Good afternoon, and welcome to the Benchmark Electronics Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Weeks, Vice President of Strategy and Investor Relations. Please go ahead.

Thank you, operator, and thanks, everyone, for joining us today for Benchmark's third quarter 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 third 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. 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. 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 as described in our press releases and SEC filings. Actual results may differ materially from these statements, most notably from the ongoing impact of the COVID-19 pandemic, and Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeff will begin by covering a summary of our third quarter. Roop will then discuss our detailed third quarter results, including a cash and balance sheet summary and fourth quarter guidance. Jeff will wrap up with an outlook by market sector and an update on our strategic initiatives and a discussion on our midterm financial model before we conclude the call with Q&A. If you will please turn to Slide 3 in the presentation, I will turn the call over to our CEO, Jeff Benck.

Thank you, Lisa. Good afternoon and thanks to everyone for joining our call today. We hope you are all staying safe and healthy during these unprecedented times. In Q3, we delivered revenue of $526 million, which was up 7% sequentially from Q2 supported by strong demand in our defense, semi-cap and telco sectors and improved productivity. With improving operational efficiency, non-GAAP gross margin rebounded 170 basis points to 8.7% for the quarter. Improved profits and focused expense management resulted in non-GAAP earnings of $0.32 per share, which includes $1.3 million or $0.04 per share of COVID related costs. We believe COVID costs are a part of the new operating normal and why we believe they will decline to some degree from current levels, they will likely not completely go away. After a challenging couple of quarters, I'm pleased to report that our manufacturing and engineering services operations have essentially returned to pre COVID productivity levels, which has supported our improved results for Q3. This has not been without an incredible amount of work from our COVID task force and our entire employee population to maintain stringent protocols to ensure we keep our workplace safe and healthy, which remains a top priority. Our cash conversion cycle for the quarter improved to 81 days from 84 days in Q2. I also want to thank our supply chain team, who's done an incredible job of managing through many global logistical challenges this year to continue production for our operations in support of our customers. All in all, a solid quarter for Benchmark and my continued thanks to the entire team for their hard work and support of our customers. Please turn to Slide 4. As I have mentioned previously, our go-to-market team continues to deliver exciting opportunities aligned to our complex and focused…

Thank you, Jeff, and good afternoon. I hope everyone in their families continue to stay safe and healthy. Please turn to Slide 6 for our revenue by market sector. Total Benchmark revenue was $526 million in Q3, a 7% increase on a sequential basis. Medical revenues for third quarter were flat sequentially as expected from moderating demand for products involved in COVID-19 therapies, such as ventilators, x-rays and ultrasound devices. New product demand is shifting more towards diagnostic devices, such as DNANudge's diagnostic box, which we were awarded in Q3. Semi-cap revenues were 14% in the third quarter and up 45% year-over-year from continued strong demand across our semi-cap customers. A&D revenues for the third quarter increased 18% sequentially due to strong defense demand in surveillance connectivity, encryption and digital subsystems and from new program rents. Conversely, commercial aerospace demand, which was 30% of 2019 revenues, remain muted and declined on certain platforms during the quarter. Industrial revenues for the third quarter were flat sequentially from continued softness for products in the oil and gas industry, which was approximately 20% of our 2019 revenue. In addition, demand remains muted for customers that support commercial building infrastructure and transportation markets. Overall, the higher value markets represented 81% of our third quarter revenue. In the traditional markets, computing revenues were flat sequentially from stable demand in high performance computing and data center storage products. Telco was up 16% from Q2 with improved demand in commercial satellite and network infrastructure products. Our traditional markets represented 19% of third quarter revenues. Our top 10 customers represented 42% of sales in the third quarter. If you please turn to Slide 7. Our GAAP earnings per share for the quarter was $0.16. Our GAAP results included restructuring and other one-time costs totaling $7.2 million, $6.3 million…

