Morning. Welcome to the 28th Annual Needham Growth Conference. Thanks for joining us. We're going to sit down for a discussion with the management of Benchmark Electronics. My name is Jim Ricchiuti, Senior Analyst in the Equity Research Department at Needham. The coverage companies include a number of names in the industrial technology space. So with us today are Benchmark's President, David Moezidis. I may have mispronounced that. I apologize. I'm going to get it, David.
That's pretty good. Not too bad.
Effective March 1st, we'll be taking the CEO reins.
April 1st.
April 1st. Thank you. From Jeff Benck, who is retiring. We're also pleased to have the company's CFO, Bryan Schumaker, and from IR, Paul Mansky is in the audience, Investor Relations and Corporate Development. So maybe, Jeff, you may want to just give whatever regulatory intro, and then we'll dive into just a brief overview. And that could be you, just in terms of the current breakdown of the market sectors that Bench plays in.
Okay. Yeah, I'm Jeff Benck, CEO. As we talked about, Benchmark is going through a transition. And our CEO and our President, David Moezidis, will take over at the end of first quarter and become the CEO as I move to retirement. But glad to be here and give you guys all an update on Benchmark. Of course, we'll probably make some forward-looking statements through the course of the Q&A and the questions and fireside chat. So with associated risks and uncertainties that are documented in our filings, they can be found on our website. So I might point you to that if you want more detail on what those are. But with that, for those of you that may not be familiar with Benchmark, we are one of the largest U.S.-based outsourced manufacturing service providers in what's considered the EMS space, which is electronic manufacturing services.
We also do a lot of design services, so we help companies that need help with product delivery and product execution, and that can start with the design of their product or to help them complete the design or do the complete design for them and then move it to volume manufacturing in one of our facilities around the world. We like the engineering side of things because it's differentiating and gives us an opportunity to really help deliver intellectual property to our customers. And then ultimately, who better to build it than the company that helped you design your product? We are diversified, as Jim kind of touched on. We play across five sectors. Our largest sector today is semi-cap equipment, which tends to be wafer fab equipment. We're more front-end focused on the semi space. That's about 27% of our revenue.
We have about 20% of our business in the medical sector. Benchmark, 40 years ago, actually spun out of a medical OEM. So we have a long history in medical devices and medical design and then manufacturing of medical equipment. And then the third sector is industrial. It's also about 20%. We also participate in aerospace and defense. And that's been an area we've seen nice growth over the last several years. And our A&D sector is also around 20%. And then today, our smallest sector is advanced communications and compute. And that represents about 13%-15% of our business. And that's the segment that traditionally used to be 80%. And as a lot of that space kind of commoditized, we diversified into higher value, highly regulated sectors.
We consciously shrunk the footprint there, although we're seeing a resurgence with AI and with high-performance computing where that's still a meaningful segment to us and a sector to us. We're looking to continue to grow it. That gives you a little bit of the company.
And to touch on all of that, David, maybe before we get into a discussion of some of these market verticals and some of the drivers that Jeff alluded to, how about sharing a little bit of your background? What drew you to Benchmark in what, 2023?
Three, yeah, July. Yeah. Yeah. So a little bit on my background. I spent a few years at Eastman Kodak and spent four years after that at KLA and spent the next 25 years at Flex. And at Flex, I was in a number of different roles with the company from operational roles, program management to running account management, business development, as well as doing a lot of the asset acquisitions for the company. That ultimately moved me into running their industrial and energy business for a bit. And I was the senior vice president running that business. And then I was tapped to become president of one of their business units and did that for three years at Flex.
That said, the opportunity at Benchmark came, and I had the opportunity to spend some time with Jeff and the leadership team and felt that Bench is in a really great, great spot to shift with regards to their go-to-market strategy and all the various things that Jeff had somewhat put in place starting in 2019, so we kid around, we use this terminology, Jeff 1.0, and now we're kind of this Jeff 2.0 when I joined in 2023 and really put together a commercial formation, and as a result of that, I feel, and I'm very excited by where the company is today, we've really positioned the company really, really well to take us to that next level as we look at 2026 and we look in 2027 and beyond.
Yeah. I mean, it looks like for investors, they're seeing a very smooth transition. Jeff, you're going to be on as a special advisor, right?
Yep, for the next year.
