I want to see if you can get that in full screen, Paul?
No. I know. It takes me no matter.
Leave it like this?
Yeah.
Okay.
Yeah.
Okay, so, welcome to the Sidoti Virtual Small Cap Conference. I'm Anja Soderstrom, the analyst covering the company at Sidoti, and it's my pleasure today to have the Interim CFO, Arvind Gururaj, with us. We also have Paul Mansky, the IR and corporate development, with us. This will start as a presentation by the management, and then followed by Q&A. If you would like to submit a question, you can do so in the Q&A function at the bottom of your screen, and with that, I'll hand it over to you.
Great. Thank you, Anja, and I'd like to start off by thanking Anja for having us at the Sidoti Conference and having the opportunity to talk about Benchmark. If we go into slide two, I just want, before we get into the presentation, I want to call out our safe harbor, which you'll see here, and can be found in the latest earnings release in the IR section of our website. Go on to slide three. Who is Benchmark? Benchmark is a global EMS and precision technology company, fast approaching $3 billion in revenue, whose uniquely focused on providing highly complex solutions, many of which are regulated. We provide full spectrum support to our customers, encompassing engineering services through design to manufacturing, to enable our customers to realize end-to-end product delivery. We have approximately 13,000 employees across 20 locations in the Americas, Europe, and Asia.
Of note, relative to public companies in our space, we have the greatest concentration of manufacturing in the Americas at 52%, followed by 38% in Asia and 10% in Europe. Let me add that as of last week, we opened a state-of-the-art facility in Penang, Malaysia. Our new facility is 233,000 sq ft and increases our ability to serve our customers globally. Given our concentration in America and Southeast Asia, we're in a good shape to benefit from future nearshoring and/or reshoring opportunities. This includes future opportunities relative to the US CHIPS Act, which we expect to receive future benefits in the upcoming years. Turning to slide four. Over the last decade, Benchmark has been on a strategic mission to transition from legacy high volume mix to a more targeted sector focus within high complexity and oftentimes regulated products.
Looking back at 2012, when we began this journey, we had almost 60% exposure to legacy compute and telco. Looking at our 2023 results, we had 20% or greater exposure in each of medical, semi-cap, and complex industrials. While telco and compute, which are both high value, collectively represented 24% of the revenue. You will see related mix shifts impact to our gross margins, which I'll talk to this in about a minute. As we called out during our last earnings call, going forward, we are combining next gen telco and advanced computing into one sector, and that will be called Advanced Computing and Communications or AC&C. As we look at those businesses, which are each high value, they're closely related and have a common internal leadership team.
As such, we thought it would provide the greatest transparency to the street relative to how we view them internally. Turning to slide five. Drilling down more deeply into our customer portfolio transition to what we're doing today, this slide provides a good view into our key customers by segment. As you'll see, these customers are leaders in their respective categories. Within each, we are working to increasingly add value and gain share of wallet, both relative to legacy, internal operations, and external share gain. Within semi-cap, we're primarily focused on the front end, and if you think about our key customers, AMAT, which is our only 10% or greater customer that we disclose as a percentage of total revenue, that's a significant customer. Other significant customers are ASM and ASML.
Medical, within medical particularly, we are particularly strong in medical devices and equipment, while less exposed to disposable. We have excellent partnerships with Stryker, Zoll, and Edwards, and the areas that we really focus in on is fluid management, radiological and optical imaging, medical robotics, and connected and diagnostic devices… Turning to complex industrials, we focus on factory automation, hospital automation, test and measurement, and thermal controls, and some of our key partners there are Fortive, Emerson, Trimble, Rohde & Schwarz. Within A&D, this tends to be a pretty sticky business for us, which is a reflection of both excellent relationships and the long-term nature of programs in which we participate.
While the supply chain challenges had impacted us in 2021 through 2022, we have improved availability, continued with robust demand that has seen us benefit from strength in commercial aero and defense customers, and just to highlight, some of those key customers are Thales, Honeywell, Raytheon, and Moog. Advanced computing, we're a key partner amongst supercomputing. These are usually government-sponsored programs for departmental applications. By definition, these wins are programmatic, which can lead to quarter-to-quarter variability. However, over the long term, we expect to continue to deliver growth while demonstrating our ability to deliver to the most scrutinized EMS environments, and then going to next gen telco, we participate in the 5G infrastructure, including government-sponsored rural infrastructure, as well as satellite applications.
