Benchmark Electronics, Inc. (BHE) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Benchmark Electronics Incorporated First Quarter 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 Paul Mansky, Benchmark Investor Relations. Please go ahead.

Thank you, Anthony, and thanks everyone for joining us today for Benchmark's first quarter fiscal year 2022 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 first quarter of 2022 and we 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 be discussing forward-looking information. As a reminder, any of today's remarks that are not statements of historical facts 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 due to the ongoing impact of global supply chain constraints and COVID. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeff will begin by covering a summary of our first quarter results and new program wins. Roop will then discuss our detailed financial results including a cash and balance sheet summary and our second quarter 2022 guidance. Jeff will then return to discuss our sector outlook, provide a progress report on our strategic objectives and then close with directional commentary on how we're viewing the year relative to our mid-term model before opening for questions. If you please turn to Slide 3, I will now turn the call over to our CEO, Jeff Benck.

Thank you, Paul. Good afternoon and thanks to everyone for joining our call today. Hopefully by now you've seen our press release and the strong results we delivered for the first quarter. We've made tremendous progress towards the strategic objectives and the midterm model we set out to achieve back in October 2020. I'm pleased to report the March quarter was a continuation of this trend. As you no doubt heard repeatedly from companies across various industries, significant global supply chain challenges persist and COVID disruptions continue, particularly in Asia. Despite this Benchmark once again delivered revenue and non-GAAP EPS above the high-end of our guidance range in the first quarter. Revenue of $636 million was $51 million above the midpoint of our guidance and up 26% year-over-year. This was the largest revenue quarter we've had since the fourth quarter of 2018, well before the pandemic. The revenue outperformance in the period was primarily driven by strength in our semi-cap and industrial sectors. Our non-GAAP gross margin in the quarter was 9.1% in line with guidance. Amid the backdrop of supply constraints and tight labor, we've been absorbing some costs and partnership with our customers. We're working on recoveries as appropriate, which will be reflected in the second half. We've also been strategically acquiring inventory to help meet our growing demand. These are conscious investment decisions we're making today in order to drive greater opportunities tomorrow. In the near-term, this will have a temporary dampening effect on our gross margin expansion. We expect that by the second half of 2022, our gross margin will – expansion will resume. Turning to operating margin. With the high revenue base, we're able to leverage our operating expenses translating to non-GAAP operating margin of 3.4%. As a reminder, our non-GAAP operating margins include stock-based compensation expenses. Excluding these expenses, our non-GAAP operating margin in the March quarter would have been greater than 4%. Non-GAAP earnings per share was $0.44 as compared to $0.21 in the year ago period, representing 110% year-over-year growth. As mentioned previously, the March quarter results were achieved with a backdrop of supply chain count – challenges, further COVID related disruptions and some of our facilities in Asia. And if those challenges weren't enough, we even had tornado damage on our site, our Austin site, and disrupt production for a week. Yet we overcame. I want to thank our teams across the globe for their incredible perseverance, which enabled these results, but there is room for further improvement. In the first quarter, we estimate that we were unable to fulfill over $200 million of demand requested by our customers. Unfortunately, our backlog of unfulfilled demand continues to increase as component supply is