Benchmark Electronics, Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good evening and welcome to the Benchmark Electronics, Inc. Fourth Quarter 2020 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Lisa Weeks. Please go ahead.

[Lisa Weeks:]

Thank you, operator and thanks everyone for joining us today for Benchmark’s fourth quarter and full year 2020 earnings call. Joining me this afternoon are Jeff Benck, CEO and President and Roop Lakkaraju, CFO. After the market closed today, we issued an earnings release highlighting our financial performance for the fourth quarter and for 2020 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 webcast live, and a replay will be available online following the call. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix of the presentation. Please take a moment to review the forward-looking statements advice on Slide 2 in the presentation.

[Jeff Benck:]

Thank you, Lisa. Good afternoon and thanks to everyone for joining our call today. We hope all of you are remaining safe and healthy during these times. In Q4, we delivered revenue of $521 million, which was at the midpoint of our guidance for the quarter. With improving higher-value sector revenue mix and better operational efficiency, we achieved non-GAAP gross margins of 9.6%, which was above our target of 9%. Even with slightly higher SG&A expenses in the quarter due to higher variable compensation and higher-than-anticipated COVID-related expenses at $1.6 million or about $0.04 per share, the resulting non-GAAP operating margin was 3.4%, and non-GAAP earnings were $0.34 per share. Our team’s effort to bring down inventory and better manage working capital are bearing fruit with cash conversion cycles coming in at 71 days, which enabled $84 million of free cash flow for the quarter. We delivered these results in the fourth quarter amidst continued challenges, including increasing COVID infection rates in our communities around the world, particularly impacting our North America operations. Our employees, operations leadership and COVID task force are continuing to do everything possible to provide a safe work environment at our sites around the world. I cannot say thank you enough to our team for all of their hard work to deliver for our customers. Please turn to Slide 4. Our go-to-market team continues to do a great job, and we had another strong quarter of bookings across all business areas of Benchmark. When I joined the company, we set a goal of consistently achieving over $200 million of new bookings per quarter, and I’m proud to report that even in the face of the global pandemic, we achieved over $800 million in new bookings for the 2020 calendar year. As I have shared before, many elements contribute to driving revenue growth, such as reducing regrettable losses in our business, which we also made progress on in 2020. More importantly, this achievement in new bookings bodes well for our future growth when coupled with our high customer satisfaction and progress on our other go-to-market initiatives.

[Roop Lakkaraju:]

Thank you, Jeff and good afternoon. I hope everyone and their families continue to be safe and healthy. Please turn to Slide 7 for our revenue by market sector. Total Benchmark revenue was $521 million in Q4, which was in line with the midpoint of our Q4 guidance and similar to our Q3 revenue of $526 million. As expected, increased revenues from stronger demand and new programs in industrial, defense and semi-cap offset declines in medical. Medical revenues for the fourth quarter were down sequentially from continued lower demand for products involved in COVID-19 therapies, such as ventilators, x-rays and ultrasound devices and overall softer demand related to elective surgeries and trauma devices, which have yet to return to pre-COVID demand levels.

[Jeff Benck:]

