Benchmark Electronics Inc (BHE) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Benchmark Electronics second quarter 2015 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question answer and session and instructions will follow at that time. (Operator Instructions). I would now like to introduce your host for today's conference, Ms. Lisa Weeks. Ma'am, you may begin.

Good morning, everyone, and thank you for joining us today for Benchmark's second quarter earnings call. My name is Lisa Weeks and I am Benchmark's VP of Strategy and Investor Relations. With me this morning are Gayla Delly, President and CEO, and Don Adams, CFO. Gayla will provide quarterly highlights and a strategic overview, and Don will provide a detailed review of our financial results followed by a question answer and answer period. Earlier today we issued our earnings release, highlighting our financial performance for the second quarter, and we have prepared a presentation that we will reference on this call. The press release and presentation are available online under the investor relations section of our website at www.bench.com.

This call is being web cast live and a replay will be available online following the call. Please take a moment to review the forward-looking statements advised on slide 2 in the presentation. During our call we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements which involve risk and uncertainty described in 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. The Company has provided a reconciliation of our GAAP to non-GAAP measures in the press release as well as in the appendix of the presentation. I will now turn the call over to our President and Chief Executive Officer, Gayla Delly.

Thank you, Lisa and good morning to everyone. Please turn to slide 3 in our presentation for a review of our second quarter highlights. Benchmark performed well in the second quarter against a backdrop of broad variability and end market demand. Our revenue of $664 million was at the high end of our guidance range and our earnings exceeded the guidance we provided last quarter. Based on the strength of prior year bookings, medical, Industrial Controls and Test and Instrumentation revenues continue to increase. We also experienced better than expected demand from our traditional computing and telecom sectors. Our operating margin was 4.2% for the quarter, a 40-basis point improvement quarter-over-quarter and a 10-basis point improvement year-over-year.

The second quarter operating margin highlights our team's ongoing efforts to diversify our portfolio, our operational excellence initiatives and the culture of discipline that exists within the Benchmark organization. In addition to our strong operational performance, we also returned $19 million to shareholders through the share repurchase program during the quarter. Over the past 12 months we have returned $66 million to our shareholders through our share repurchase program and have $69 million remaining in our current authorization. Now please turn to slide 4 for a review of our portfolio.

In Q2 revenues generated in our higher growth markets represented 53% of total revenue, exceeding our traditional markets for the third consecutive quarter. These results demonstrate continued execution on our portfolio diversification strategy and we expect this trend to continue. Our diversification strategy balances the steady base of new program opportunities in our higher margin growth businesses while we manage and support the rapid pace of product mix changes and demand variability within our traditional customer base.

As noted in our prior calls, not all industries move in sync and we expect continued choppiness associated with seasonality and new product introductions, and our traditional markets of computing and Telco. However, we have the operational strength and resiliency that allows us to effectively manage these variations and continue to increase margins towards our stated targets.

Now let's turn to slide 5. Bookings during the second quarter align well with our focus on early engineering engagement and our focus on longer product life cycle manufacturing solutions. We won 42 new programs including 13 engineering projects that should result in estimated annual revenues of $110 to $130 million when fully released to production.

New bookings during the quarter were led by strong aerospace and defense wins in the industrial sector and wins in the medical sector driven by our differentiated solutions and high reliability design and manufacturing. In the traditional markets we had new bookings for data center solutions and networking infrastructure product. The current pipeline for new business opportunities remains healthy and we are encouraged and excited to be engaged with our customers at the inception point with new design technologies, a key focus of our early engagement strategy. Now I will turn the call over to Don to provide additional insight into our second quarter financial performance. Don?

Thank you, Gayla. And good morning to everyone. Please turn to slide 6 for a summary of our results. Second quarter revenues of $664 million were at the high end of our guidance range of $635 to $665 million. Revenues were generally in line with our expectations across all markets with demand in traditional computing and Telco at the high end. Net income on a GAAP basis was $21 million for the quarter compared to $22 million last year. Non-GAAP net income for the quarter was $22 million compared to $23 million last year. Our GAAP EPS was $0.40 compared to $0.41 in 2014.

