Good afternoon, and welcome to the Benchmark Electronics Inc. Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Mansky, Investor Relations and Corporate Development of Benchmark. Please go ahead.

Thank you, Andrea, and thanks, everyone for joining us today for Benchmark's fourth quarter fiscal year 2023 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 pertaining to our financial performance for the fourth quarter of 2023, and we have prepared a presentation that we will reference on this call. Both are available online under the Investor Relations section of our website at 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 to the presentation. Please take a moment to review the forward-looking statements disclosure on Slide 2 in the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks, which 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. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeff will begin by providing a summary of our fourth quarter. Roop will then discuss our detailed financial results and our first quarter guidance. Jeff will then return to provide more insight and a demand trends by sector, business wins and then closing remarks. If you'll please turn to Slide 3, I will turn the call over to our CEO, Jeff Benck.

Thank you, Paul. Good afternoon, and thanks to everyone for joining our call today. The fourth quarter was another period of solid execution for the company. Despite some revenue softening, which impacted our top line, we met or exceeded all other objectives for the quarter. And this directly reflects the company's focus on operational execution. Let me step through a few highlights in the quarter. Total revenue of $691 million was down high single digits year-over-year, and mid single digits sequentially. I will point out that supply chain premiums or SCP have normalized ending the fourth quarter at slightly below $8 million versus $46 million in the same period last year. Excluding SCP, fourth quarter revenue was down low single digits versus last year. Despite this challenge, our non-GAAP gross margin exceeded 10%, growing both sequentially and year-over-year, coupled with a 9% year-on-year reduction in non-GAAP operating expense in the quarter. We drove operating margin to greater than 5%. As a reminder, this margin includes approximately 50 basis points of stock compensation. I want to congratulate the entire team for delivering such a strong set of results, which allowed us to report $0.58 in non-GAAP earnings per share above the midpoint of our guidance. Finally, as we've highlighted over the last few quarters, we've implemented a number of actions to drive free cash flow. I'm pleased to report that we generated $126 million in Q4 and $97 million for the full year, well ahead of our objective of $70 million to $80 million. This was enabled in large part by reduction in inventory. Considering all the end market obstacles facing us and others, I'm proud of the team's execution in the quarter and throughout 2023. Now let me pass it over to Roop to share more details on the December quarter, our fiscal year 2023 and guidance for Q1 2024.

Thank you, Jeff, and good afternoon. Please turn to Slide 6 for our revenue by market sector. As Jeff mentioned, our total revenue was $691 million in Q4. The reconciliation of this and our sector level performance that excludes the effect of SCP can be found in the appendix section of the presentation materials. Turning to Slide 7. As we look at our sector performance, our discussion will exclude the effect of SCP. Medical revenue for the fourth quarter was down 7% versus the prior year. The decline was due to general softness across the industry driven by inventory rebalancing and demand normalization post-pandemic. Semi-cap revenue decreased 5% year-over-year in line with our expectations. A&D revenue was up 15% year-over-year due to commercial aerospace remaining strong and the defense sector benefiting from the ramp, existing programs and broadening of new wins within our customer base. Industrials revenue for the fourth quarter increased 8% year-over-year, driven by strength and with existing customers, providing energy efficiency solutions. Advanced computing increased 3% year-over-year, aided by our build of subsystems for a new large high performance computing program that started in Q4 and is expected to continue into first half 2024. In the next generation communication sector, revenue was down 31% year-over-year. Our year-over-year performance was impacted by general softness across the sector due to reductions in capital spending. We expect this dynamic may persist throughout 2024. Please turn to Slide 8. Our GAAP earnings per share for the quarter was $0.49. For Q4, our non-GAAP gross margin was 10.3%, 70 basis point increase sequentially and year-over-year. Gross margin benefited from our mix of revenue and improved operational execution, including the previously announced cost actions taken in the first half due to demand softness. SG&A expense was $35.6 million, flat sequentially and down 10%…

