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Okay, great. We got that sorted out. Welcome to the Sidoti Virtual Investor Conference, and thank you for joining us today. I'm Anja Soderstrom , equity analyst at Sidoti, and as I mentioned, next up we have Benchmark Electronics. With me today, I have Arvind Kamal, the Vice President of Finance, and Paul Mansky, the Head of Investor Relations and Corporate Development. This will be conducted as a fireside chat. If you have any questions that you would like to squeeze in, you can submit them in the chat box or in the Q&A box at the bottom of your screen, and we'll try to incorporate them. Welcome Arvind and Paul.
For those who may need a refresher on the company, could you start providing us a brief overview, including the current breakdown by revenue, and by market sector?
Absolutely, Anja, and thanks for having us. Always a joy attending this conference. For those that might not be as familiar, Benchmark has been around 40 years. We were born initially as a medical device company, headquartered in Texas. We grew for a very long time, kind of focused on that market and then expanded markets, but we grew inorganically through the majority of our life up until about 10 years ago, when we really started focusing much more on kind of an organic growth, focused on complex, highly regulated opportunities, with a big North America footprint and really bringing that end-to-end capabilities from engineering through precision machining, what we call PT or Precision Technology, to EMS.
As we focused on that in our sectors, we've evolved over time, attriting out low margin business, low caliber business to what we have today. 10 years ago, 15 years ago, we were 50% exposed to legacy telco and compute. Today, we have about 20%, high 20s% exposure to Semi-Cap. We have roughly 20% exposure between industrial, medical and A&D. On the other end, offsetting the high 20s% in Semi-Cap, we have, on the lower end, we have advanced computing and communications, which, unlike traditional PC servers, that really means kind of 5G infrastructure as well as super computing and incrementally so, enterprise and sovereign AI.
Along with that journey, we've demonstrated, and I think as Arvind is smiling and certainly he's proud of, demonstrated 9+ quarters of 10% or better gross margin, while we've continued to progress towards our longer term operating margin goal, most recently putting up 5.5% non-GAAP operating margin in the most recent quarter. I'll go ahead and pause there from an elevator perspective.
Okay. Thank you, Paul. You mentioned your target operating margin and goal. What are you targeting?
Arvind?
Yeah, from that standpoint, Anja, as Paul just mentioned, we finished Q4 at 5.5%. I think the biggest lever for us is really scale. Scale is a big lever, especially if you look at our earnings to revenue ratio. Behind the scenes, we've been focused on centralization of some of our SG&A functions. As we add more revenue, right, it's just gonna flow to that ops margin line. For Q1, we did guide to a little bit below 5%.
You know, as we see the scale, you know, the upturn in the Semi-Cap cycle, and some of the things that we're gonna be double-clicking on, whether it's medical or industrial, we'll talk a little bit about that here in the call. You know, when we factor those things in, you know, and we guide it to mid-single digits, and we have the opportunity to do a little bit better than that's gonna drive that leverage, and it's gonna expand the overall non-GAAP operating margin.
Okay. Thank you. The company has had some leadership transitions in the recent month and quarters, including a new CEO starting recently. Can you walk through that, and what can investors expect as it relates to the ongoing development of the growth strategy at Benchmark?
Yeah, I mean, it's a fair question. I guess it probably starts with David at the CEO role, which we announced that transition last September, that will be effective as of the end of this current month. David's not new to Benchmark. He's been here almost three years now, serving as our chief commercial officer, which is not just head of sales, but as the name implies, a much more kind of strategic DNA infusion into operations across the board. Previously, he'd spent about 25 years at Flex, running a business that's bigger than Benchmark.
Definitely not new to this space and we're very fortunate to have gotten him on board three years ago, and we're very fortunate to have him as our CEO now as Jeff moves on to retirement. Underneath that, we brought, you know, we had Bryan Schumaker, our CFO. He has been in that role for about two years now. He's moved over from an industry steeped in the manufacturing as well. The message is, you know, this isn't a step function change. It's a continuation of what we have. Some fresh ideas, certainly. It is a, you know, we were fortunate to be able to reload from an existing, very strong bench. Pun intended.
Okay, thank you. Something that's been a hot topic for you and a lot of your peers is the Semi-Cap. Lots of discussions in the market around improving demand dynamics in the industry right now. How do you see Benchmark growth opportunities going forward in this market?
Yeah, we've done clearly lots of interest in Semi-Cap right now, you know, given the sound bites from the industry followers of the industry and otherwise. We are coming out of what has been a, you know, extended down cycle in Semi-Cap that frankly I think surprised everyone. You know, normally they're 12 months or so, give or take. This one extended into greater than two years. Number of reasons driving that probably we could spend the rest of the call talking about. We've invested throughout that entire timeframe, continued to invest in our customers and our manufacturing capabilities, et cetera. Historically, we've tended to grow faster than the WFE market, and so we get a good return, it being our amongst our highest profile margin businesses within the portfolio.
We get a good return off of that investment, and that's where we are today. We continue to expand in Penang, as was alluded to on our last earnings call with CapEx 2%-2.5% this year, up from our normal 1.5%-2%. Timely, we think very well-timed to what could be a multi-year upswing within CapEx that started with some increased specificity and tenor around conversations last November, and has continued to build since then.
Okay, thank you. What differentiates Benchmark versus your competitors?