Non-GAAP earnings per share were $0.42 in the second quarter this year, compared to $0.43 last year. Our non-GAAP operating margin was 4.2% compared to 3.8% during the second quarter of 2014. This continued improvement is a result of our ongoing operational excellence initiatives in the diversification of our portfolio. During the quarter we had $1.6 million of restructuring and integration costs mostly associated with the consolidation of previously acquired facilities.

The second quarter non-GAAP effective income tax was 22% compared to 20.9% last quarter, primarily due to a geographic mix of revenue. We expect the tax rates for the third quarter to range from 21% to 22%. The diluted weighted average shares outstanding for the second quarter were $52.7 million.

Now please turn to slide 7 for a training view of our operating income. Our second quarter non-GAAP operating income of 4.2% demonstrates the strength of our operating platform. It represents a 40-basis point improvement over last quarter and a 10-basis point increase from the last year. Our improving operating margins result from our continued efforts to diversify our portfolio into higher margin business sectors and to execute on our well-defined lean and operational excellence initiatives.

Please turn to slide 8 to view our revenue by industry sector. Industrial Controls were $201 million and represented 30% of second quarter revenues. On a sequential basis revenues were up 1% which was slightly less than we expected due to lower shipments to customers that support the energy markets and continuing head winds associated with the strength of the US dollar.

As expected, Telecom revenues of $177 million increased sequentially from the first quarter and performed better than we expected due to increased demand in the final month of the quarter. Computing revenues of $137 million increased sequentially from our seasonal low first quarter and some were the Telecom experienced final month demand. Medical revenues of $90 million which was up from prior quarter sales based on a significant number of new program introductions. This represents an 11% increase, both sequentially and year-over-year.

Test and Instrumentation revenues of $59 million were up quarter-over-quarter. The significant difference in the year-over-year comparison includes $27 million for a customer who declared bankruptcy in 2014. Excluding this customer, year-over-year sales were up 32% based on these programs.

Now please turn to slide 9 where I will highlight a few balance sheet and cash flow items. Our cash balance at June 30th was $409 million. During the second quarter we repurchased 779,000 shares at a cost of $19 million. As Gayla noted earlier we have $69 million remaining for future repurchases and we finished the quarter with $57 million of cash in the US. Our near term capital allocation priorities remain focused on executing share buy backs, investing CapEx in the business to drive continued operational improvements and supporting strategic growth initiatives.

During the quarter we generated $52 million in cash from operations. Capital expenditures were $8.2 million and depreciation and amortization expense was $12.3 million for the quarter. We believe that CapEx will range from $40 to $50 million for the full year. Our accounts receivable balance was $501 million, an increase of $10 million from the last quarter, and our accounts receivable days were 68 which is a 3-day improvement from the last quarter.

Inventory at June 30th was $445 million, an increase of $18 million from last quarter. Inventory turns were 5.5 which improved from the last quarter. Overall our cash conversion cycle improved by 8 days in comparison to last quarter with improvements demonstrated in all areas; receivables, payables and inventory days. Our continued portfolio diversification strategy to higher mix businesses provide near term head winds to our cash conversion cycle.

To offset these impacts we have aggressive initiatives related to improving working capital in place including better aligning our customer and supplier payment terms, optimizing demand and inventory management programs and implementing strategic sourcing initiatives. While we are pleased with our progress to date, we believe there is much more work to be done. In the near term, we are working to reduce our cash conversion cycle to 82 days. Longer term our goal is to reach 75 days. Now I will turn the call back over to Gayla.

Thank you, Don. Please turn to slide 11 to review our guidance. We expect our third quarter revenues to be between $635 and $665 million. Diluted earnings per share excluding restructuring charges are expected to range from $0.38 to $0.42. Also implied in this guidance is a range of 3.8% to 4.2% operating margins. In addition, our guidance includes an expected tax rate of 21% to 22%, as Don noted. Restructuring charges are expected to be less than $1 million next quarter.