Thanks, Roop for that update. Following Roop’s comments on our guidance for the first quarter, I wanted to provide some additional color on our view of demand by sector for 2021 on Slide 17. For the first quarter, we expect revenue to slightly decline sequentially from some seasonality and sector-specific dynamics. Strong demand for semi-cap and the new HPC program ramp in computing are offset by continued softness in some of our medical sector products, our industrial sector, oil and gas products and further weakness in our commercial aerospace business. From this Q1 base, we expect sequential revenue growth throughout the remainder of the year, supported primarily from new programs in industrials, medical and computing. In the medical sector, we are expecting revenue to remain relatively flat in the first half as demand started to slow for COVID-19-related therapy devices in 4Q, and elective surgery products have yet to recover. However, we are in flight on a large number of new program ramps for diagnostic and ultrasound products that will benefit second half revenues. With our deep expertise in design and manufacturing for complex medical products and our recent program wins, we have confidence that 2021 will be another growth year for the medical sector. In semi-cap, demand remains strong for semiconductor capital equipment in Q1, which we expect to continue throughout all of 2021, driven by the deployment of 5G and cloud computing demand created by work-from-home and school-from-home trends as well as growth in e-commerce. We remain well positioned in this sector with both our advanced precision machining and electronics manufacturing services and now expect revenues to grow greater than 10% over 2020 levels. Moving to the A&D sector outlook, we expect sector revenues to be flat to potentially down in 2021. Expected gains from new programs in our strong defense business are offset by further declines and persistent weakness with our commercial aerospace customers. Customers in commercial aerospace have not provided visibility into a time line for demand improvements. Conversely, we are seeing further improvements in military programs, supporting advanced communications, radar applications and ground-based systems. In industrials, we expect strong year-over-year growth from our new programs that will ramp in first – second half 2021. At present, we suspect that our oil and gas business will begin to recover starting in Asia in the back half of the year. Independent of this recovery, our new sector leader and business development teams have made significant strides in growing both existing and new accounts. In fact, the industrial sector had the highest value of bookings in 2020. These new programs support our confidence in full year growth, even against the softer near-term demand outlook. For the full year, we also expect growth in the traditional markets. In the telco market, where we remain highly selective in our engagements, we expect overall stable revenue underscored by demand strength in satellite and broadband communication programs. In computing, we expect strong revenue contribution from high-performance computing projects with expected ramps in late Q1 through midyear 2021. Let’s now turn to Slide 18, where I will share some broader perspectives on the new year. Now that we’re in 2021, we are becoming increasingly bullish on our ability to achieve mid-single-digit growth over 2020. We are expecting continued growth in the medical and semi-cap markets with incremental contributions from industrials and high-performance computing. Our higher-value markets are expected to grow for the full year. We expect the higher-value markets to again represent over 80% of our total annual revenue. We are targeting gross margins for the full year to be at least 9% as we offset headwinds from continued COVID costs and a number of new program ramps with benefits from our operational excellence programs. We are also targeting SG&A for the full year to be below 6% from effective expense management and continued progress with shared services consolidation. We remain committed to growing shareholder value and providing incremental returns to shareholders through quarterly dividends and with our share buyback program. If you will turn to Slides 19 and 20, I wanted to provide an update on our commitment to supporting ESG and sustainability, which is a strategic imperative for Benchmark. At present, the 5 tenets of our ESG strategy are environmental responsibility, our people, our community, governance, and the ongoing COVID-19 response. Under the oversight of the Board, our internal ESG council is comprised of an enterprise-wide, cross-functional team tasked with defining and implementing key projects and investments that will advance these priority initiatives. We have further supplemented this team by partnering with like-minded customers and by engaging with third-party consultants who have specific ESG experience to further accelerate our strategy. For your information, we have been monitoring and tracking energy reduction programs for almost 10 years in support of the environment. On the governance front, we have a diverse corporate Board with 22% of directors represented by women, but we can and will do more. We have plans in flight to expand racial diversity on our Board of Directors and overall plans in the company to strengthen our diversity and inclusion platform through strategy, training and a focused recruiting plan. We have conducted a peer analysis and are mapping current material ESG programs to SASB standards, which we will publish this quarter. We will also provide further updates in the ESG sections of our upcoming annual report and proxy in Q2. We expect to release a standalone sustainability report in 2022. Future reports from Benchmark will include both qualitative and quantitative measures reflecting updates and improvements as we advance our overall ESG strategy. I want to wrap up our call today with a summary of our three strategic initiatives for 2021 on Slide 21. Growing revenue is a top priority of Benchmark. As I referenced earlier, we have spent a considerable amount of time over the past couple of years, optimizing the customer experience through recurring feedback mechanisms and enhancing our strategic relationships. Our account management processes are improving, and we are focused on increasing the attach rate of design engagements to manufacturing wins through selling the full breadth of services and capabilities to our customers. Once we successfully win new programs, we are then laser-focused on supporting new program ramps which are forecasted to be at record levels in 2021. In order to achieve our financial targets, we must also invest in a sustainable infrastructure and talent needed to scale our business. As I discussed earlier, ESG sustainability initiatives and advancing diversity and inclusion underpin these foundational efforts. This also involves creating an efficient and scalable infrastructure to streamline the global delivery of our shared services. We have rationalized our investments in corporate infrastructure, including our HR, IT, finance and other shared services, and centralized these groups to achieve scale while concurrently managing SG&A expense in support of our midterm model which we introduced late last year. Ultimately, our model reflects that we expect to grow earnings faster than revenue. Revenue growth in our model enables higher utilization to better leverage our fixed costs, but not all revenue dollars are created equally. We are targeting a portfolio of customers, with the right sector mix that value our advanced technologies and leverages the breadth of our services. Through these targeted higher-margin customer engagements and ongoing operational excellence efforts, we will expand margins and ROIC through 2021 and into the coming years. I remain excited about our team’s ability to capitalize on the growth opportunities in our diverse end markets where our deal pipeline and win rate is increasing, and we remain focused on executing our ongoing initiatives to increase value for our customers, employees and shareholders. I look forward to 2021 with optimism, knowing that our strategic investments in the business to drive differentiated value and sustainability have solidified a path to achieve revenue, margin and earnings growth in 2021. And with that, I will turn the call over to the operator to conduct our Q&A.

