Good day, ladies and gentlemen, and welcome to the Benchmark Electronics, Inc. First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder to our audience, this call is being recorded for replay purposes. Now, I would like to hand the call over to Lisa Weeks, Vice President of Strategic Planning and Investor Relations. Ma’am, you have the floor.

Thank you, operator. Good morning, everyone, and thank you for joining us today for Benchmark’s first quarter earnings call. With me this morning are Gayla Delly, President and CEO; and Don Adam, CFO. Gayla will provide an update on our strategic priorities and near-term outlook and Don will provide a detailed review of our financial results followed by a question-and-answer session. Earlier today, we issued an earnings release highlighting our financial performance for the first 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 webcast 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 risks and uncertainties described in our press releases 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 earnings release, as well as in the appendix of the earnings presentation. Finally, Benchmark has filed a definitive proxy statement with the SEC with respect to the 2016 Annual Meeting and has mailed the definitive proxy statement to its shareholders. Benchmark shareholders are strongly encouraged to read the definitive proxy statement and other documents filed with the SEC carefully in their entirety when they become available because they contain important information. Benchmark, its directors, executive officers and other employees may be deemed to be participants in the solicitation of proxies from Benchmark shareholders in connection with the matters to be considered at our 2016 Annual Meeting. Shareholders may obtain a free copy of the definitive proxy statement and other documents filed by Benchmark with the SEC free of charge at the SEC’s website or at Benchmark’s website. Now, if you will turn to slide 4 in the presentation, I will turn the call over to our CEO, Gayla Delly.

Thank you, Lisa, and good morning to everyone. Over the last several years, Benchmark has been making steady progress to transform our portfolio as commoditization of traditional market has necessitated a continuous evolution in the EMS industry. We have been realigning our business to drive alignment with the highest return investment opportunities. This repositioning is not without challenges, but we remain committed to bolstering our service offerings as we expand our portfolio with longer lifecycle products and less volatile markets. The ultimate goal for our rebalanced portfolio is to deliver sustainable growth and higher profit margin, which in turn generates higher returns on capital for our shareholders. Our first quarter of 2016 was more challenging than we anticipated as we experienced rapidly declining demand late in the quarter as compared to earlier forecast from our customers. Our revenue for Q1 was $549 million, which was below the low end of our guidance of $565 million. Our EPS was $0.26, which was $0.03 below the bottom of our range. Our results were significantly impacted by a sharp decline in our computing sector, primarily due to lower than expected demand from our top computing customer. We anticipated a normal seasonal revenue slowdown from Q4 to Q1 in the computing sector. However, the 37% sequential decline came late in the quarter and this magnitude was greater than we expected. The impact from the macro environment and broad based demand softness also impacted a number of our industrial customers. While no single customer or industrial customer reflected significant changes, we saw moderate reductions across the board in factory automation equipment, building infrastructure and energy-related products. In speaking with our customers, we understand that end users are further deferring capital investments and this drove inventory correction. In contrast, medical demand remained fairly stable and our…

Thank you, Gayla. Please turn to slide 9, where I will provide income statement highlights for the quarter. First quarter revenues were $549 million, which were adversely impacted by softness in computing and industrials, coupled with qualification delays in some of our medical customers. Because these forecast changes occurred late in the quarter, we weren’t fully able to offset lower revenue with cost alignment actions and our operating margins were impacted. However, as Gayla noted, we are already executing certain actions to optimize our global cost structure to further align current and anticipated demand throughout 2016. Net income on a GAAP basis was $11 million for the quarter compared to $14 million in 2015. Our GAAP results included $3 million of costs, which were primarily associated with restructuring activities. Non-GAAP net income for the quarter was $13 million in 2016 and $18 million in 2015. Our GAAP EPS was $0.22 for the quarter compared to $0.27 in 2015. Non-GAAP EPS was [$0.26] for the quarter compared to $0.34 in 2015. The first quarter 2016 non-GAAP effective income tax rate was 22% compared to 21% last year. The tax rate for the first quarter was lower than expected due to a slight change in the geographic mix of earnings. We expect the tax rate for the second quarter to be approximately 22%. Diluted weighted average shares outstanding for the first quarter were 50.3 million. Now, please turn to slide 10 for a trending view of operating income. Over the past several years, our increased operating margins have reflected the success of our strategy to increase sales in focus markets and executing our operational excellence initiatives. During our seasonally lower first quarter, we had forecasted operating income to range from 3.8% to 4.1%. Because of under absorption of cost, our operating margin…