Thanks, Roop. Please turn the Slide 18. Again, all commentary related to demand trends by sector are excluding SCP. Within semi-cap, our fourth quarter performance was up modestly, sequentially, and in line with our expectations. On a full year basis, revenue performance was down high single digits. This compared favorably to the overall industry revenue trend, which we believe was down approximately 20%. As mentioned in prior calls, we believe our semi-cap sector likely bottomed in the March quarter of 2023. However, based on public commentary, for many semi-cap OEMs, we don't expect improved demand at the industry level to return over the next few quarters. This may change in late 2024, but it's too early to make that call. Looking forward into 2025 and beyond, we continue to believe in the strong secular drivers propelling global semi demand. Adding to this, our government subsidies designed to accelerate the reshoring a wafer production to North America and Europe. Although we won't see the downstream effects for some time, this is just another example of the long-term drivers that serve as the basis of our strong commitment to the sector. In support of all these demand drivers and our confidence in our ability to benefit, we have been investing heavily in our capabilities and winning new programs, which we believe positions as well to continue to outperform the market. We had a number of new wins in the quarter, including an important next generation wafer fab equipment program with one of our existing customers. In medical, this past quarter, we did a good job meeting demand as the supply chain continues to improve. Offsetting this was some incremental demand softening later in the quarter, both as a function of end markets and customer focus on inventory levels. As such, while we…

[Operator Instructions] Our first question will come from Jim Ricchiuti of Needham & Co. Please go ahead.

Hi, thanks. Good afternoon. Jeff, I wanted to just focus on two of the sectors, medical and industrial because I think you're kind of clear on some of the other ones what you're seeing. Not entirely clear on where you see medical and industrials going, so often, I guess, midway or so through Q4, do you see that recovering? Or is this something that maybe persists through the first half of the year?

Yes, I think for both of those, we kind of in the -- on chart 18, we kind of give you some first half guidance. We didn't go out to the full year just given the dynamic environment, but just looking at first half, we see both of those being down from like, looking at sequentially, where we ended the second half of last year. In medical, while supply constraints eased and allowed us to fulfill, the demand we saw, we did see forecasts come down in the fourth quarter that continued in 1Q. We certainly believe people are paying a lot of attention to inventory. Some of it probably related to that softness. We will -- I will say there's still a lot of outsourcing activity and near-shoring continues, we're excited about a number of new wins in Mexico for us as medical OEMs look to get closer to point of consumption. On the industrial side, again, I would say it's similar kind of broader. It depends a little bit by OEM, but certainly some broader softness that looks to persist into the first half. That's an area where we had done pretty good with wins. We had put resource on that a few years ago and we still believe we're really well-positioned there with some of the activity we're seeing in energy management and automation and test and measurement. But in the meantime, again, sort of the softness coupled with people being looking at their own inventory and the channel inventory is putting some headwinds in front of us for the industrial sector.

But the softness through the first half in these areas, it's both a combination, they're both related, but it's not just OEMs, Some of your OEMs destocking, it's -- there's just a weaker environment in both these areas. And …

Yes, I think that's -- I think that's a fair assessment. It's -- as demand softens, then you say, hey, we've got inventory in the channel or -- so they're kind of interrelated, although I will say, there's just a general sense of, I'm not going to carry as much inventory now that [indiscernible] the pandemic. The lead times have come down on components, I can deliver faster. So, I'm going to look carefully at that. But, yes, that's somewhat what we're seeing in both sectors.

Got it. Just two quick follow ups, and I'll jump back in the queue. Nice progress on gross margins. Can you continue to deliver on these kinds of gross margins in this kind of a soft environment? You alluded to it in your presentation, just trying to get a sense of your confidence is that whether you can maintain these kind of margins with this [indiscernible]?

Hey, Jim, its Roop.

Hi, Roop.