still severely restricting our output. Thanks to the diligent efforts of our supply chain and operations teams. We were able to fulfill a meaningful amount of the demand in the period and even outperformed against our initial customer forecast for the quarter, which enabled our first quarter 2022 upside. However, demand is continuing to increase. Unfortunately, we don't see a broad improvement in supply constraints throughout 2022, given the disconnect between current demand and our ability to fulfill it coupled with the expected continued strength in new bookings, our operations teams have been strategically building inventory as it becomes available. This will enable us to maximize throughput in our operations when longer lead time components arrive. Please turn to Slide 4. Our go-to-market organization working closely with our functional teams continues to secure new wins, both from our existing customers and our new accounts across our targeted sectors. Let me highlight a few of those exciting wins for Q1. In medical, we awarded new design and manufacturing programs for an ophthalmic therapy device as well as manufacturing on an image guided radiation platform. We were also ordered a design program for a neurological monitoring system. In semi-cap, we continue to win design awards for wafer handling and processing in support of next generation semi-cap tools. This past quarter, we secured new engineering wins for lithography submodules and metrology systems and a manufacturing program for planarization modules. Benchmark is proud to enable our customers to provide some of the most complex process technology on the planet. In the A&D sector, we were awarded the manufacturing of a ruggedized RF SATCOM device, as well as an encryption and secure communications platform. We were also awarded the design and engineering of an RF module used in a lower orbit space application. During the quarter, we were pleased to announce the key new partnership with Dynetics, a division of Leidos whereby Benchmark will be manufacturing the electronics for the enduring shield defense system. Dynetics selected Benchmark due to our deep experience and reputation in the A&D market, where we are known for our full product lifecycle support from design to new product introduction to aftermarket services. In industrials, we were awarded the manufacturing program for smart climate control devices, which is nicely aligned with our commitment to sustainability. Elsewhere we secured a new logo for manufacturing robotic subassemblies to be used in warehouse automation. We were all also ordered a design and engineering program for the redesign of controllers going into construction and agricultural equipment from a well known market leader in the space. In computing and telco, we want new manufacturing programs for a high-end computer power subsystem, which was a new logo for us as well as a broadband network power assembly representing another in a growing portfolio of next generation broadband wins for Benchmark. We were also awarded the design responsibility for a specialized high-end computing platform to be used in crypto applications. We continue to see a mix shift within computing and telco from legacy applications to leading edge technologies and are pleased with the quality of new complex wins in this sector. Further bolstering this shift and creating new opportunities for Benchmark has been a renewed focus on restoring manufacturing of these systems and platforms to the U.S. We look forward to incrementally participating in this emerging trend. Our new business pipeline continues to grow across our targeted sectors and we remain very encouraged about the prospect for continued wins, where more OEMs are looking for strategic outsourcing partner that could take on both manufacturing and engineering projects to help them get to market faster and scale efficiently. I will discuss our momentum in our various sectors later in the call and provide an update on our progress against our key initiatives. But first, I'd like to turn the call over to Roop go into the details of our first quarter performance and our guidance for the second quarter. Roop, over to you.