And then collectively, you know, some of the customers that are key partners to us, especially from a next-gen telco perspective, is Viasat, Viavi, and Verizon. Within advanced computing, you'll see Lexmark, Thales, and Hewlett Packard Enterprises as being key partnerships there. Relative to the AI infrastructure build-out, we're not a joint developer or partner to the major cloud providers. However, we see an opportunity for derivative impact via semi-cap exposure, power management through industrials, and liquid-cooled HPC exposure. Turning to slide six. We have established this multi-year guidance back in November of 2022, including revenue growth, operating margin, and non-GAAP EPS targets. While clearly the macro backdrop has challenged our former 10% CAGR revenue forecast at the midpoint, we have outperformed gross and non-GAAP operating margin.
At the same time, relative to our $70-$80 million per year free cash flow forecast, we have delivered $225 million over the last four quarters and have provided guidance for the current year of over $120 million. Turning to slide seven. Although the macro-driven environment has evolved since then, resulting in revenue challenges, we're tracking to or better than our gross margin expansion and cash flow plans. While we continue to return capital to investors in the form of increased dividends, while standing by our commitment to repurchase shares to offset dilution. Some of the things you can see here is we're managing through the volatility of the macro environment through delivering on year-on-year gross margin expansions. We continue to work down our inventory to drive free cash flow.
We've reduced inventory $38 million sequentially, and $157 million year over year, and we continue to return, as I mentioned, capital to the investors. As a matter of fact, we increased dividends by 3% to $0.17 per share, which we announced in our last earnings call, so these are some of the items that I wanted to, you know, cover here in this call. With that, that concludes the presentation portion. I'll hand it back over to Anja to conduct Q&A.
Okay, thank you so much. So, to the audience, if you would like to participate in with your own questions, you can submit them in the Q&A function at the bottom of your screen. And I'll kick it off with a couple of questions while we wait for those to populate. So it seems like the entire EMS industry has seen operating margins expand to levels not seen in a very long time. What has changed, either with the industry overall, and then also Benchmark specifically?
Yeah. Thank you, Anja, for the question. Let me start off by saying, more broadly, we're seeing a number of trends that are good for the EMS industry as a whole. One is, you know, product complexity, sensors, and intelligence embedded everywhere in various sub-assemblies and assemblies. I would also say seeing previously under-penetrated markets starting to become more outsourced, namely medical, complex industrials, semi-cap, and even A&D. These new programs carry better gross margin profile once they're ramped to volume and we're seeing those programs starting to come to ramp. So you're starting to see, specifically for Benchmark, you're starting to see some of those, the fruits of those labors. Coupled with OpEx efficiencies on higher revenue levels, we demonstrate leverage in the model with more margin dropping to the bottom line.
So I would tell you, that's kind of, you know, the response. Additionally, what I would say is, you know, we've, as I mentioned in the presentation, we've transitioned into more of a higher value and more complex programs within the sectors. I think that mix is also helping us in the overall expansion of margins. So it's kind of all these different facets, if you will, coming together to help us see those margins.
Okay, thank you. And in terms of your free cash flow, along with your peers, that has been impacted by supply chain-related inventory over the last few years. Things seems to be improving in the last several quarters. How confident are you in the company's ability to drive working capital improvement and positive free cash flow going forward?
Yeah, so inventory is expected to continue to come down. You know, I would go back to our multi-year model that we shared November of 2022, and we said that the longer term model is to get to a five-turn inventory. Just as a reminder, as of Q2, we were four turns, so we have some more inventory to come down. We've grown free cash flow significantly over the last several quarters, but we believe our inventory turns have a good amount of room, as I just mentioned, for improvement here. Performance won't be perfectly linear as we, you know, generate cash flow.
Just from the standpoint of as we continue to reduce inventory, that level won't be the same reduction amount, but nevertheless, it's gonna be a key driver as we have reiterated our target of that free cash flow to be $70-$90 million throughout 2025. And you'll probably recall, we recently upsided our guidance for 2024 as well, and that we said is greater than $120 million.
Okay, thank you. And then, given this improved cash flow story, can you just remind us again, what your capital allocation priorities are?