[Operator:]

The first question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

[Jim Ricchiuti:]

Thank you. Good afternoon. Hello everyone. Jeff thanks for the color on how you are thinking about 2021.

[Jeff Benck:]

Sure.

[Jim Ricchiuti:]

That’s helpful. I wanted to go back to gross margins because I’m looking at the Q4 gross margins, looking at the revenue levels that you were at and being able to demonstrate those kind of gross margins. You highlighted mix, were there some other factors? And Roop, maybe if you could, I may have missed it, but did you break out the impact of COVID on gross margins in the quarter?

[Roop Lakkaraju:]

So Jim, this is Roop. Appreciate the question. We didn’t break out the gross margin effect. But in effect, it’s about 30 basis points of COVID costs in that gross margin, roughly, although not all of that – I guess a little bit less that because there’s a little bit in SG&A as well. But to get to the heart of your question, part of this is taking out the onetime recoveries that we had in Q4, so 9.6% comes down to about 9.3%. But then you look at the revenue difference and most importantly, within that revenue difference, is the nature of the revenue, right? We got lower – higher value market revenue in Q1, and we’ve got increased traditional market revenue in Q1. And then the other part of that is – so from an absorption standpoint, that has an effect. The other part of that then is where the revenue is within our sites overall, where it also has some further absorption issues potentially or challenges, if you will. Then the final piece is, obviously there is some additional costs that you tend to have in Q1 from employee expenses, payroll taxes, these sort of things that are factored into that as well. The other piece I’ll remind you of, Jim, through our comments is we talk about having margins expand through the year. And at the end of the day, for ‘21, we think getting to a 9% gross margin for the full year or at least 9% is very reasonable and is what we expect.

[Jim Ricchiuti:]

Okay. And it sounds like in a couple of instances, a couple of other verticals, you are anticipating a pretty healthy second half ramp and I think medical being one that you called out. Is – do you guys have a pretty good line of sight on some of these new programs in terms of – because there is always the risk that some of this can slide. And I’m just wondering how confident you are about that line of sight and that ramp?