Thank you, Jeff, and good afternoon. Please turn to Slide 6 for our revenue by market sector. Total Benchmark revenue was $636 million in Q1, which is flat sequentially and 26% higher year-over-year. Medical revenues for the first quarter decreased 8% sequentially and increased 8% year-over-year. We expect medical sector growth through the rest of 2022 from new programs ramping and improving demand with existing customers. Semi-Cap revenues were up 12% sequentially and 62% year-over-year, demand levels throughout 2022 remain high for our complex precision machining and large electromechanical assembly services, which are primarily related to front-end wafer fab equipment. A&D revenues for the first quarter decreased 14% sequentially and 9% year-over-year from program transitions. Industrials revenue for the first quarter were up 10% sequentially and 44% year-over-year from demand improvements from oil and gas, building infrastructure and lidar applications. Overall, the higher value markets represented 82% of our first quarter revenue. In our traditional markets, computing was down 8% sequentially, but 26% year-over-year from the planned ramp of high performance computing programs. These programs will continue to ramp through the remainder of 2022. In the telco sector, revenues were down 2% sequentially, but up 12% year-over-year, primarily from demand improvement for satellite programs and new broadband ramps. In the first quarter, our traditional markets represented 18% of revenues and our top 10 customers represented 51% of sales. Please turn to Slide 7. Our GAAP earnings per share for the quarter was $0.31. Our GAAP results included restructuring and other one-time costs totaling $4.3 million, $2.3 million related to the closure of previously announced sites in San Jose, California, Angleton, Texas and Moorpark, California, and other small restructuring activities throughout our global network aligned to future business focus as well as a $2 million loss on the sale of assets held-for-sale related to certain manufacturing capabilities that we exited in 2021. For Q1, our non-GAAP gross margin was 9.1% consistent with the midpoint of our first quarter guidance. Sequentially gross margin is lower through the mix of our revenue in Q1 and operational inefficiencies caused by the continued supply chain challenges in COVID disruptions. On a year-over-year basis, we are higher by 80 basis points through the revenue level and mix. Our SG&A was $36.3 million, which was down 4% sequentially due primarily to lower variable compensation. Non-GAAP operating margin was 3.4%, which included 70 basis points of stock-based compensation expenses. In Q1 2022, our non-GAAP effective tax rate was 19.3%. These are the mix of profits between the U.S. and foreign jurisdictions. Non-GAAP EPS was $0.44 for the quarter, $0.09 higher than the midpoint of our Q1 guidance based on higher revenue. Non-GAAP ROIC was 9.3%, a 70 basis point increase sequentially and a 290 basis point improvement year-over-year. The improvement in our non-GAAP ROIC as a result of the continued profit growth from revenue strength and gross margin improvements. Please turn to Slide 8 to review our cash conversion cycle performance. Cash conversion cycle days were 82 in the first quarter, compared to 69 days in Q4 with the increase primarily due to our investment and inventory to support the strong customer demand across our market sectors. Please turn to Slide 9 for an update on liquidity and capital resources. We use $68 million of cash in operations and invested $18 million in CapEx. The CapEx investments added capacity throughout our network, especially in our Mexico and precision technology sites. We expect to use cash to support inventory and capacity expansion in the first half of 2022 and are still targeting cash flow from operations to be between $40 million and $60 million for the full year. We expect our CapEx spending in 2022 to be between $50 million and $60 million. Our cash balance was $245 million at March 31, with $94 million available in the U.S. Our cash balances decreased $27 million sequentially. The decrease in cash is primarily due to the investment in inventory. As of March 31, we had $131 million outstanding on our term loan, $73 million outstanding borrowings against our revolver and our cash net of debt is a positive $42 million. Our strong balance sheet borrowing capacity will enable us to support our growing revenue and increasing customer demand. Turning to Slide 10 to review our capital allocation activity. In Q1, we paid cash dividends of $5.8 million, which represents a dividend yield of approximately 2.8%. A total share repurchases in Q1 were $5.5 million, which represented approximately 214,000 shares. As of March 31, we had approximately a 159 million remaining in our existing share repurchase authorization. At a minimum, we will continue to repurchase shares to offset our annual equity dilution. Beyond that, we will evaluate share repurchases opportunistically while considering market conditions. Please turn to Slide 11 for a review of our second quarter 2022 guidance. We expect revenue to range from $615 million to $655 million, which at the midpoint represents a 17% year-over-year growth. For the second quarter, we expect the medical sector to grow sequentially based on increasing demand with existing customers and new program ramps. We also expect sequential growth in A&D although still challenge we are beginning to see some improvement in aerospace and expect defense to gain momentum later in the year. Supply chain constraints are affecting our Semi-Cap, industrials, compute and telco sectors in Q2, more significantly than in Q1. Notably in Semi-Cap, third-party constraints are expected to have a near-term impact on this sector's performance. As such, after a particularly strong March quarter, we expect Semi-Cap revenues to be modestly down sequentially in June. Meanwhile, our industrials, computing and telco sectors are expected to be roughly consistent quarter-over-quarter. We expect the timing of material availability will improve for each of these sectors through the year. The demand environment remains strong and in each sector demand outpaces supply. We have over $200 million in unfulfilled demand with our investment in inventory and capacity as this demand moves into few quarters, we'll be able to fulfill it. We expect that our gross margins will be between 8.7% to 8.9% for Q2 and SG&A will range between $34 million and $36 million, implied in our guidance is a 3.2% to 3.4% non-GAAP operating margin range for modeling purposes. The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs. We expect to incur restructuring and other non-recurring costs in Q2, approximately $800,000 to $1.2 million. Our non-GAAP diluted earnings per share is expected to be in the range of $0.39 to $0.45 or a midpoint of $0.42. Other expenses net is expected to be $2.6 million, which is primarily interest expense related to our outstanding debt. We expect that for Q2, our non-GAAP effective tax rate will be between 18% and 20%. The expected weighted average shares for Q2 2022 were approximately $35.5 million. In summary, our guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base operations or customers. Guidance also assumes no material changes to end market conditions and our operations due to COVID. And with that, I'll turn the call back over to you, Jeff.