Absolutely. Our capital allocation priorities are as follows: We will continue to pay a dividend. In fact, we increased it this past quarter. We'll also continue to pay down our revolver, which immediately is accretive, especially from an interest expense standpoint. Our focus on buying back our shares, at least to offset dilution, continues to be a focus, and as valuations come down, we may look at, you know, tuck-in deals that make sense to us, but we're not looking to do anything transformative or dilutive at this point, but we'll definitely look at, you know, potential opportunities down the road as tuck-ins.
Okay, thank you, and then also, with the macro environment backdrop, how confident are you in your ability to continue to drive operational improvement?
Yeah, like others, we've said, continue. You know, they're seeing continued softness, specifically in medical and some in industrial. We're cautiously optimistic on semi-cap. Meanwhile, A&D continues to perform well. We continue to invest in our targeted growth spaces, which are blind to our customer forecast and share gain. At the same time, we're continuing finding opportunities to rightsize, elsewhere, everywhere else within the company. So I think it's a combination of, you know, growing in the areas that I pointed out, more of that higher value end market. In the areas where, you know, especially in factories where we don't have the demand, we're looking to be cost conscious and rightsize the labor that's supporting some of those factories.
In the areas that we do have, you know, strong revenue, we're making sure that we're gaining efficiencies to continuously drive the margin expansion and the non-GAAP income.
Okay, thank you. And a question here from you, from the audience: Are your contract manufacturing services feeling any competitive pressure from India or China, or is that balanced out by some of the onshoring, reshoring momentum?
You know, I would say that there's always gonna be, you know, competition, and pressures from China and from overseas. And more so our customers feel that. So us, Benchmark, having the options of how we're located, and that's kind of what I covered. We have, you know, we have a... While we have a concentration, you know, half of our concentration is in the Americas, we have specific locations, whether it's low-cost regions in Mexico or Southeast Asia, that do offer our customers that ability to fight off those, high price pressure, competitive environments, and thereby, you know, leveraging us to, in terms of production and cost, to help them, you know, balance some of that out.
Anja, this is Paul Mansky. I'd add to that, when you look at what Benchmark does and what we really focus on, you know, in partnership with our customers, it's really the kind of the lower volume much higher complexity opportunities out there. And those are types of products and programs that kind of the high volume, you know, commodity-focused, you know, EMS competitors really can't bring their, or can't, or aren't in a position to bring their strength to bear. And so it provides a little bit of a buffer for us, you know, relative to kind of our go-to-market approach.
Okay, thank you, and again, to the audience, if you have a question, you can submit it in the Q&A function at the bottom of your screen. We have another question here more related to your share prices. It's seen a strong momentum over the last six months. What do you think is the main driver for that?
Yeah, so I would say, you know, it's kind of what I talked a little bit about, which is, you know, driving that, you know, strong gross margin, the non-GAAP operating income that we've, you know, that we laid out in our longer term model. So we're in that 10%, which we've, you know, shared with you in our Q2 earnings call, and it's been consistent over the last couple quarters. I would say in addition to that, that free cash flow generation through reducing inventory and really optimizing our net working capital, coupled. Those kind collectively together has really helped from a share price standpoint, you know, really helped us there.
Yeah, and just to, you know, putting on the investor relations hat here, going back to, you know, Arvind you know articulated around the November 2022 multi-year model that we laid out, you know, before the street, you know, that contemplated, you know, a revenue growth rate that we're not experiencing right now, just given the macro pressures that we've seen since then, which has actually resulted in flat to down revenue in the majority of the quarters since we rolled out that model. And yet, in each of those quarters since we rolled out that model, you know, we've expanded year-on-year gross and/or operating margin.
So I think in doing that, you know, investors are coming to have a more kind of acute understanding of kind of the fundamental shift in the business model that's taking place, not just for Benchmark, but across the EMS industry as a whole.
Okay, thank you. And another question here from the audience: Could you share more about how much AI high-performance computing exposure there is in the business?
Yeah, I would say, you know, from the standpoint of, you know, AI, I would say relative to AI infrastructure build-out, we're not a joint developer or partner to the major cloud providers. We do see, however, an opportunity for derivative impacts via semi-cap exposure, power management through industrials, and liquid-cooled HPC exposure. Paul, you have anything to add to that?