Yeah. Yeah, and at the same time, you've also added some key folks, and you want to talk about the key additions that we've seen, some of those more recent, new CTO, SVP, new Chief Commercial Officer. So maybe you'll just elaborate on that.
Sure. Yeah. I'll start with backfilling myself, right? As a result of this transition, I needed to identify a Chief Commercial Officer to step into my role. And we identified David Cummings, which we announced early in December. David brings a lot of experience, EMS experience, supply chain, commercial. He also ran a business and someone I'm familiar with and felt that he could step into this role and do a terrific job. So we're thrilled that David joined us and excited to see him take the organization that we've really built in the last 24 months to the next level. And then just recently, we announced Josh Holland. And Josh stepped in because Jan Janick, our CTO, is retiring and retired.
And so Josh is another really talented individual, has extensive background in manufacturing and AI and robotics, as well as he's got a really good, deep understanding of the EMS space. So we're thrilled to have Josh join us as well. So two great candidates with a lot of runway in front of them.
Great. So let's start on some of the various sectors that you guys participate in. What are maybe just take us through some of the dynamics that are impacting the various sectors because you do crossover a number of different areas.
Yeah.
Go ahead.
Do you want to? Okay, so as Jeff mentioned, we participate in five sectors. And each of them have a different story with regards to what we do and what we're excited about. I'll start with semi because that seems to be topic du jour. Semi for us has been an area that, giving a lot of credit to Jeff, he saw something some years back and pivoted the company in making investments. Those investments have really played out well, has allowed us to participate in the WFE market with a number of players, all the ones that you can imagine. And we've done well. We've grown share. And we're excited about 2026 because there's been a two-year slowdown, if you will, in the space. And so our view right now is the second half of 2026, semi's going to finally perk up. And we're excited by that.
We've made investments and worked with our customers to increase our share wallet and our position with our customers, as well as go after some new incremental customers to add to our portfolio. All of that's going to come together nicely for us in semi. I'll pivot to medical. Really excited about medical. In the July earnings call, I signaled to the street that we feel that medical has turned a corner. Indeed, if you look at the performance since we said that, it has certainly demonstrated that it has turned a corner. Medical went through a little bit of a channel clearing, if you will. We didn't think it was going to last as long as it did. We thought it was going to be a six- to nine-month cycle. It turned out to be about an 18-month cycle. It cleared out.
We kind of started signaling that in July. We also signaled in July that we won a pretty meaningful program from one of our larger competitors. In medical, if you're familiar with it, because of all the regulatory, when you win a program, it takes a couple of years to ramp it at times. That one particular program was really great for us because it enabled us to do a lift and shift on an existing program. Time to revenue was a lot quicker. A&D has been really good to us. While we saw softness in medical and we saw softness in semi, A&D has held up really well in the last couple of years. We've had double-digit growth in the high teens, low 20s, if you will. We see that moderating going into 2026.
But we're not sitting and doing, if you will, sitting still. We're out there. We're driving new relationships. We're focusing in new areas that we didn't participate in the past. Space is an area that I think all three of us have mentioned in prior calls. So that's an area that we've won some business. And we're now participating with a number of different customers in various different space programs without going into any specifics. So that gives you a little bit on the A&D context. Shifting to industrial. Industrial has been just steady. It's been steady for us. Looks like it's going to just continue to be steady. It's really macro-driven if we think about how industrial behaves. But what has us extremely excited about industrial is the fact that there are so many opportunities in industrial for us to pursue.
So when you look at the total available market, industrial is probably one of the largest markets out there. And so we're extremely excited by that. And I had about eight years of experience in industrial and energy. So that's an area that I've certainly put some personal focus into it as well. And then just bringing it home, I should defer this one to Jeff because this is his area of expertise. And I'll let him speak to ACC and sovereign AI and all of that. But this is another area that we think has a lot of potential.
Yeah. I mean, we've done typically high-performance computing and worked on some of the largest supercomputers, three of the top five on the TOP500 . We had the fortunate opportunity to participate and help with the integration of those.