Thanks Roop, for that update. I will start with providing some additional color on our view of demand by sector and the anticipated contribution to our growth this year on Slide 13. In Semi-Cap, revenues have grown double-digit year-on-year for 10 consecutive quarters through Q1 2022. And we expect Q2 to be number 11. On a sequential basis, the strong March quarter, coupled with incremental constraints from outside service providers will affect sequential performance. We believe this is going to be temporary and expect sequential growth again in the back half of 2022. More broadly, we believe we are in the midst of a semiconductor super cycle, which will last into 2023 and possibly beyond, driven by increased silicon content and nearly every corner of the market. The growth in new domestic semiconductor fabs and post-COVID demand recovery. We remain well positioned in this sector to support the breakthrough technologies developed by our customers with our design precision machining and electronics manufacturing capabilities. For the full year, we continue to expect revenues to grow 10% to 15% in this sector over 2021 levels. In our medical sector, we were down sequentially in Q1, and it was entirely materials related. Medical is our most acutely affected sector relative to supply chain issues. We expect these constraints to start to ease in the second quarter and predict the medical sector to be our fastest growing sector for the year. Growth will be underpinned by higher demand from existing programs and a large number of new program ramps and ultrasound imaging, cardiac care and diagnostic devices, where we will leverage our deep expertise in design and manufacturing for complex medical products. In industrials, we expect revenue in the June quarter to remain roughly consistent with the higher levels from Q1. Sequential growth from this level is expected to resume in the back half as new program ramps and advanced lidar applications, energy management systems, and IoT-enabled smart devices begin volume ramps. For the full year, we expect the industrial sector will grow above the corporate average. Moving to the A&D sector outlook. We have seen some mitigation of improved demand from both the aerospace and defense sectors. Within defense, we continue to see strengthening bolstered by budget increases, while aerospace is showing some early signs of recovery. Sequentially, we expected to be growth in June, largely as a function of delays in March coming through in June. However, with many of our recent design wins, not expected to materially ramp for several quarters, we continue to anticipate growth prospects within A&D to be muted in the current year. Within telco, we expect June to be roughly consistent with March, but remain optimistic for growth prospects in 2022, driven by broadband infrastructure wins ramping aggressively throughout the year. The world is becoming more connected and government programs aim to enable broadband from anywhere and increased SATCOM adoption around the world provide an excellent backdrop to support further growth. Finally, in computing, we are planning on the ramp of some new high performance computing programs in second half of the 2022. But program development timing may see some of this demand slipped into 2023. For the second quarter, we expect revenue to remain flat to March quarter as ongoing supply chain constraints will limit sequential growth. On a year-over-year basis, however, the midpoint of our guidance represents 17% growth. Looking deeper into the year, we are confident in our ability to continue to grow as our fundamental demand and growing backlog outpaces our ability to fulfil in the near-term. We are positioning ourselves to meet this demand over a multi-quarter basis. But for all the reasons, we’ve articulated predictability in the out quarters remains below levels, we would prefer. We do, however, believe we are positioned to deliver at least modest sequential growth for each quarter in the back half. Turning now to our strategic objectives on Slide 14. Headed into 2021, we laid out three strategic imperatives, grow revenue faster than the EMS market, invests in infrastructure and talent for sustainability and grow earnings faster than revenue taking advantage of the leverage in our model. In looking at these objectives, they are as equally applicable today as they were then. Not only do they remain central to how we manage the business, but they are also core tenants to achieving or overachieving the mid-term financial targets we set out to achieve by the time we exit 2022. As such, we intend to continue reporting our progress on each of these objectives during the year. First, we said we would grow revenue even in this constrained environment. The investments we have made both human and capital coupled with new program wins based on our strong differentiated value proposition began to deliver a return on that investment in 2021. This growth was supported by renewed program win momentum at existing customers and an acceleration in bookings amid new customer locals. As programs can take years to fully ramp, second half 2021 