So maybe I'll start with this. I think for us, obviously, a focus for us has been on getting to that 10% and sustaining that 10%. As we've also said, historically, we'll see kind of that bounce around a little bit quarter-to-quarter, but based on kind of where we're at and kind of the mix of revenue, the proactive cost actions we've taken, that kind of 10% is where we'd like to be throughout the year. I think, depending upon how demand continues to profile and as you know, where the demand comes in within our factories, and these sorts of things start to come into play. So I think there's an opportunity to do so, definitely at that 10%. We've got work to do to sustain that on a longer term basis.

Got it. Nice progress on inventory is how we think of that going forward. Should we see that continue to come down over the next couple of quarters?

Yes, I mean, it's clearly -- this is, Jeff, again. It's clearly a priority for us. We've kind of demonstrated that a lot of things culminated in fourth quarter to drive a lot of free cash flow and inventory was certainly -- really a lead there, but it's something we're putting a lot of attention on, as you can imagine, and particularly in the software environment, we're really looking at that end and spending a lot of energy. We do believe, we'll continue to drive this down as we go through '24 and then certainly see a reduction even in the first quarter. So this wasn't like a one-time event. But the last few quarters we started coming down off of what was peak and I think first quarter of last year. So anyways, yes, to your point, it's important.

Got it. Thank you.

Thanks, Jim.

The next question comes from Steven Fox of Fox Advisors. Please go ahead.

Hi, good afternoon. Couple of questions for me. Just first on the semi-cap slide on -- on Slide 18 where you're talking about sort of flattish trends. You guys outperformed last year pretty, pretty dramatically versus the overall market. But if -- are you still seeing the market down, or are you trying to be conservative in terms of talking about first half? Or like, is there certain programs where you're seeing down versus up, et cetera? Like, it just doesn't seem to compute fully with how the market might be flattening out and you guys have been outperforming?

What I would say is, sequentially, I think, on that chart 18 we kind of said it's kind of flattish at that level we've been at which is clearly off -- up off the bottom that we saw a year ago in the first quarter. But we're just not seeing dramatic recovery in some of the segments that were legacy that we've been really strong and not -- and certainly not tools that were near end of life. So the wafer fab equipment, I think capital spending is still being managed pretty close, and we just aren't seeing that broad semi recovery. I think we're -- we've outperformed what's helped us is we've won incremental new tools, we have a ton of NPI activity going on, where we're building new tools, and that's helping us certainly outperform. And I look to get more constructive here. I won't say that we're being conservative, because we literally have heard a lot of the major OEMs where we play and most of those, if not all of those, at some level, they've all kind of said, yes, it's kind of flatter now. I think we have the potential, I don't know why we wouldn't continue to do better than the market. It's just that with the China restrictions, and some of the -- even some of the CHIPS Act, we're really not going to see the benefit of that till '25. There's just moving parts that has a sort of looking at it saying, what do we see in front of us for first half? And it's, it's kind of continuing at the level we've been.

That's really helpful. And then just broadly on the other end markets where you're seeing pressure, where do you have sort of the most confidence level or evidence that things could be bottoming out cyclically in like medical industrials comes. I know, advanced computing sort of episodic, but like in the other three, where you have strong signs of that, or upcoming signs? Just any ...

I mean, we're trying to -- I guess, we've gotten some indication on medical that there may be some -- again, it's early, but say, hey, there may be return to normal pace with inventory, looking at second half, like we might see some reflection there were maybe there's like -- we saw it in semi where the first quarter was like, we're taking it down, and you have that big reaction. So maybe we start seeing that in fourth quarter with medical. Industrial, I still think it's so broad, so many different companies. It's a little harder to look at where the bottom is. And then A&D has been strong and continued strong and I guess we said that in the thing I need to ask about that. But certainly that's been a bright spot and expect that to continue. Do you want to add anything?

Yes. Hey, Steve, this is Roop. I will just add one thing. I think, maybe building off of Jeff's comments, if you think about industrial next gen comps, that's CapEx related. And CapEx considerations, I think are weighing on customers minds and just market in general. I think medical has an opportunity to that point for that reason to come back a little bit faster, just as Jeff indicated, which is another point to just keep in mind.