[Roop Lakkaraju:]

Yes. I probably have higher confidence than in the past a little bit because for some of these programs, we’re in the thick of it, right, and even saw some of those programs get qualified in fourth quarter. And so we’re off running on a number of new things. It does take time. It does take sometimes multiple quarters to really see it ramp up. But – where in the past, we might have said, okay, we’ve got to win and there’s still engineering to go on, and it’s going to take time. I think our line of sight, particularly in medical, is that there’s a number of things that we’re actually investing. It’s actually costing us a little bit on the cost side of things early on, but I would say we have pretty high confidence in both medical and industrial that – a lot of wins over the last 2 years, in fact increasing in 2020, which won’t all impact us in ‘21, but pretty bullish in those two segments in particular which you probably picked up.

[Jim Ricchiuti:]

Got it. Okay, thanks very much.

[Roop Lakkaraju:]

Sure. Thanks, Jim.

[Operator:]

The next question comes from Anja Soderstrom with Sidoti. Please go ahead.

[Anja Soderstrom:]

Hi, thank you for taking my question and good evening. So I first want to ask about the industrial. You see some challenge in there in the infrastructure and transportation and oil and gas, can you just remind us how big the oil and gas is of the pie?

[Jeff Benck:]

Yes, around 20% of that segment. Obviously, with some of the decline, it’s a smaller piece kind of going forward that we see there, but some of the strength, just to kind of pick up on where test and measurement still is a pretty big category for us and with some test and measurement in oil and gas. But beyond that, right, things like oscilloscope and things that are more broadly used are important element of that group and we have got some new wins there. Beyond that, we also have some LiDAR activity that is – we have been investing in for quite some time and see some of those programs come into production in the coming years. So those are a couple areas where we see strength in industrial and pretty excited about the potential there. Because I think if you remember, Anja, last year or about a year ago, we were – we felt like we were under participating there. We are doing better in factory automation and warehousing and some of those other segments as well, but those are a few touch points for ‘21.

[Anja Soderstrom:]

Okay. Yes, my follow-up were for pockets of strength. So those pockets of strengths seems to be pretty good areas to be in, so oil and gas and the infrastructure and the transportation costs that would be pretty powerful then?

[Roop Lakkaraju:]

So Anja, you broke up a little bit there, but obviously, with that strength and once oil and gas does recover, I think it’s an open question as to the timing of what that recovery looks like or how the vaccine rollout affects infrastructure projects and these sort of things. So yes, you are right there could be some further strength that we could see as we get to the latter part of ‘21 and hopefully into ‘22.

[Anja Soderstrom:]

Okay, thank you. And then I think you participated in some testing in the UK, is that something you see any growth potential in as to maybe expand testing as it is to open up their economy significantly?

[Jeff Benck:]

Yes. We have a customer in Europe that is building – we are building for them a rapid COVID test device, which pretty exciting technology. It’s really just amazing that you can get a result point of care in less than an hour. Basically, you swipe this and you’re able to quickly get a result. And there’s quite a bit of the UK government is leveraging that to deploy that around Europe. And then obviously, they have designs that go beyond that. So I won’t comment too much on the customer but pretty exciting about the technology, and we’re probably most excited because this does applications beyond just COVID. It’s not COVID specific in the sense that you think about other viruses or other things but also the DNA-level capability. So it’s pretty amazing where the technology can go. But we’ve been a phenomenal customer, great partner and work jointly together to ramp this and hope for it to contribute meaningfully in 2021 as we started producing volume in fourth quarter.

[Anja Soderstrom:]

Okay. Thank you. That was all for me.

[Jeff Benck:]

Thanks, Anja.

[Operator:]

This concludes our Q&A session. I would like to turn the conference back over to Lisa Weeks for any closing remarks.

[Lisa Weeks:]

Thank you again for joining our call today. If you have any follow-up questions regarding our earnings release, please don’t hesitate to reach out and I will be happy to follow up. Also wanted to put in a reminder that Benchmark will be supporting the Sidoti Spring Conference on March 26 and we look forward to engaging with you at this event. Please have a great afternoon, and we look forward to sharing our first quarter results with you on our April earnings call. Good afternoon. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.