and early 2022 are beginning to show the fruits of that labor. Revenue in the March quarter grew 26% year-over-year representing the fourth quarter in a row of year-on-year growth. Part of our differentiation and why we win is our superior engineering services. These services are key in any market conditions, as they’re a value-added gateway to deeper partnerships and greater opportunities. However, in times of labor tightness, they take on an increased significance as it represents the source of flex capacity for our customers who might otherwise have the ability to quickly add resources to support a new program. This high value engineering work is opening doors to incremental manufacturing opportunities for Benchmark. Our objective was to achieve a 70% attach rate of engineering services to manufacturing bookings. We are pleased to report that in the first quarter, we achieved that goal. Second, we said we would invest in sustainable infrastructure and talent. Over the past year, we’ve continued to make investments in shared services, such as human resource systems, employee development and cybersecurity to ensure that our shared infrastructure can scale. We are also investing in to add capabilities in engineering and manufacturing as requested by our customers, while effectively managing our SG&A expenses. Also to meet customer demands, we continue to invest in physical capacity, particularly in our precision technology sites in support of continued growth in our semi-cap sector. In parallel, we’ve made meaningful progress on our ESG and sustainability initiatives, culminating last month with our publishing of Benchmark’s first annual sustainability report, which lays out our current state, plans and progress on our ESG journey. I encourage you to download a copy from our website to learn more about our progress in this important area. And third, we said we grow earnings faster than revenue. Building upon our commitment to return to revenue growth, we set the objective to deliver leverage to the bottom line at both the growth and operating expense line – operating expense lines. Supply chain headwinds notwithstanding, our increased volumes, manufacturing efficiencies and a mix shift to higher margin products combined with operating expense controls on the higher revenue level has improved operating margin leverage. In the first quarter 2022 non-GAAP earnings grew 110% year-over-year and grew 4x faster than the already impressive rate of revenue growth. Suffice to say, I’m proud of the way we continue to execute to the plan and am confident that with our backlog of demand and strong bookings momentum, we are well positioned to continue to deliver to our objectives throughout the rest of 2022. Let’s now turn to Slide 15. Back in the fall of 2020, we laid out the midterm model for the company, which we committed to achieve by the time we exit 2022. In 2021, we made steady progress against these goals laying a foundation to build on in 2022. I’m please report that in Q1 2022, we achieved three of these four targets. Revenue growth of 26% is at multiples of the EMS market growth rate and represents significant share gain in the high value markets we participate. With quarterly revenue now above the 2019 levels, this demonstrates that we not only overcame the COVID revenue impact of the last two years, but we also overcame the revenue loss of a major low margin customer program that we decided to not renew. With the higher revenue and continued operating expense discipline, we also achieved our non-GAAP operating expense ratio target coming in at 5.7% in Q1, which was better than our target of less than 6%. Finally, we delivered non-GAAP operating margin in March of 3.4%, which was at the bottom end of our target range. Clearly we have room for further improvement, but while others have been cutting their forecast due to supply chain issues, our team has overcome these external challenges and stayed focused on continuing to improve our business model, while we build a foundation for sustainable growth. In summary, if you will turn to Slide 16. Benchmark is encouraged by the demand trends among our target sectors. And we’re confident we have the team, know-how and differentiation to go after it. With this as the backdrop and in consideration of our March quarter performance and our June quarter outlook, we expect 2022 revenue growth to be above our midterm model at 10% or better, depending on our ability to close supply. With our current revenue level, we expect non-GAAP operating expenses for the year to come in on track to our midterm model of less than 6%. Finally, we anticipate some of the operational detractors to gross margin we’re facing in Q2 to improve in the second half of 2022, which will translate to a stronger operating margin. The improvements in the second half will enable us to achieve the midterm model and grow earnings faster than revenue. I look forward to updating you on our continued progress in the coming months, as we successfully navigate these interesting times. With that, I’ll now turn to [Audio Dip] to help us conduct our Q&A session. Operator, over to you.

