrying the date in almost every industry.

And we have a question in queue from the line of Jim Suva with Citi. Please go ahead.

Kind of a bigger, long term strategic question ? when I look at your wins, they are kind of going all around, around say 23%ish of your trailing four quarter revenues which is very, very healthy. I know there are things accompanying that come out all the time. Is there a rule of thumb of at that rate organically, what you should see the company growing? The reason I ask that is I am just trying to then bridge about, you just posted 18% year over year growth which is great but I think if you back out CTS, and I am just estimating about $50 million, then the rate would be closer to 9% to 10% organic growth rate year over year so I am just trying to extrapolate. Is that what we should expect, kind of 9% to 10% organic growth for the company on win rate that is going at kind of 23%ish or am I missing some variables which is likely the case?

There are always a number of variables, as you indicate, that are included in the overall numbers but I would say that at 9% to 10% organic growth rate against the backdrop of the marketplace today, we feel that this is a very strong number and so feel pleased with the bookings rate we have when it converts to that rate. I think as we look forward and as we continue to grow, clearly we will push for bookings to be even stronger and I don't always believe that you will end up with formulaic ability to review the bookings but for us, as we have indicated before, somewhere in that $120 million to $150 million range would be what I would expect and clearly, are going to drive to have that number go higher as we continue to grow but when it converts to 9% to 10%, I am very happy with that.

Great, and then as a follow up, I believe and maybe I'm wrong, is the restructuring kind of related to the CTS integration and if so, can you walk us through about how far along that integration we are and how much longer we have to do and kind of the expected future charges and benefits?

In terms of the integration, we probably have another quarter to go in terms of the nature of it, consolidation, back office, those types of, I would say, customary integration efforts but as we have said in the past as well as we are seeing now, we should largely be complete with those by the end of the third quarter.

We will go next to the line of Amit Daryanani with RBC Capital Markets. Go ahead, please.

A couple of questions ? I guess, one, maybe to sort of understand the September growth quarter guide a little bit, you said there were no pull-ins and I think, Gayla, you talked about you have a lot of ramps ahead of you in the back half of the year. Why don't you think these could be better than seasonal, I guess, in September given the trends you have seen, given the ramps that you have? What are the offsets of that that you see in September?

As we noted in our comments and in history, computing is traditionally weak in the third quarter or weaker than second quarter and also European demand is typically significantly down in the third quarter. I don't see that the ramp changed those dynamics so while some of the ramps are coming into the fold, and just in general, I would say it is a lackluster quarter. There don't seem to be as many, I would call it shows or activities where the attention getting is there for some of the new program and new product introductions so I think it is, I'll call it the pre-positioning quarter when launches are done to really get out there in the fourth quarter, remembering that we are not supporting consumers so that really is probably the biggest difference when you compare some other markets.

And then, Gayla, you talked about being very happy with the high single digit organic growth. To Jim's question earlier, is that something you can sustain throughout the year or is that more of an aspirational statement that you made? And then reason I ask is if you can sustain it through the year it would imply your December quarter should be closer to $800 million versus what the Street is modeling right now.

No, I think the key there, and that is a good point, Amit so thank you for bringing that up for clarification. The key there as you note, with telecom being down to 20% we are expecting for the year for telecom to be around that range so as we come off from the prior year where compute was very strong ? okay, I said Telco. I'm being corrected, thank you. As compute comes down to a 20% range, we did have some programs last year which we noted in last year's call notes, that were not ongoing programs and so they added to last year's revenue. That is probably the primary headwind, that if you take out and look at compute versus the overall you will see that we are seeing the non-traditional markets grow significantly and also the telecom growth offsetting that. That is probably the biggest change that causes it to not achieve the numbers of $800 million that you set forth and so clearly, we don't see that that is rocketing up in fourth quarter like we have seen some of the fourth quarter performance in prior years where you had a significant launch or a new program specifically in compute.

Got it, that's helpful. And then just finally, is there a way to think about what was the CTS-centric inefficiencies on your operating margin line in the quarter?

No, I don't really segregate that. It is all part of Benchmark operational excellence plans right now so there is no forgiveness for not performing. The key there is we are looking forward to getting the back office activities integrated so it is more efficient but I don't have a specific calculation of the segregated impact.

We'll go next to the line of Wamsi Mohan with Bank of America. Go ahead, please.

In telecom, you noted five or six customers exceeded plan. If you look on a dollar basis, was the strength also pretty broad based or was it more concentrated and dollar-wise, could you just comment on sort of maybe rank order between cellular infrastructure or optical or anything else that drove that strength in the quarter?

No, in fact, Wamsi, I don't have a breakdown and I don't look at our businesses ? that is not ? our primary focus is on the end. I mean, clearly, the cellular infrastructure, whether it is backhaul systems, [trunking], ODUs, network monitoring and control, there was a variety of markets that the products serve and so I think that we saw again good growth and apparently good (inaudible), new programs being well accepted and new product acceptance of our customers' products. Five out of six is pretty notable to see that we had that much broad based activity in Telco.

And then on test and instrumentation, in your guidance of quarter on quarter decline, I know you shared some color before and I understand demand can be lumpy but is this largely driven by semi-cap? Is this a technology transition that is impacting multiple customers and when do you think that that starts to sort of tick back up again?

I think it is technology based and overall, when do I expect it to pick up? I probably don't have a real estimate of when that takes place but I would expect it to be early 2015 but clearly, I don't think our customers are providing reads out that far in that industry.

And we have a question in queue from the line of, a follow up question from the line of Sean Hannan. Please go ahead.

Just wanted to ask in terms of some of your regional facilities, Thailand, we haven't talked about that much and just want to get a sanity check in terms of how your facilities are perhaps changing or modifying or implementing any types of business contingency plans based on the geopolitical activity there and any thoughts you could provide around that would be helpful.

Thank you, Sean. I would say that as you know for Benchmark, we have the challenge and the opportunity to really put into action our contingency plans through prior experiences so I believe we are well positioned to manage the challenges that may come about and there is a lot of geopolitical instability around the world today. We look to control that which we can control and manage what we can manage and try to stay alert and informed but beyond that, the key for us is to ensure that our contingency plans are strong and in place and I think we have demonstrated that in prior periods that we have those and they are very supportive of what we need to accomplish when challenges arise.

Is there anything even anecdotal that you have seen as, or that has been reported to you, as disruption as a result of some of what is occurring over there or has it just entirely remained a non-issue?

If you are specifically referring to any impacts to Benchmark and/or to the Thailand [run rates], no, nothing there and as you also know, we don't have anything in the Middle East so if you are talking specifically about Thailand, no and then we don't have anything in the Middle East related to any more current activities that are being broadcast in the news today.

(Operator Instructions) Speakers, we have no one else queuing up for questions at this time.

I want to thank everyone for joining us for the call today and if there is any follow up questions, we will be in the office for follow up calls. Thank you very much and have a great day.

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.