Thanks Roop for that update. Following Roop’s comments on our guidance for the fourth quarter, I wanted to provide additional color on our view of demand by sector shown on Slide 14. Overall for the fourth quarter, we expect increased revenues from stronger demand and new programs in defense, industrials and telco to offset anticipated declines in medical, as we pivot manufacturing from COVID-19 related therapeutic equipment to diagnostic trauma and elective surgical devices. The results in Q4 revenue should be in line with Q3 level. We do not expect a seasonal uptrend in Q4 this year, as customers are more cautious on increasing their demand signals, given the economic and geopolitical environment. Now turning to the medical sector. During the first half of this year, we saw demand reductions in our core medical products in the cardiac, renal and orthopedic markets associated with trauma and elective surgeries, as many of our existing customers and new customers reallocated their manufacturing and sales capacity in the fight against COVID. As reported, one of the existing key cardiac customers, ZOLL Medical enlisted benchmark to support a rapid ramp of manufacturing capability to support ventilator production. In the fourth quarter, we see declining demand for COVID-19 therapy devices, but the corresponding demand recovery for our non-COVID products, isn’t expected to start until first half of next year. This anticipated recovery along with new medical programs gives us confidence that next year will be another growth year for the medical sector. In semi-cap, after a stronger than expected increase in Q3, demand remains stable for semiconductor capital equipment in Q4. We remain well positioned in this sector with our advanced precision machining and electronics manufacturing and further demand outlook. This sector is expected to remain strong as the semiconductor capital equipment index is predicting…

[Operator Instructions] And our first question comes from Jaeson Schmidt of Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions. I just want to start, Jeff, you mentioned that your customers are being a bit more cautious than hence why you won’t see that seasonal uptake in Q4. I know there’s a variety of different moving parts given the business segments, but can you just discuss, have you seen any significant change in your overall visibility? Or just comment how visibility has changed from three months ago?

Yes. Thanks, Jaeson. Good to hear from you. I think, I’ll start with saying a little bit that that we are staying probably more stabilization and demand and not quite the level of fluctuation, certainly in Q2, it was pretty crazy and then Q3 it – there was still a lot of movement, but in the end, we landed where we felt we would. What – whereas we look at Q4, you’re absolutely right, there’s quite a few moving parts and we see continued to strengthen in Semi-Cap and Defense products and those segments. What probably was a little different than the way we thought about it a few months ago, was that we seen a little bit of softness in medical in fourth quarter with some of the COVID specific products that we had some upside, and certainly, we enjoyed some of that and some of that will continue in part of Q4. But we see some of that coming to an end, as folks, build up inventories and did what they needed to do. I think we’re getting decent visibility to it. So it’s not like this is a complete surprise, but it certainly shifted a bit over the last couple months. And that’s just what causes, when you look at our guide being more in line with Q3 than what might be a higher seasonal Q4. And I would say that that’s a bigger the driver. We’re still bullish on medical and have – not only a great win, instead of wins that we’re ramping, but that’ll really be happening for us more in 2021.

Okay. And then just going off that, sticking with the medical business, I mean, are you starting to see the funnel build backup for COVID related or COVID adjacent projects for 2021?

I would say when you – we have a very diverse medical business and we’ve highlighted 12 products that we’ve built to fight COVID and we have some exciting new therapeutic and we talked about DnaNudge as a rapid COVID test. That’s non – right on point, point-of-care, and they’ve got a great position in Europe and super excited about that. So there’s examples like that. We did build a number of ventilators, ventilators for multiple customers and the course of treatment for COVID has shifted, right. And people are going to ventilators as a last resort. So that’s an area where there was a ton of demand and people were building up stores and we’ve seen that come back down to normal levels. So there’s some kind of moving within that. When I think about our medical business though, we really have been broadly winning everything from I talked about a renal product, other diagnostic products, new ultrasound devices, new mobile MRIs, and X-Ray devices. So we have a very diverse set of products that are – you wouldn’t necessarily put under a COVID banner. I just think that, we knew some of the COVID activity was going to provide upside in the second half of this year. But we didn’t see that necessarily sustaining. I think some of the new diagnostic COVID products next year could be nice incremental business for us, but probably not as much of the emergency room things as, hopefully, we keep more people out of emergency rooms, right, in the New Year.

Okay. No, that's very helpful. And then just last one for me, and I'll jump back into queue. $1.3 million in COVID-related costs in Q3. Is that a good figure to use just for the foreseeable future or until something changes? And just relatedly, the goal for SG&A to be under $130 million next year, that includes any potential COVID-related costs, correct?