Thank you. [Operator Instructions] Our first question will come from Jim Ricchiuti with Needham and Company. You may now go ahead.

Thank you. Good afternoon. Congrats on the quarter. I wanted to go back to the two segments that clearly outperformed industrial and semi-cap. Obviously, those areas where I think well stronger than I believe you were expecting back in early February. So I’d be interested to maybe if you could talk about both of those market verticals. Was this a case of you being able to procure components that allowed you to ship? Or was it just some other dynamics within these two market verticals? Thanks.

Yes. Well, maybe I’ll start and then let Roop add in here. This is Jeff. Thanks Jim, for the question. In semi-cap, we do, do quite a bit of assembly work, but we also do a lot of precision machining, which is quite a bit different, right? It’s not as dependent on electrical components or board builds or the likes. So that’s just sophisticated high precision machining work. We’ve continue to work on our operational efficiency to be able to put more output out. We’ve also invested in capital to continue to increase capacity and brought more online. So it’s an area we’ve been going after for a while. And the demand has been strong. We know we’re in a bit of a super cycle there. We do believe that’s going to extend into 2023. It gets cloudier as you go way far out. But there’s certainly a lot of people indicating this is a very unique semi-cap cycle. And the frontend way for equipment – capital equipment providers are relying on us to produce many parts across several customers in that segment. And we’ve had demand, but it’s also it’s really been upon us to make sure that where we do need components or even raw materials that we can get them. And we did a bit better in first quarter. On industrial, if you remember, it was a few short years ago, we weren’t happy with our performance there. We had made some changes. We’d won a bunch of new programs and frankly, we’re seeing some things ramped there. And that timing is always a little tough. This is a very difficult environment to ramp new programs as you’re pursuing parts and working to get those. We’ve been working within partnership with a number of customers to kind of free things up. And it’s the kind of environment where a lot of the components may arrive really late in the quarter. And it really comes down to how well the team can execute to make shipments to our customers. And frankly, the demand has been there. The output is a little more unpredictable or not unpredictable, but hard to call exactly because of the timing of the materials coming in. And so, we executed well, I get accredit our team even in the face of, we still have disruptions with COVID. We mentioned in the script, we had a tornado hit a building in Austin that was disrupted there for a week. We’ve just done a nice job of staying focused on delivering on that. Roop, do you want to add anything on those sides?

You covered it really well. Just one thing in each area, really with the strengthening in the semi-cap is across our customer set. And that’s an improving trend if you will, across all those customers. And on the industrials, we’ve got a lot of ramps, new program ramps and our operations teams are really ramping effectively. And we proactively have put in capacity in place in support and as we mentioned in Mexico as an example for the industrials. And so that’s helping support the performance as well.

That’s helpful color. I just wanted to follow-up with a question on the build and inventory. Can you say whether this inventory build as we think about it is specific to customers or verticals or is there still a large component of commodity components that are associated with this build up in inventory?

Yes, Jim. I’ll start. This is Roop. The inventory build is purposeful with the amount of strength that we have on the demand side and the amount of unfilled demand that we mentioned. There’s strong demand across the board in all of our sectors. The other aspect here is, the supply chain environment continues to be very challenging. Those challenges cut across the various component categories. The other thing is you’re seeing late de-commits and reschedules and these sort of things. And so really our ops teams have done a really effective job in working with our customers to understand what the forecast looked like prioritizing that forecast and identifying the parts to support the bills that that we are executing. And so, as we think about this inventory, it’s purposeful, it cuts across and it’s not just – the primary build-up is in the raw materials area, and it really is across all of those sectors. So we can get those parts to be able to fulfil as those parts come in the demand levels that we have across the sectors.

I might just add to that. Jim, we don’t – we’re not chasing broad commodity categories. It’s very much linked to the demand of a particular customer and their program. So it’s not like we’re buying parts to be just for the sake of aggregating. We do aggregate demand if customers have the same component across multiple customers or programs, of course, to leverage our scale. But we’re not – we're – it's related to the demand and the forecast that's committed by customers. And frankly, they're obligated based on that forecast. So, it's not like we're just thinking, hey, let's try to corner the market on resistors or even some kind of semiconductor. It's really related specifically to the build materials that we might be building for those customers. I just wanted to clarify that.

Got it, Jeff, thanks for that. And maybe just it really ties into when you guys talk about medical being, for instance, the fastest growing piece of the business for all of 2022. I assume that you've got some confidence about that just because of the way you are procuring some specific parts for these…

Yes. And we mentioned that I can't remember if it was Roop or I that the medical was probably a little more acutely impacted because the way the demand came back in medical for our customer set, the demand start to recover, but it was further in the last year than it wasn't at the beginning of the year. And so by the time they started recovering the lead times that already really extended. And so, it's taken a bit longer to get the line, the clear to builds on the medical side. It's not a problem in demand. And it was a little bit down, which a little lower than we had initially anticipated in Q1, but we know the demand is there. We are starting to free things up. That will continue to improve through the year. And that's what gives us confidence to still call medical a fast growing segment that that it really hasn't – we didn't demonstrate that in Q1…

Got it. Thank you.