Through that skill set and water-cooled infrastructure and some of the complexity of those systems, it's really positioned us to look at as those AI builds continue to grow. While we aren't as focused on the hyperscalers, we do see an opportunity with sovereign AI, a lot of government installations that are assessing and looking at how they might deploy those platforms. And then also in the enterprise commercial side of things, we do think it'll move beyond just the cloud players. And with our OEM exposure and the folks that we partner with, we also see an opportunity to more directly participate there. So we're kind of in the early stage for us on the AI opportunity, but we do see some incremental direct participation.
And then, of course, in the semi space with wafer fab equipment, as there's a higher demand for chips and silicon, we'll see strength in our semi sector related to AI too.
A lot there. Let's start maybe if we could just dive a little more deeply into semi, which gets about 30% of revenues. David, just given your background, you like your Benchmark, like a lot of companies are anticipating a stronger second half. And I'm just wondering, is that based on the conversations that you're having? You have customer concentration, obviously. So is that just coming from the customers and how confident, just given your background?
Yeah. Yeah, so I would say we're more confident than prior years, so much so that in October during SEMICON, we were in all the various conversations you can imagine with our various customers, and it was very clear that they're starting to see movement, and if you fast forward in the last 60 days, that movement has now turned into forecast adjustments upward, and so that's a lot more concrete than the prior years where it was, "Hey, it's going to come around second half. We'll see. Let's hang in there." This year was very different.
Yeah, it's good to see it actually come through the orders and forecasts, as David said, versus just, "Hey, can you prepare or demonstrate that you're ready?
Jeff, this may be one for you. I mean, the company's done a nice job. It looks like always hard for the outsiders to determine share. But you think there's been some share gain. I mean, your revenues were up this year of about 8% semi?
Yeah. Two years ago, we grew 10%. The market was flattish. Last year, we'll see when they tick and tie, but we think we gained share. We've done a nice job of diversifying across those wafer fab equipment suppliers. And it's given us more diversity across different platforms. And we've frankly invested. And even in the downturn, we opened a third facility in Malaysia focused on our precision technology, which plays heavily in the semi. And we've started investing on our fourth building that actually comes online. Bryan and I were talking about mid this year. And we think the timing's perfect. And so having that capability, doing more vertical integration where we can actually build a frame that these large systems go into, we can machine the tools that the wafers ride on.
And then we can do the integration in a clean room environment along with the electronics and the complex assembly and integrate that all into that frame really gives us a unique advantage. And then having the available capacity with the new facility coming online in Malaysia in mid-year, we think bodes well for this next upcycle.
David, you mentioned medical. And this is a broader question just on win rate in general, win rates with existing customers and with new. You highlighted one in the medical market. What is it that allows you to relatively quickly win some business on an existing program, which has been part of a competitor's program?
Yeah. So that particular example had a lot to do with one of our competitors having difficulties executing the customer requirements. And what happened was we actually dug into it and identified ways to build the product using automation. And by doing that, we reduced, almost eliminated cost of poor quality. And as a result of that, we were able to win that particular lift and shift that I alluded to a couple of quarters ago. You don't have that fortunate situation that often because at the end of the day, I think all of our competitors are formidable competitors. They do a great job just like we do. And that was a unique opportunity.
But if we kind of park that and go back to the how do you win and such, I'll probably answer this more of a holistic, but it applies to medical as well, is we shifted our go-to-market structure a couple of years ago when I joined the company. And what we did was we rebalanced our go-to-market organization so we have great coverage on our base customers. And we felt like that was an area of opportunity for us. If you focus on your base customers, you're able to go and grow their share of wallet and service them differently. We talked about this customer obsession culture. And as a result, we've been winning share with our base customers. But that's not where we didn't stop there. What we did was we also put together a dedicated business development team.
So the industry hears these terminologies, hunters and farmers, if you will, right? And so the hunting organization, if you will, was focused on going after new customers that we don't have relationships with. So it allows us to go into the marketplace and focus on our base customers as well as focus on new opportunities. And what's the spread there? We aim at 50/50. In some quarters, it'll shift. Sometimes it'll be 60/40 and such, but depending on what opportunities are out there. So it's been working really well. I signaled in July that it was a multi-year record-booking quarter for us. And as a result, we thought, "Okay, is this going to stick?" And we went into October. We had another great booking quarter in October. And stay tuned. We'll talk to you about how Q4 ended in another couple of weeks.