Thank you, Don. Our first quarter of 2016 was more challenging than we anticipated based on customer forecasts that had been provided earlier in the quarter. But our strategic repositioning and investments in our focus markets worked together to backstop the quarter and will drive improvements in the latter half of 2016 and 2017. Clearly, the merits of our strategy are focused on our portfolio evolution towards higher margin, higher value markets is solid. We are encouraged by our program wins in our target markets and with anticipated market improvement as well as expect enhanced results in the second half of 2016 and 2017. Before turning to the Q&A session, I will remind everyone that we would like to keep the focus for today on our earnings results for the quarter. Let me now turn it over to the operator to open the mike for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Steven Fox of Cross Research.

Two questions for me to start. First of all, can you give a little bit more color on how Secure performed in the quarter, sequential revenue trends and gross margins? And I know you mentioned that you already have sort of a cross-selling opportunity, but can you give a little more color on how that came about? And then secondly, you’re alluding to cost reduction activities that are now planned, but I’m not quite sure I totally understand the driver. I understand you’re walking away from some telecom business here and I guess that’s taking up some overhead absorption that you need to clear out, but is that the only thing that’s driving this or what else is adjusting down your utilization outlook for the rest of the year?

Okay, so that’s two separate questions. Let me speak to this separately. First, as always, we’re not specifically carving out the impact of this acquisition of Secure or any other acquisitions. But we are saying that they have been additive and to our industrial sector that otherwise would have had a greater impact. And therefore, also, as you see from our margin, even though we had decline in revenue that was much greater than what we had expected, our margin performance at 3.5% demonstrate the improvement that we’ve made in our portfolio as well as our operational excellence and productivity improvement. So we believe Secure has really provided the benefit there. Importantly, as you highlighted and as we noted in our comments, we have already in pretty short order had our first win associated with jointly approaching an opportunity with a customer. So we think that’s going to be a part of what we see in a number of activities undertaking this year with our combined efforts and we’re just very excited to have the opportunity to report that already this quarter. Second piece related to cost containment, our industry is very adept at looking at the future outlook as Benchmark has specifically and identifying what we need to do in order to manage costs and align our footprint with the opportunities for the future. So it isn’t any one single event. It is looking at the forecast overall and identifying the appropriate allocation of resources to make sure that we can drive productivity and utilization rate such that we can deliver the operating margins and the targets that we have set forth. So while we are pleased at 3.5% upon the surprises that we had in Q1 in forecast reductions late in the quarter, 3.5% was a good result, but it’s not good enough and it’s not where we want to be going forward. And so we’re going to continue to drive and put in place our activities to continue to drive up our utilization rate.

Just as a quick follow-up, is there a scale of restructuring that we are talking about or cost out or is there a way you could talk about what – how much of your full-year revenue outlook has been impacted by the events that you saw in the last couple of months?

So we do not have a quantification at this time. We’re reviewing the activity. In the coming months, we will continue to look at the information provided by our customers in their forecasts. But again, we’re expecting the telco and computing sectors to be relatively flat and so we will dial that in as we look at the landscape going forward.

And that’s flat off of what you just reported in Q1 revenues?

Right. Again, as Don highlighted in his comments, we’ve got some excellent programs that we’re excited about that we’re supporting associated with new generations of technology in both telco and computing and we expect those to ramp in the second half. And along with that, some of the more traditional telco and computing programs, we do not see growth returning to those. So we’ll see the headwinds of the mature products likely as strong or offset any growth we would see from the new product ramp.

Our next question comes from the line of Jim Suva with Citi.

On the telecom disengagement, can you clarify, is it just a program or two or are you disengaging the entire customer? And also can you help us quantify the dollar amount that comes out of your company and specifically the timing of that?

Well, again, as we have anticipated we’ve been in program transition for next generation of products and so it is next generation that we had expected would be in the second half of 2016 and moving into 2017 that will not be incorporated into the revenue stream.

So that is not impacting the weakness seen in the March and June quarters, correct?

It would have been potentially ramping in in the June quarter and clearly as we ramp down, I would say the market place in telco would have been impacted, but not these programs.

As customers transition to next generation programs over time T-1 or legacy programs go away, is it fair to say this customer will cease to be a customer of Benchmark maybe in six to nine months or 12 months from now?

Not necessarily. Again, it really is aligned with specific programs and there are within any customer a number of programs that we make for some of which will fit our portfolio mix where we can add value through some of our engineered solutions and alignments and some which are more driven towards potentially cost pressures and commoditization.