Our next question will come from Jaeson Schmidt with Lake Street. You may now go ahead.

Hi, guys. Thanks for taking my questions. I just want to circle back to sort of the upside in Q1. Was that driven by a handful of programs? Or was it pretty broad based?

I would say it's – as we mentioned in answering Jim, right, semi-cap and industrials really help to drive a primary level of strength there and there is a number of customers across both of those market sectors within that Q1 period, Jaeson. Yes. A number of the – a several of the sectors were up year-over-year, but those two were the leads and that's why we called them out.

Okay. But not just a select number of programs within each of those end markets.

No, as we said that was semi-cap. We had several customers that were pressing for incremental product. So it wasn't – yes, it wasn't like one unique – I mean, it was really broad based strength, I would say, for sure.

That's right.

But those two sectors contributed the most.

And Jaeson, as we mentioned earlier, in the industrial sector we've got a lot of new programs that are ramping and that's helping support that as well.

Okay. Got it. And then I know you alluded to it in your prepared marks, but how are you thinking about potential kind of COVID restrictions in China? And I guess, relatedly given that your footprint over there is much smaller than some others in the space. Have you started to see increasing – sorry inbound interest for you guys?

We – I'm not sure I understand that second question. What do you mean by inbound interest?

I mean, just looking at customers, not wanting to run their programs through the China facilities…

Oh, okay, okay. Yes. Yes, yes. Well, I could speak to both. It's kind of a two part question and then I'll let Roop to add. In terms of COVID, obviously Asia is going through a bit of the Omicron and some of those cycles that the U.S. went through early, very early in the year. So we're watching China closely. Obviously, we watched Shenzhen and some of those areas get impacted the end of last quarter, didn't impact us. We were able to mitigate that where our facility is in Suzhou has not been infected, but we're watching it close, because China is going through a bit of a surge here that others aren't. The other regions in Asia for us like Malaysia and Thailand, we've been dealing within disruptions through first quarter. It feels like things are stabilizing, which we feel good about in the sense that hopefully they're going to see the same kind of recovery that we experienced here. And then in terms of demand we do, like you said, have one facility in China. We build China products for sale in China, so that's worked well for us. But we have had other customers come to us, not our own customers saying, hey, we'd love to be in low cost region, but we want a near shore to the U.S. And so, we're seeing a lot of demand in our Mexico facilities. We have a couple. And so, there's no question that's not a new trend, but we have had a number of competitive wins in Mexico, probably with people saying not so much they want to leave Asia because we see good demand in Thailand for example, but they just might say, hey, I want to build more regionally with all the supply chain restrictions and the cost of freight, everybody is sort of saying, hey, it's not, so – it's not so great to build everything in China and put it on a boat. We might want to build closer to the consumption, but it might still be really sensitive about being a low cost region. So we're seeing that distribute demand nicely over our footprint globally. That same goes to Europe too.

Okay, that's very helpful.

Same goes for Europe. We're seeing a lot of interest in our Romania…

Regionalization, yes.

Yes.

Okay. And then just the last one from me and I'll jump back into queue. You did allude to some decommits, which I think is consistent with what you said last quarter and it may be too difficult to give an exact number and certainly not looking for that, but how should we think about the stickiness of that kind of $200 million in unfulfilled demand? I mean what's – how are you thinking about potential decommits within that pipeline?

Well, I think, we are always very cautious in evaluating what that unmet demand is. And is there a risk that it potentially can be get decommitted or is perishable? Yes, and I think we've alluded to that in past periods. What we – although we haven't seen that specifically, Jaeson, right. What we've seen is actually a growth in overall demand. And as we have evaluated that pipeline of unfulfilled demand, we've seen it roll into subsequent periods and customers being committed to that and demand that they're seeking.