Now let's please turn to slide 12. As we provide an outlook for the industries we serve, I would like to highlight that many of our customers are experiencing challenging business conditions. Our customers are reporting greater uncertainty related to the timing of business recovery. It is worth noting that the growth we are seeing is not so much driven by broad-based demand improvements with new programs where our customers are stimulating growth with new products and innovative technology.

With positive momentum on our early engineering engagement approach and supported by our diversified portfolio, Benchmark is well positioned to support our customers in this regard. However, we do expect to see continued variability across our end markets. In Industrial Controls for the third quarter we expect increases based on new program launches which will continue into Q4. We are seeing some strength in our aerospace and defense customers, partially offset by softer demand from industrial customers serving the energy markets. In medical, after a strong increase in Q2 we expect an increase further in the third quarter as we continue to support program qualifications.

As Don stated previously, medical is up 11% sequentially and year-over-year based on the conversion of prior year bookings into revenue. For the full year we expect double digit growth in medical. In Test and Instrumentation we expect demand in Q3 to be higher than Q2 levels. We expect double digit growth in this sector for the full year, excluding the impact of a customer-declared bankruptcy in 2014. In our traditional markets we expect Telecom to decline for the quarter and for the full year in comparison to the very strong double digit growth we witnessed in 2014, which was based on the new projects. In general, our Telecom customers are reporting restrained spending by their end customers. Our support of customer R&D activities remains high and a return of Telco spending is not expected until 2016.

In computing, after our seasonally low first quarter and expected increases in the second quarter, we anticipate a revenue decline in the third quarter. As previously reported we expect overall computing revenues to decline for the full year 2015.

Now turning to slide 13, in summary, during the second quarter we continue to execute well against our long-term strategy. In the near term we remain committed to effectively allocating our capital.

We will continue to repurchase shares against our $69 million remaining in the current program, invest in CapEx for operational excellence and in support of organic growth and selectively support strategic growth investments. We also remain focused on our key strategic priorities including further diversifying our portfolios, enhancing our operational excellence program and accelerating working capital improvements to increase value for our customers and shareholders.

As we continue to navigate through challenging end markets for our customers, we believe Benchmark remains on a positive trajectory supported by our ongoing initiatives. As our higher growth markets continue to outpace growth in the traditional markets, we expect to sustain and exit the fourth quarter at our previously stated target of 4.2% operating margin. In 2016, we anticipate even further progress towards our 4.5% operating margin target. In closing, I have confidence in our strategy, our business model and most importantly our team members who work tirelessly to create value for our customers and our shareholders.

Now, as you can tell by my voice, I'm a bit under the weather and we will keep our Q&A to a bit shorter time today but we will be available in our offices for follow-up questions that you may have. Operator, I'll turn it over to you to open it up for Q and A. Thank you.

Thank you. (Operator Instructions). Our first question comes from the line of Jim Suva with Citi. Your line is now open.

Thank you on congratulations to you and your team at Benchmark. A quick question. It looks like your operating margins are progressing in the right direction, which is great. Assuming a favorable mix, is there a specific revenue level we should kind of think about for what it takes to get to that 4.5%? And on the customer breakdown, did you have any customers over 10%? If so, how many, and which segments were they in?

Jim in, terms of the second question, no 10% customers for the year. In terms of the revenue, again, it's a little bit difficult to measure. Certainly to achieve 4.5%, we'll need increased revenue. But to pinpoint that number is a little bit difficult, given the changes in mix that may occur.

Okay, gotcha. Maybe just a quick follow-up, when you think about your new business wins that came in, you mentioned they were pretty broad. Were there a couple of segments that maybe were a bit bigger historically?

I would say, Jim, that what we've seen as far as our new business wins is truly a broad mix. In fact, some of the programs we are engaging in are early engagement for some very broad opportunity, such as industrial, that have very long life cycles that we're excited about. And then likewise we see some other opportunities, as we spoke to in the networking Telecom that are just different. So we have a good blend of new opportunities that we're excited about, and I think that's the important message that we wanted to get across to shareholders, is it is portfolio management. It's not that we prefer one versus the other. It really takes a blend of business to allow us to operate most effectively and efficiently. And we're seeing our go to market to allow us to balance the portfolio in a manner that we're very happy with.