No, I think you encapsulated it well. I mean, the you know, kind of the classic, you know, JDM, you know, model is not something that we typically focus on. We don't necessarily have the volumes to be able to fully leverage that market, and so, you know, we leave that to others that are better positioned for it. You know, we, we instead redouble our efforts on how we kind of add value, and those sectors that Arvind alluded to, you know, specifically semi cap, you know, industrial power management, which is gonna be a... You know, power is gonna be a, you know, a big player, you know, in the AI, you know, the infrastructure revolution.
Then, you know, to the extent that HPC sees, you know, further penetration within the AI space, you know, we certainly anticipate playing, you know, very directly there, you know, via, you know, some of our largest customers that we laid out in the earlier slide.
Okay, thank you. And going back to your last Investor Day in November 2022, you highlighted medical, A&D, and industrials as being significantly under-penetrated in EMS. Is this where you're deploying more design and engineering resources, and where are you seeing the most success from a win rate standpoint?
Yeah, thanks for that, Anya. These are under-penetrated spaces, no doubt, but I would, I would add semi-cap to that list. There's significant opportunity for us here. We have invested accordingly. Within the other three that you mentioned, I think industrials is probably the bigger opportunity today. We're optimistic about medical, no doubt, but between the current demand challenges and the long tail behind regulatory approvals, this may take a little longer to play out. A&D is not too dissimilar regarding national security, but once again, it's a very sticky business for us once you win it, and we've done a good job winning it.
Okay, thank you. And then in semi-cap, which has been your largest sector, and what are you hearing from your customers as it relates to the demand environment through the rest of 2024 and into 2025?
Yeah, sure. Customers continue to point to a flattish 2024, but we believe we will outperform this market again and remain optimistic about the long-term potential in this space. As you recall, 2023 for us was down high single digits year over year, but that compares down approximately 20% for the wafer fab industry. We've heard different inputs from our customers and the broader market about timing of recovery. Regardless, we are continuing to invest in this space without compromising profitability and expect it to be a significant catalyst as the market demand recovers.
Okay, thank you. And then, within medical, which is one of your larger markets, what are the key areas in medical in which you participate?
Yeah, you know, for medical, you know, as I kind of mentioned beforehand, you know, we're largely in strong in devices and equipment, less exposed to disposable, you know. So I think from that standpoint, that's kind of where we focus. And you know, we said, like, the recovery, we think is gonna be a little bit more longer played out. But we're continuing to invest in and win new business in this end space. Paul, anything you want to add to that?
No, I mean, I think you captured it well. I mean, we, you know, we've talked about a couple different dynamics there. You know, within medical, it'll probably we'll see that a bit more protracted in terms of timing to the recovery. You know, I think a good example, you know, of that would be, you know, for instance, we're particularly strong in devices such as defibrillators. Well, you know, a year ago, you know, or even two years ago, you know, people were assuming there was gonna be a defibrillator next to your fire extinguisher underneath your kitchen cabinet in every house. Well, that's probably not exactly the case.
The penetration will be greater than what it has been historically, 'cause the technology has enabled it, price points have enabled it. You know, but it, you know, but there's probably a little bit of an absorption that has to take place, you know, before that market, you know, sees a return to, you know, a return to growth. And I'm just calling out one sub, you know, deep, you know, sub-market, but that, that's an example. And again, we've been continuing to win new business all along. But, you know, as Arvind pointed out, because a lot of this stuff is, is highly regulated, you know, it could take 12-18 months for it to hit, you know, hit volume, you know, volume levels.
And so we're cautiously optimistic, continuing to invest in the space. But you know, as we look across the portfolio, you know, it's probably not the one that's gonna return to kind of incremental growth for us, you know, sooner versus you know, industrials and semi-cap and others.
Okay, thank you. And for A&D, the revenue has been a bit weak for you for almost two years before the third quarter in two thousand twenty-three. What led to this inflection point for you?
Yeah, and I would say for this it's been the increased supply availability, particularly on the defense side, coupled with increased demand, given some of the you know the global conflicts that have been you know with us here over the past several years. So that's one, and then the continued strength in commercial aero and you know strong demand from defense all lining up to drive growth. We expect this sector to remain strong, although you know compares may may. Some of the comparisons may start to normalize on a year-to-year basis going forward, but it'll nevertheless it's gonna remain strong here going forward.