And then when you talked about the volatility you saw, was it linear through the quarter? Was it like the past last week or two, or last month of the quarter and what have you seen so far in the month of April, the guidance would show that it looks like the step down was pretty steep and it looks like the step down in demand has definitely continued, if I read the outlook correctly?

As we indicated, it was late in the quarter. Again, the traditional market have profiles such that the last few weeks or last couple of weeks typically had a hockey stick demand profile and that did not prove to come through. As you look at this quarter guidance, what we indicated is we see the traditional markets remaining flat or slightly up generally, but the real growth to achieve, the 6.5% improvement quarter over quarter, is associated with demand improvement and the higher value market.

My last question, obviously this telecom customer for the next generation products will need to get their products done elsewhere. Do you think it was they were just asking for too lower price? Do you think it was where Benchmark’s physical facilities are, they were a little too high costed, or your hurdle rates are just higher than maybe some of the others out there? How should we think about it, because it’s always tough to see a customer go elsewhere and I’m sure they’re not doing it for charity, and so how should we think about other people are embracing that new product, yet you’re kind of walking away?

I’m not going to be in a position to share as much specifically there, but I believe as you know the telco markets or certain portions of the telco market are transitioning to whether it’d be an ODM solution or other cost competitive solutions. Our profile may not fit some of those products. So it’s not saying that it’s not a good solution or a good product for everyone, but probably not directly aligned with our direct competitors.

Our next question comes from the line of up Sean Hannan with Needham & Company.

Just a follow up on the topic of the communications market, that customer, just to get an indication, what is the area of communications where this was, I mean, is this cable providers, is this traditional telco, how do we think about that as well as that’s obscene being relevant to your continuing strategy within that segment?

I would say the traditional telco is where this resides and where we’ve seen some of the opportunities in growth are in some of what I consider next generation 100 G, just some optical-related areas as opposed to traditional. So that’s how I would characterize it.

And then cash cycle days has certainly been a hot topic recently. Can you talk about arguably that best case as we look out three quarters to make 25-day, roughly a 25-day improvement, how do you really accomplish this? And can you be specific in terms of what gets you there, the nature of the initiatives or programs or negotiations et cetera?

Sean, as we indicated in our call, we do anticipate pretty significant improvement this quarter. The midpoint of our range was at 90 days. So that’s a 10% improvement. Our goal is 75 to 80 days. So we think certainly the next quarter will be – we will get a lion’s share of that. Certainly, the inventory velocity is going to also help. We’re working on demand management with our customers in terms of aligning the supply chain with the demand requirements and then a longer term solution is renegotiating contracts with suppliers and renegotiating terms. So it’s a multi-point focus; it’s not one area that’s going to cure all of it. But we do anticipate significant improvement this quarter.

Is part of – there have been a lot of reasons and explanations around why this is so stretched for you guys. One topic I haven’t heard too much and perhaps you can comment on is do you feel that there has been under the hood more transition among your customers and programs in the nature of what you need to secure for components and the nature of the programs, kind of what’s ramping up, has there been perhaps arguably velocity or greater nature of change that’s happened for you folks versus on arguably a like for like basis within the space, just a perspective trying to understand a little bit better.

I think if you look over the last two years in terms of our new program wins, they have been in the higher value markets. So a lot of those wins have come from where they’re insourcing and for the first time we’re outsourcing. So we’re inheriting their supply chains. And part of what we’ve got to do is optimize that supply chain which are inherently more complex than traditional customers. You’re dealing on a product by product basis. You’re dealing with more suppliers, more components. The supply chain is not as sophisticated. So it’s not an easy solution. It takes time. And just given the number of ramps that we have seen in these industrial, particularly the industrial side, it’s not an easy fix. It takes time and it’s going to take work. And we’re confident we’re going to get there. Bottom line of the question is – the answer is probably yes. I think we’ve seen more of those type of customers than others.

So Sean, I think the point early on that we made is as we saw and put forth a goal of growing these markets, as you can appreciate, computing and telco have outsourced for many generations and their supply chain is designed for outsourcing. In some of the markets and customers that we’re supporting, as Don indicated, they may not have outsourced or have been insourced and were transitioning to outsourcing and we’re transitioning it to geographic location that may not be in proximity to the established supply chain. But when we talk about supply chain optimization, it is first making sure that we establish the manufacturing solution and then that we transition the supply chain solution and we recognize that takes time. And [unless] demand profile changes, we would not make the progress that we would have expected to and in fact you saw the impact on the inventory days and that’s simply a result of the forecast variability late in the quarter.