We've all been reading, obviously, in the news about defense budgets. That's a lumpier business, and I don't know if that plays into the potential that there could be some pause in different quarters, but just in general, how are you thinking about the A&D business, and this could be commercial aerospace as well, just for defense over the next one to two years?
Yeah. We've got a really good footprint in A&D, as Jeff mentioned. It's about 20% of our company. So we're going to continue to participate in the areas that we've been successful in. And we do participate both in commercial air as well as defense. And our product set is very diverse. So it allows us to participate on a broader platform with, I would say, just about every big name out there we have some sort of a relationship with.
So our penetration in A&D with regards to customer penetration is probably the best. Now, we have to go deeper, and that's an area that we're going to continue to focus on. And I mentioned just earlier, one area that we've been winning is around the space, space communication, space satellite. That's an area that we're going to continue to focus on and execute the wins from the various customers that we were able to attain in the last 12 months.
We haven't seen that really be very lumpy. I mean, those programs tend to go 10 years, Jim, like when you start. I think what did drive a downturn was coming through COVID, where there were supply chain constraints. A&D was probably the latest to recover because they don't easily resource a component. They don't easily swap things out because our primes would have to go to the government and get approval. There's a long cycle with that. They tend to sort of wait it out. We did see a few years ago where it took time because you were supply constrained. Then we've seen really stable, really nice growth the last two years.
And we kind of look at that and say, "Well, we're not likely to grow 20% every single year." And we think this year we'll see some normalization, but certainly at a higher level. And it's nice with the diversity of programs that it is more stable, is what I would say, than being up and down. Some areas, like we have one solution that we provide to the government for the Border Patrol with video surveillance system. And that tends to be more programmatic. And so that builds that build out and time out. But broadly, as David said, it's a pretty diverse set of customers there.
I want to go back just because there's so much investor interest as it relates to AI. And you guys have talked about it in previous quarters. You touched on it and some of the water cooling capabilities. Can you talk to the types of customers you work with in this area? And I'm wondering, how do you view the opportunities in that area, looking out to the next one to two years?
Yeah. I kind of touched on it, that our high-performance computing experience is large complex systems. And typically, the infrastructure is water-cooled. And so we had the opportunity to, I think we did a press release even on a very large Intel-based supercomputer that we helped develop and/or helped build for them and installed. And that really gave us a lot of experience in putting these complex systems together and doing the testing and the complete system integration work with partners there as well. And so when you think about the AI opportunity, it has some of the same characteristics. Although we are a bit choosy in terms of where we'll participate.
As I mentioned before, we've not typically developed an ODM platform and put it on the shelf and said, "We'll sell it to anyone that wants to build that." We would tend to build a custom home versus a spec home, right? Where we see it being a good fit for us is kind of in that government installation, the sovereign AI, whether that's in the U.S. or internationally. Then in more of the commercial space is where we're seeing some traction there. We've also helped develop some systems that are differentiating. There's some new technology coming through that are allowing people to really front-end their AI solution. Excuse me. We think that as that builds out, there's a little bit where not everybody wants to put everything in the cloud.
And if you want it on-prem, we see an opportunity there where we can help build those systems. So we're in an early stage on a couple of those. So 2026 looks to be a year where we'll participate more directly, as I mentioned, in that. And the kind of things are it can be at a board level, but then also system integration and that water-cooled infrastructure kind of plays in there because to put this together in a rack and have the chiller and the water systems, at least now. Now, maybe eventually we get back to air-cooled, but I know NVIDIA has talked recently about that. But today, there's a lot of water infrastructure needed to effectively do it. And not everyone has that, particularly in the U.S.
I want to just pivot a little bit to your manufacturing footprint and maybe also tie this into some of the geopolitics that we've seen over the past year or so. Talk to us about the impact that's having on the business, maybe the conversations you're having with customers?
Yeah. If I look at our overall footprint, we have 22 locations around the world. And if you look at kind of the tariff and the implications, again, those are a pass-through to our customers. We're not responsible for that. But even with kind of the tariff, geopolitical, I mean, we've seen growth in Thailand in that region. We have Mexico. So whether it's nearshore, offshore, or onshore, I mean, we're well-positioned for all of our customers' needs. And we've seen some shift, but nothing dramatic. I mean, they've expanded continually in Thailand. And we've seen some over in Mexico interest in that and our new factory that we've put in there. So overall, with the geopolitical issues, we haven't seen a big impact to us. And we're well-positioned for growth in those locations.