Okay. Thank you. Congratulations again to you and your team at Benchmark Electronics.

Thank you.

Our next question comes from the line of Andrew Huang with B. Riley. Your line is now open.

Thanks for taking my call. So in the business wins that you talked about, I'm not going to complain, but computing and Telco seemed a little bit high compared to normal. So I'm just wondering why that is.

Welcome to our Benchmark conference call. We see Telco and computing to traditionally have variability in demand, such that the second and fourth quarters are the stronger quarters. And first and third quarters are, in comparison, weaker quarters for those marketplaces. And we have long ago determined that we know the customers seem to be able to move Christmas. So June and December are the strong quarters for those markets. And then I believe you had another question?

I was more commenting on the wins. It seems like it's a little bit higher as a percentage of your wins, those two segments. I was just wondering what's driving that.

Oh, on the new program wins. Sorry, I misunderstood your question. On the new program wins in computing and Telco, again it's probably timing of wins. I don't think we'll ever get to a perfect allocation by quarter, but we want to see wins across each industry. So we're seeing a pretty good level there. But I wouldn't consider it imbalanced.

And then my next question is that if I look at consensus revenue for 2016, I think it's up 4% year-over-year. Can you just comment on that, directionally?

We're not at the point of giving guidance for 2016. What I do see, though, is we expect to be competing effectively in the industry. I haven't really looked a great deal to see where the updates have come in for the industry. But I would expect us to be at or above what you see for the industry. And we're clearly driving for stronger than 4%, but I'm not giving any guidance at this time for 2016.

Okay. Thanks very much.

Thank you. And our next question comes from the line of Steven Fox with Cross Research. Your line is now open.

Thanks. Good morning. Just a couple of questions. First off, you guys talked about a strong finish to the second quarter for both computing and Telecom. But it sounds like you still have sort of a muted outlook for the rest of the year and maybe even into next year. Can you talk about if there was anything encouraging behind that finish, and what drove it, and what is the difference between that and the forward outlook? Thanks.

I think that in some cases we saw the demand exceed both ours and our customers' expectations. And what we see in our outlook in comparison is the environment. There are a number of environmental changes going on, continued head winds in currency, continued a very high level of M&A activity that is changing the end market demand and also causing some, I guess, hesitation or potential delay in the infrastructure spending of the end customers. And I think that is what is embedded in the forecast given by our customers, and the conservatism that has been baked into their outlook for the third quarter, that we have rolled into our forecast.

Great. That's helpful. And then just really quickly as a follow-up, among the new wins you did mention data center and I know there's been a trend towards EMS providers benefiting more from a white box type of products. Is that something that you're participating in and leveraging your design to? Or can you just generally talk about what you're doing in data center to drive some new wins there?

We are performing more on the high-performance computing end of the marketplace there.

Okay. Thank you very much.

Thanks, Steve.

Thank you. And our next question comes from the line of Brian Alexander with Raymond James. Your line is now open.

Okay. Thanks. Good morning. Gayla, did I hear correctly that you're looking for the industrial segment to be up sequentially in the September quarter? And I know you called out oil and gas as sort of an area of weakness, but if you are expecting that overall segment to be up, how do you reconcile that with maybe some of the comments coming from your supplier base that industrial has softened in the US as well as in Europe?

In my comments, what I highlighted we also have in our industrial sector aerospace and defense, and we're seeing strength in aerospace and defense offsetting the weakness in energy that we see right now.

Okay. And maybe switching over to working capital. Don, I think you talked about trying to get to a 75-day cash conversion cycle, I think you said longer term. So, maybe, what's the timing on reaching that target? Where do you see the improvements occurring specifically? And what are you guys doing differently to get there?

Well, the challenge or the opportunity we have right now, Brian, as we diversify into these higher mix customers. What we're finding as we ramp these programs we have more work to do on the front end. So in terms of the targets and the days, I think certainly 82 at some point this year towards the end of the year. And then longer term, 75 sometime in 2016.

Okay. So that's not too far out in the future.

Correct.