Our next question comes from the line of Mitch Stevens with RBC Capital Markets.

I guess sort of on the high-end computing side, so I know the major customer there was down about 40% sequentially in the March quarter, but it looks like the entire high-end computing segment was down about 40% as well, I think [30% here]. So can you just talk about what you saw with the other customers outside of IBM?

Actually the other customers we saw had some – we have some new programs that we’re ramping even against some of the traditional markets. So that is a net change associated with that, with some strength in some customers associated with the ramp and then some – also some softness. We did have some forecast variability from other customers, but the predominant change is in our top customer.

And then returning to the telco side, so I know that the program ramp didn’t meet your hurdle marks, but could you maybe provide us some information of what hurdle marks it did not meet just internally?

Again, we have financial targets associated on our return on capital employed and so as we look at those, that’s an ongoing part of what we evaluate.

And then one last one on the medical side, it looks like that’s maybe up about 8% or 9% sequentially, but it looks like the year over year growth is going to be down a bit. Do you still expect that segment to grow in the full year?

Again, our primary impact for the medical would be Q1 associated with the delays, not anything associated with the future outlook for medical and any impact to not having the growth that we would expect because we do see a stable environment and we have a number of program wins there.

So you think it will be roughly stable for the full year, right?

Yes, we would expect – as we have the growth opportunities in front of us as opposed to the weakness that we saw in Q1 associated with the timing of ramp.

Our next question comes from the line of Herve Francois with B.Riley.

Just going back to the cash conversion cycle, when you look at the growth that you’re going to be seeing from your higher value markets into the second quarter and then throughout this year, what kind of challenges do you feel that that places on getting to your targeted 75 to 80-day cash conversion cycle for the remainder – for the rest of this year, at least towards year end, since you’re going to be obviously focusing on those higher value markets where you may have to hold on the inventory a little bit longer and so on and so forth when you talk about dealing with industrial and medical customers?

Again, I think in terms of the improvement, I think, certainly you pointed out correctly that as you get into these higher growth areas there are challenges with it. That being said, we’ve got certainly a line of sight, significant improvement this quarter. I would say the other thing is we’ve ramped a number of programs and so some of the initiatives that we’re getting, so we should get some traction on programs that we ramped 12, 18 months ago. So I would just say that we’ve got specific actions in place and we feel comfortable that we’ll get to that 75 to 80 days by the end of year. It has challenges, but I think we’ve got line of sight to get there.

And I think you asked kind of a qualification that’s probably $150 million, $200 million that we would look at with the majority of it being outside the US as Don indicated that we would look to achieve there an improvement.

And then when you take a look at your entire portfolio of customers in a manner that you made the decision not to fall through with this next gen program from the telco customer you are talking about, when you look at your portfolio of customers, do you see others be it in the telco segment or any other segment that you feel may fit the parameters of that telco customer, where that customer might not meet some of your internal metrics, if you can just walk us through how do you guys come to that decision, was it early in the quarter, later in the quarter that you had made a decision or is it something that they told you or something specific about the program that told you that this is not going to fit what you guys do internally?

So again I want to not get into the details that would be inappropriate to share, but it was late in the quarter and we – constantly as we go through new programs and as we address customers ensure that we have alignment. But overtime and over a prolonged period of time, the challenges that their products face in order to meet their cost targets may not be the same of original product set that we had aligned with. And so that’s an evolution over a long period of time. And we constantly work with our customers to make sure that we have a roadmap that is aligned and understand which portions of their portfolio we can participate with effectively and meet the value added targets that we have and also to support them in achieving their goal. So it’s highly unusual. I think you’ve known over many years that this isn’t a commonplace activity, but it does happen from time to time typically over a long period.

We have a follow up question from the line of Sean Hannan with Needham & Company.

The margins that you expect to expand and progress through the course of the year, in the past you’ve given us a sense of where some of your targets are for exiting the year. I don’t think I heard a target for this year. We’ve heard the long term target. Any sense that we could get on that?

I think during the last call we indicated I think we’re going to be at 4.8% as we exit the year. We believe that target is still attainable and so we’re still expecting 4.8%.

Thank you, operator. I don’t believe – indicated we had any more questions. And so we will sign off for today and appreciate everyone attending the call.

Ladies and gentlemen, this does conclude today’s program and you may all disconnect. Everybody have a wonderful day.