You know. It's funny. There's been enough movement in tariffs where they're significant and then they're reduced, and it's like it's really about saying, "Look, we can investigate moving you. If you want to move from Asia to Mexico or from China to Southeast Asia, we can help you with that." For a lot of our customers, because we've got long-term customers, it's like, "Let's just sort of see how this plays out and where it lands," and it's certainly driven a lot of activity, but when it comes to full-on movement, we've probably seen a little more movement to Southeast Asia from maybe China, but in terms of South America versus Asia, really customers are looking at where is their demand, how do they build closer to consumption.
Our ability to provide them a low-cost region solution, whether that's Mexico, it could be Romania for Europe, or Thailand or Malaysia for Asia, really gives us the ability to have those dialogue with customers.
Maybe in the remaining time of the case, some of the financials, despite the challenging top-line environment in certain parts of the business, you guys have actually delivered pretty healthy gross margins, improving operating margins. What would you attribute to that stable margin performance? Maybe how should we think about the margins profile of the business going forward?
Yeah, so over the last nine quarters, we've delivered upwards of 10% in margin profile, and we guided this last Q4 up to another greater than 10%, so we feel good about kind of where we're going. We're not just adding top-line revenue that's impacting our margin. Everything's been accretive and continues to support it. If you look at our overall footprint, again, we have capacity in our current footprint. We've talked about PT 4, our Penang facility, Guadalajara, as we ramp that up, and we'll continue better utilization across our footprint in the United States. So it's not like we need to expand a lot to continue to grow with that, so we see additional margin accretive on those, both on filling the facilities and the pipeline that we're bringing in.
I think just to add to Bryan's comment, utilization is one aspect where we've got capacity. We have invested. So now if we get the right business to fill in there, that certainly helps us for the efficiency and can help margin. The other element is really semi-cap having not been as big a growth driver. As that continues to be a bigger piece, certainly it's on the higher complexity, higher value-add side of things. So there's an opportunity to, I think, help the top-line margin as well, go further than where it's been. But certainly, we've kind of looked at that 10% and been able to consistently deliver there. But we think there's more opportunity as we grow at this point. I think that's one thing that is great about Benchmark is that we tend to lever up pretty well, right? Our infrastructure is kind of set.
One of the things that differentiates us in maybe a way that there's opportunity is that as the revenue top-line grows, we can drop more to the bottom line. We believe the opportunity to grow earnings faster than revenue is certainly there for us.
Yeah. And you guys have also done a nice job just managing working capital. You had about $74 million of free cash flow over the last 12 months. How are you thinking about that going forward? And maybe last question, just in general, it ties into also capital allocation now, which is a good shape.
Yeah. So on the working capital side, I mean, we've dropped, call it $270 million from inventory since Q1 of 2023. Coming out of COVID, we've done a great job of that. You look at our cash conversion cycle and actually days of inventory, we've dropped about 14 days off of that, down to 75. And our overall cash conversion cycle in total is now sitting right around 77 at the end of Q3. So we've had a lot of focus on that, continue to drive that working capital piece of it. And if you look at the working capital and then how it converts into capital allocation, we continue to basically on the dividend front, we pay the dividend out, continue to look at paying down debt as necessary.
What I will say, as we are growing some of the inventory and some of these project wins that we've talked about, that could impact some of the inventory number, but again, days inventory on hand, we continue to really look at that, and then stock buyback, we've done that over the last few quarters. We've had some additional buybacks to offset any dilution there, and then if you think about on the M&A front, again, there's a lot of deal flow out there. We continue to look at it. We're not looking at just to grow the top line. Again, it's got to be accretive on the margin front and whether it's a tuck-in or something like that, so again, we've continued to look at different acquisition targets. I mean, it's been a while since we've done one, but we're continuing to look at that.
Yeah. I mean, I think we've demonstrated we can grow organically. And M&A can be an additive, but we also know bad M&A can really hurt the company. So we've been pretty stingy and frankly see a ton of opportunities to grow our sectors without necessarily relying on M&A for that.
Okay. I think we're going to end it there.
Okay.
Awesome. Thanks. Yeah. Hopefully, you guys can take a look.
Thanks, Jim. Appreciate it.
Thanks.