And in terms of decommits, I mean, we kind of hoped, maybe naively in the second quarter of last year that, hey, by first quarter of 2022, we would be flushing parts and it's just been – it's been a challenging environment and I think Q1 wasn't any really significantly better than the back end of 2021. And so we still have suppliers, unfortunately, that stuff has been out over a long time and a decommit can happen. It's hard for us to characterize that it's not across one given component supplier, but we still are seeing some disruption there. And that's why when we look out and think about the second half of this year, we feel confident enough to take our growth rate from what we said was going to be seven to double-digits, but just a lot of specificity beyond that, particularly in the out quarters in Q4. And it's just hard to fully appreciate whether the environment will be more predictable from a supply standpoint. But as we kind of demonstrate with the numbers we've been putting up and with the rollover of demand that we can't fulfill in the quarter, we have a lot of opportunity from the demand side, if we can get supply.

Okay, perfect. Appreciate the color guys. Thanks.

Thanks, Jaeson.

[Operator Instructions] Our next question will come from Anja Soderstrom with Sidoti. You may now go ahead.

Thank you for taking my questions and congratulations on the great quarter despite the challenging environment.

Thanks Anja.

So I have couple of follow-ups actually, first in the medical, you said, this kind of software first quarter was mainly due to supply chain challenges, but the demand is there. So if the demand sort of back to the pre-COVID levels, or is it still building up or how is that trending?

I think that's fair to say that it's returned to pre-COVID level. Maybe customers have optimism and been able to do more. It's a little hard because people paused and a lot of like elective service injuries. So it might even be above pre-COVID in some customers because there people put off things. So the demand is very high, but maybe that's not going to be the steady state level over time. But I think that's one element. The other element and Roop alluded to this is that we've had strong bookings for two years in a row. So those book things in medical can take three years to come to market. And so we do have a fair number of new customers added to the mix too. So that's also why our confidence in medical growth is pretty good.

Okay. Thank you. And then in terms of China, you said you don't see maybe a direct impact on that, because it's not really affecting the regions you are in yet, but do you see maybe an indirect impact among being more challenging for you to get components because other players are affected?

Yes, I guess Anja, let's clarify a couple things. And so yes, we have electronic suppliers in China. We do see effects from that. So we want to be clear about that, from a overall supply chain standpoint. With that said, our teams have managed that fairly effectively in helping support the continued growth and commitments with our customers, right. The other part of it is, our China factory just as in Suzhou, just as all of China has been dealing with COVID have been managing effectively through any kind of COVID considerations in these sort of things. And we haven't seen as others may have in Shenzhen or other places, any stoppages to-date.

But they're pretty strict, right, there's multiple times a day COVID testing. I mean, it's complex right now to operate in the environment. We're fortunate our region hasn't had a formal shutdown. When Shenzhen went – did go down because it's sort of electronic center. I mean, we were glad had that it was a week and it didn't persist because if that were to go down for a significant amount of time, it might affect one of our components suppliers more dramatically. So you say this four or five days really matter. I mean, right now everything matters, but we're not alone in that. I think a lot of the world lives with a lot of boards and components coming from that region. So we're all paying close attention, but I don't think we have any unique risk there. In fact, as you know, with more of our competitors, I mean, we probably have the smallest actually factory footprint in China. But we do have the one facility in Suzhou.

Okay. Thank you. And then in terms of the inventory level, you say I mean, I understand you are procuring inventory to be ready when the components come in, but do you expect that to sort of remain at the same level throughout the year as in the first quarter?

Yes. I mean, it's interesting Anja, the way we kind of see it is the supply chain market is going to continue to be challenging through the year, but as we look at how our inventory will track through Q2, we think that this period really will be kind of the peak in Q2. We do expect it to have a gradual decline as we get through 2022 and continue to fulfill against the demand we have.

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

Thanks Anja.

Thanks.

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

Thank you for joining our call today. If you have any follow up questions as always, we encourage you to reach out to the Investor Relations department and we'll be happy to get those addressed. Outside of that, wish everyone a happy afternoon or evening, depending on your location, and look forward to sharing with you our second quarter results in July with July's earnings call. Thank you very much.

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