Yes, and one thing with medical, just maybe the example, we built defibrillators, right, and components and subsystem for defibrillator. And you think about like during the pandemic, no one is going to stadiums, airports and that's where we saw a huge surge back, right. When things opened up, you start seeing demand there and then people got on the runway and they said, wow, this is great and this is the new normal. And I just think you've seen that modulate a little bit as you kind of caught up with that and people saying, okay, still care for it, it's still important, not going to go away. But just not maybe is, as crazy upside as there had been.

That’s helpful. And then just if I could squeeze one last one and one of your peers seems to be walking towards providing EPS, excluding SPC. And so I mean, you guys may get lonely with your own EPS approach. I was curious if any chance of you guys changing how you report your EPS going forward?

Yes, we did notice that the only peer that was kind of aligned with us on including stock based comp in their non-GAAP results sort of indicated there was a shift there. So, to that end, we got to assess our current approach and we'll provide an update when we conclude that and we look to get back on that. But obviously, peer comparisons are important to us, but we've got to decide what's right for us. And we did pick up on that. So thanks for bringing that up.

Great. Well keep doing the math. Thanks.

The next question comes from Jaeson Schmidt of Lake Street. Please go ahead.

Hey, guys, thanks for taking my questions. I know it's going to vary by segment, but just curious at a high-level, if more of the issue is demand for current programs that you've already won, you noted for customers not wanting to hold a lot of inventory anymore? Or is the bigger issue new programs that you thought would currently be ramping just getting pushed to the right.

I think it's some of both. I mean, I've certainly seen people are watching expense closely. And I think we've seen some rants move to the right. But I -- but really when you consider the bulk of our revenues with existing programs, and these are multiyear programs, I think we've just seen that overall demand modulate, and I don't know that we've actually measured both, I'm just giving you a little my gut feel from what we're seeing that that it's probably I would pour it probably lean more towards the base business. And then some of the new stuff coming in is some of that's in flight, but not fully ramped yet. And it's not always the best environmental launch new stuff. But I don't think that stops, I just think that we're seeing that -- that folks are being careful about their development expense. And so that has an impact sometimes on timelines.

Okay, that's helpful. And then are you seeing any change in the tax rates for your design and engineering services, just given the changing macro?

We almost -- we are almost at 80%, not quite to what the target we had said. So we have net of tax rates been pretty, pretty, pretty good. I'm pretty happy with that. Obviously, we had a couple of wins, we referenced even one where we've done the engineering on an AGV product and now it's moving into manufacturing. So that's that we love that, the whole product realization and how do we help customers get to market faster with their OEM designs or design that we might help develop or develop the whole thing? And we've got a couple of great proof points there. So still an important metric for us and really hasn't shift materially from how we did last quarter. And I don't really see that that being a trend or anything.

Got you. And then just the last one for me. I know it's mix dependent [indiscernible] program dependent, but can you remind us what capacity is for the Mexico facility? And then what current utilization is today?

Hey, Jason, that's -- I can give you a general, we don't give specific utilization and these sort of things. With that said, what I would reinforce is our continued investment in Mexico. As you would imagine, there's been quite a bit of reshoring and with existing OEMs, who want to expand new programs in Mexico, and so we've seen the benefit of that. So we've been aggressively investing over the last couple of years in our capacity and availability there, and we're seeing that capacity get used up as we -- as we've gone over the last few periods and into '24 and into '25.

Yes, it's funny, we've seen growth in Mexico, but we've also added -- we continue to add capacity and it's been investment areas. So we're not -- it's not like we're seeing the fact that we've invested as long as to sort of stay in front of that, so we're not like add capacity by any means.

Okay, perfect. Thanks a lot, guys.

Thanks, Jason.

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

Thank you, Andrea. And thank you, everyone for participating in Benchmark's fourth quarter 2023 earnings call. Before we go, I'd like to remind listeners, we will be attending the Sidoti Small-Cap Virtual Conference on March 13. Please remember to check the events section of the IR website at bench.com/investors for updates to the schedule. With that, thank you again for your support and we look forward to speaking with you soon.

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