Yes. Jaeson, this is Roop. Good to talk to you. So I'll start with your latter first. And that $130 million would include some amount of what I'd characterize or we'd characterize as new normal sort of costs, right, cleaning protocol, et cetera. So that includes about that – within that $130 million annually.

$1.3 million.

No, no. $130 million annual SG&A cost. The $1.3 million is probably a little bit higher. Obviously, lower than Q2. It came down. We think it'll probably normalize just under $1 million is where we'd expect. Maybe $800,000 to $1 million as we move forward.

Okay. Thanks a lot guys.

Thanks, Jason. No worries.

Our next question comes from Anja Soderstrom of Sidoti. Please go ahead.

Hi everyone. Thank you for taking my questions. So, just to follow-up on your comments around the medical, you said, you see that might be ramping with more elective related production in 2021. Will that be an early event with 2021, or is it more in second half?

It’s funny. We believe the ramp will start in first half. We just – it’s probably not at the beginning of the year, and somewhat, that’s a little bit of unpredictable just a little bit on and how the macro economy performs, because we sort of thought, we’d start to see elective surgeries come back and some of those other activities, I think we’re probably seeing less of that at the end of this year. We’ve obviously got new programs that are outsourcing that are coming to fruition and they will help us next year. I – when I look at medical and I’ll have Roop kind of add on it, we see next year being a pretty strong growth year for us overall in aggregate. But the timing, it’s certainly will build as we go through 2021. You want to add anything?

Yes, thanks, Jeff. And so I think you’ve answered it well there. The only thing I would add is, to your specific comments, first half, second half, we’ll see it start the ramp with those new program ramps in Q1 and carrying through the year for overall sequential growth annually is what we expect on yet.

Okay. And then the fourth quarter is going to be rather soft in terms of medical?

Correct.

For this year?

Yes. Correct.

Okay. Thank you for that additional color. And in terms of Mexico, where are you standing thee now with the capacity and how you ramping down?

Mexico has been one of the more challenging regions and we still have some, it’s the one site, we’ve said we’re essentially back at productivity levels, pre-COVID, Mexico is maybe the one exception where we still have some restrictions with some high-risk folks that are out. It’s not materially changing, what our ability to deliver for customers are, so we’re not necessarily missing customer forecasts or commits on it. But it’s still a little bit of inefficiency because the sites there, do have a small percent of the population that isn’t allowed to come into the office speaker into the plant because of their risk classification. So, I would say that, we’re watching it closely, because everyone around the world is seeing upticks and we don’t know exactly what the full fall will bring, but well, we’ve been able to manage through it so far and we’re kind of staying close to it. And it’s not anything like it was back in second quarter, but still a little bit more disrupted there than anywhere else in the world.

Thank you. And how impactful is that additional costs for you and is that going to fall off – and actually come out of COVID or?

Well, it’s kind of embodied in that $1.3 million that Roop talked about, right. That was quite a bit less than, when we were $4 million, a few quarters ago. So, we’re – we believe that it’ll be like Roop said on under that $1 million level and that’ll include, paying people that may stay home or whatever has required to protect the folks there. And so, it’s not a major driver now that could change if restrictions changed and things amp up because of the caseload and all that. It certainly feels like people are trying to figure our way through it without shutting down of companies and facilities and all that. But that’s, I guess that’s the risk, but right now that’s not how we’re thinking about it. We’re thinking that it’s at that $1 million level.

And Anja, maybe I’ll just add to that. The SG&A range being relatively flat between Q3, Q4 contemplates that at our overall margin being 9% to 9.1% in Q4 also contemplates that. So it’s kind of all inclusive.

Okay. Thank you. And then in general people speaking about them manufacturers moving out of China, is that something you see, I know you have a small footprint in China, but is that something you see and are you beneficial to have a bigger footprint than in the U.S. and Mexico and elsewhere in Asia?