And then just on margins, the 4.2% this quarter was obviously very strong, given that you actually had some adverse end market mix, and overall revenue environment pretty challenging. It sounds like you're still expecting that 4.2% in the fourth quarter, after dipping maybe a little bit in Q3. But I suspect your revenue might be higher in the fourth quarter than the second quarter. So I guess I'm curious, one, would Q4 revenue likely be above Q2? And if so, what would keep margins in the fourth quarter from not getting above what you just reported? That's all from me.

Well, I think in terms of the revenues for Q4, we're certainly not providing guidance. What I think we're trying to reiterate is what we said at the beginning of the year, is we expect to exit the year at 4.2%. Certainly margins are going to be dependent and you're going to have leverage if revenues are up. So more so just trying to reiterate that we expect to finish the quarter, the year at 4.2%. (inaudible).

Maybe a different way to ask it; Was there anything unusual or temporary that aided the second quarter?

No.

Okay. Thanks.

Thank you. And our last question comes from the line of Sean Hannan with Needham & Company. Your line is now open.

Yes, thanks very much. I think most of my questions here have been answered. I just want to see if I can summarily understand the overall picture for you guys at this point accurately. It appears that from a kind of a Telco standpoint we're going to be, and computing back into this year and we have some comps where that may not be necessarily a lot to get excited about. But it's really within the other areas of your business, particularly driven by new program wins, versus necessarily end market demand pull-through that is giving you the optimism you have going into the back end of this calendar year, perhaps positioning for 2016. Is that the right way to think about things?

You said it very well, Sean.

Okay, great. Thanks, folks.

Okay.

Thank you. And we have a follow-up question from the line of Andrew Huang with B. Riley. Your line is now open.

Thank you for taking my follow-on. As your revenue mix shifts towards the higher growth markets versus the traditional, I'm just curious, are there any end markets in the higher growth segment where you have gross margins above 9%?

Andrew, we don't go into details at that level. But I think that the easy way to make sure that you get an understanding of the mix of business is we have a broad base of services that we offer to customers. And depending on the level and type of services they require, some of those will render greater margin opportunities for us.

So to the extent that we are engaged at the early phase on engineering all the way through the end life cycle, based on the complexity of the business model and the product, there may be an opportunity to have a more favorable margin versus when it is a more volumetric build to print volume product. So it's a variety, and we really don't have any specific margin that we provide publicly on a program-by-program basis.

And then as a follow-on, you've done a really good job keeping operating expenses very tight. Should we expect that to continue, going forward?

I would not expect any significant changes from the levels that we've seen in the first half of the year.

Great. Thanks very much.

Thank you, everyone, for joining our call. Oh, I believe we have one or two more questions?

Thank you. Our last question comes from the line of Mitch Steves with RBC Capital Markets. Your line is now open.

Thanks for taking my question, guys. I just had a quick one on the networking business. It looks like the Q-over-Q guidance from the whole sector seems to have been mixed. [inaudible] you guys are kind of in the center. So maybe it would be helpful, since you guys aren't going to give customer information, maybe within networking, what's stronger, what's weaker within the segment going forward?

I think the challenge in networking specifically has to do with AT&T's [inaudible]. Clearly they are the large driver, as well as some of the other players that are part of pending or potential transactions. So I think when I referred to M&A, that would be an industry that is probably most highly impacted, with limited visibility on behalf of our customers to provide a lot of insight and forecasting accuracy on any short time window basis, just given the level of and number of customers that they have driving some of the infrastructure spend on that side. Beyond that, on some of the newer products we are seeing strength.

So that's probably why we are going in our guidance towards the middle of the pack, as you would say. And that's new product implementations and some of the higher performance Telecom, if I can refer to it in that manner. So it is a mixed bag out there in the Telecom space right now, as to what the build-out opportunities and plans are. But you really would have to look to our customers to get a great understanding because I don't have a very strong depth of knowledge on truly the underpinnings on that.

Got it. That's helpful. Thank you.

Okay, Operator, we are at 10:30. I appreciate having you join us on our call today and we look forward to following up with you. And we are in our office this afternoon. So thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.