Okay. And then in terms of reshoring or nearshoring, how is that impacting your customer decision?
Yeah, and I kind of alluded to this when I kind of went through the market where we play from a market standpoint. But having that, you know, number one, we're about 50% concentrated in the Americas, and then we have a fairly strong presence in Southeast Asia. So I think we're in a good position to benefit from any potential nearshoring or reshoring that may occur with, you know, strong footprints in Americas, as companies no longer have to worry about, you know, the supply chain crisis. We think, you know, these decisions will move pretty quickly, including not only locations of outsource, but legacy in-house versus outsource.
Okay, and I'm gonna squeeze in a few more questions here since we started a little bit later. Rounding out the discussion on market verticals, the company used to refer to the computing and telecom markets as the traditional markets, but the nomenclature has changed over the past couple of years to the point you have combined them to AC&C. What drove that?
Yeah. Two considerations here. One is that while they're high value to us, they're expected to be slower-growing businesses for us over a period of time, relative to maturing and the penetration of those businesses. The second is, we manage them internally under the same leadership team. As such, we thought it would provide the greatest transparency to the street relative to how we view them internally.
Okay, thank you. And, two more questions, one from the audience: How much of a lift drag would you expect from an interest rate change if one is announced today?
You know, I definitely think there's gonna be, you know, some lift. It's. I don't have the number, to be honest, to rattle off, but, you know, there's, we have the, you know, within our, the revolver portion of our debt, you know, there's the interest rate component and then the, obviously, the balance. There's, you know, if let's just say they announce, you know, a twenty-five basis point reduction in rate, so we'll see some of that. But really, the bigger driver of the interest expense reduction is gonna be drawing down that balance, which we've been doing, you know, really well here in the last couple quarters. There'll be some, but I don't, I can't articulate exactly how much that is at the moment.
Yeah, I mean, I think just from a sensitivity perspective, you know, factor in that, you know, we're absolutely focused on driving down that revolver. And lower interest rates, they will certainly be incrementally accretive, but the biggest driver to our reduction in interest expense is driving down the balance. And so if you look at that, you know, we did roughly $6.7 million in interest expense and other, and in the June quarter. If you go back to June of 2022, that was $1.1 million. And obviously the interim period is when the revolver expanded in order to support inventory and growth amidst the supply chain challenge.
So we want to get back, you know, to the five-plus turns, you know, inventory, and we want to get our revolver, you know, paid down dramatically. And then at the same time, kind of benefiting, you know, from a slightly eased rate environment.
Do you think it also will have an impact on the demand environment among your customers?
We certainly hope so. I mean, obviously we have a lot of, you know, capital intensive, you know, exposures across, you know, semi-cap, clearly, you know, industrials and medical. So it, it's not. It won't hurt.
Okay, I'm gonna squeeze in one last question. What impact do you expect from the CHIPS Act, and when?
Yeah, it's a good question. We have, within the last six months, begun to see significant monies being granted through this program. While encouraging, and it's a great leading indicator, we know that, you know, what the cadence is here. We have to build factory shells first, which takes anywhere from 12 months to two years. Then the equipment has to have a home. Now, the orders may come in before then, leading, you know, from a lead time purposes, we'll see. But there's certainly a lag between the time the money is released and the equipment gets installed. We believe this is a 2025 into more of a 2026 catalyst for us.
Okay, thank you. And I think it's time to wrap up. So I wanna thank Benchmark and the management team for joining us today, and everyone who participated in the audience. I know you have a pretty full one-on-one schedule, but if anyone wants to have a follow-up with you, they can reach out to us or to the management team directly, and I'm sure that they will make themselves available. With that, I'll hand it over to you, Arvind, for some closing remarks.
Well, it looks like Arvind's on mute.
Or, Paul, maybe wants to handle that too.
Looks like Arvind went on mute. But no, thank you for having us, Anja. It's always a pleasure, you know, here to be at this Sidoti conference. And, you know, to your point, if anyone care for any follow-up, we're certainly here to support those meetings. So just reach out and let us know.
Okay, great.
My phone was accidentally muted. Yeah, I just wanna thank you, Anja, and thank the listeners. I appreciate the opportunity to speak.
Thank you.
Let us know if you wanna follow up.
Thank you. Thank you, everyone. Have a good rest of the day.
Thank you.