Yes. We certainly have seen an increase in people wanting to source not only domestically, but also in regions that are closer to where the end demand is. So if you – for example, we used to build everything in China, and even some of it was coming back to the Americas. You might see that now going to Mexico as an alternative. So we've seen incremental demand in our Mexico facilities where people want a low-cost region alternative but maybe don't want to be all the way over in China. Our own China plant, we have moved some customers within our own network. If they want to stay in Asia and maybe Thailand or Penang is a great alternative to them. But we've also got a number of customers in China that are ultimately selling into that market. And so we're building the product for that region, and they're not impacted by tariffs because it's not coming back. And that's why it's still makes sense for us to have support in the region. We just have the one facility, as you said. So it's not like we've got a huge exposure that half of our production capacity is there. In fact, we have more approaching half in the U.S., which is pretty appropriate given our mix and our focus on the defense sector as well as FDA medical products. And we definitely see – we definitely don't see people moving away from U.S. manufacturing, and there does seem to be more people that are looking to outsource and stay domestically. And so that's a good trend for us.

So do you see maybe that being a driver for new logos coming on board? Or is it more with existing customers you see this...

The pipeline definitely has improved for us. We've seen about a 30% improvement in overall pipeline of opportunities. Some of that is though the trend that outsourcing in general, more people are like in a tough economic environment, people are deciding where is my differentiation? Maybe I'm really good at product development, but why do we need to build my own product? Maybe I'm not as competitive as what Benchmark could do for me. Or I might need help with engineering or test development, and I can rely on someone like Benchmark to do both engineering and manufacturing. So that trend is serving us well. Plus in the high-value markets we participate the penetration of outsourcing really hasn't reached 50%. So there's still a lot of companies building their own products that this is a time to really decide whether they want to continue doing that. On top of that, though, yes, there is an adder for companies that may be manufacturing in Asia that they want to come back to the U.S. and be in region. And that's a piece of the incremental demand that we're seeing. But I think there's a couple of good secular trends that are really supporting. I wouldn't put it all on that move from China back to the U.S. But when you add it all together, it bodes pretty well for the future potential and new logos coming on. And we're seeing some bigger companies in our mix, which is great. And we're also seeing repeat business from companies that are strategic to us, and that speaks to their customer satisfaction, which right now is – we're doing pretty well and our measures on that. So that's encouraging.

Thank you. And then lastly, just to circle back to business came about what you see in sort of end market demand and your customers. And as it relates to your revenue guidance for the next two years. I can agree with maybe 2021 being a little bit muted at 5%, but I would expect that to maybe accelerate in 2022 as we hopefully are sort of seeing a light at the end of the tunnel there?

Well, what I think we're all trying to judge the macro environment. And what I think we wanted to do is, look, we didn't want to go out three years, right, in this environment that seems pretty far away. But we did want to give a little bit of a midterm model over the next two years through 2022, how are we thinking about the business. We also wanted to give share that – while we brought SG&A down dramatically this year because of all the furloughs, pay cuts and things we did, that we also did some structural things through this quarter to bring our footprint down. So as we restore some of those temporary actions, we keep SG&A at a manageable level and in line kind of with revenue opportunity. But when you think about the growth prospect for the company, I think we – Roop and I would also say that a lot of what we're looking at is based on the wins that we've won and new business coming on that will ramp over the next two years. The headwinds that we're facing are the macroeconomic environment, the – some of the existing industrial products like oil and gas. We don't see commercial aerospace coming back in 2021. And so those are actually bringing our growth rate down, but we have enough momentum that we're overcoming that. As you get to 2022, I would be inclined to say if that macro environment improves, then you're going to like the upside growth a lot because we're growing organically based on new business not counting on a really significant upswing in the macro environment and the return of the current customers because we have lost any customers through the downturn. But oil and gas is up 20%, 30%. Aerospace is off 40%. Even some of the elective surgery medical, we see off 10%, 15%, maybe. So as that all comes booming back, which hopefully, it's in late – hopefully, it's in the second half of 2021, maybe 2022, I think that could be a sweetener and certainly helped the demand outlook in line with your comments.

Okay. Thank you very much. That was all for me.

Thanks, Anja.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Lisa Weeks for any closing remarks.

I just wanted to put in a reminder that Benchmark will be supporting a number of virtual conferences before our next earnings call in February. On November 19th, we will support the NYSE Industrial's Investor Day. On December 8th, the Raymond James Technology Investors Conference, and on January 13th, we will support the Needham Growth Conference. We will look forward to engaging with you during these events. In the meantime, if you have any further questions, please feel to reach out to us, and we'll be happy to follow up. Thank you, and hope you all have a great day.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.