Yeah. Within Semi-Cap specifically, I'd have to say that it comes down to our precision machining capabilities, whereby, you know, we have a lion's share of our Semi-Cap market is tied directly to Precision Technology, which not a lot of people have. It's an area that we've been investing in very aggressively over the last several years. Now, also within that, given that Precision Technology focus, we tend to be more on the front end of the manufacturing food chain. WFE front end sitting in chamber, which is a very sticky place to be.
We're thankful to our OEM customers for the opportunity to serve them in that market. I think more broadly, you know, any of our OEM customers can pick up the phone and talk to anybody at the highest level of this organization at any given time. You could probably say that about every one of our sectors, which I think also differentiates us from a lot of our other competitors. We have a maniacal customer focus here at Benchmark, which has served us well, and we're gonna maintain and build upon that going forward. I think that'll serve us well in the future as well.
Okay, thank you. Can you walk us through some of the puts and takes impacting your other various sectors?
Arvind, why don't you tackle that? Why don't you tackle those?
Yeah, thanks, Paul. Let me kind of double-click on industrial, medical, and A&D. You know, let me start with industrial. Industrials, I would say, Anja, it's been a kind of steady eddy for us, you know, predictable in terms of outcome. Industrials with one thing, one dynamic I want to kind of highlight is it's we have a huge serviceable TAM within industrials. We deal with large companies. You know, if you think of large companies, it's Honeywell, ABB. You know, or maybe on a mid-tier B, someone like Trimble. You know, what I want to say here is, you know, and we have companies ranging from, you know, $200 million - $4 billion - $5 billion kind of thing, the existing business has been stable.
We've also had competitor takeaways. When you know, factor in new wins, we see gradual improvement here. We mentioned this in our last earnings call, the new booking performance is really led by improved demand. That, that's really what we feel is gonna drive some of that improvement. That's kind of the industrial part of it. Shifting over to medical, we anticipated, we set this, you know, beginning of 2025, you know, midway through, we said, "Hey, we're gonna see this, bottoming out for this medical sector," and it did. Based on improving demand and new program ramps, we see higher demand from medical devices from the sector. You know, continued growth from new wins, bookings related to med tech.
We had a lift and shift opportunity. When you combine these factors in the back half of 2025, we saw double-digit growth, and we said this also in our last earnings call, that we see this dynamic continuing into 2026. That's sort of the medical side. On A&D, you know, we're coming off two years of double-digit growth. As we kind of look forward, you know, due to timing of certain defense programs and new ramps of programs especially related to space, we feel that A&D will be moderating.
These new wins are what we're excited about because they're in the space application, which really bodes well for our future growth prospects of these programs in the coming quarters. Kind of leave you with a thought. A&D is really made up of commercial air, defense, and space. You know, currently we're more penetrated towards the defense side. Eventually, we would like to be known as aerospace, defense, and space. You know, obviously, you know, really excited about these end markets, much like we are, you know, Paul talked through Semi-Cap. You know, with that, I don't know, Paul, if you wanna cover AC&C, that'd be great.
Yeah, absolutely. The AC&C is an area that we've gotten a fair amount of interest in of late. For those less familiar with it, the AC&C is advanced computing and communications. For us, that's historically been on the comm side, things like 5G infrastructure, for example. On the advanced computing side, we tend to play in, historically tend to play in the supercomputing space. So a handful of folks there that you could probably guess who that might be. What's gotten some interest and it's kind of factored into our existing guidance has been a couple of OEM wins that we've announced over the last quarter or so related to AI equipment.
Unlike some in the market that kind of sell AI into the hyperscaler space, this a little bit more OEM-centric. Think about enterprise and sovereign AI, is our target markets there. We announced, as I said, a couple of OEM wins there, expect to see revenue contributing. Importantly, it really brings some of the same skill sets, a lot of the same skill set we had in supercomputing, specifically liquid cooling, which we've been in way before liquid cooling was considered cool. We've been in that for quite a while. We're bringing those capabilities into this next gen kinda AI deployment environment. We look forward to being able to update you know, as the year progresses on how that business takes shape.
We're fairly optimistic around our early traction therein.
Okay. Thank you. Looking forward to that. Talking about AI, many of your competitors are benefiting from the AI data center build-out. Can you discuss your strategy there and your current exposure?
Kinda going back to, you know, we focus on what we're good at and, you know, how do we differentiate? You know, we aren't high volume. You know, don't wanna play in that pool. We like to play in the lower volume, higher mix, which allows us to bring in you know, that engineering design consulting, Precision Technology, and EMS, the portfolio solution.
So with that, you know, we by design did not participate, are not directly participating in that classic hyperscaler AI rollout, which is, you know, the CapEx tied to the CapEx numbers from the big three, five, depending on what week, you know, what the sample size is of that group. Instead, we're going after the enterprise sovereign AI, as I alluded to previously, where we think we can sustainably differentiate in a growth market that has legs on it, as opposed to being subject to being turned off very quickly, you know, potentially. You know, elsewhere, we have derivative exposure clearly on the Semi-Cap side of the business.
That does, without a doubt, get an upward pull, you know, from both sides of the AI spend, your hyperscaler, non-hyperscaler, as well as more, you know, more broadly from the miniaturization and increased functionality associated with all products spanning consumer all the way through. That's a good derivative play. Now we have direct and derivative primarily from those two. If we really wanted to drill down and within the enterprise, within the industrial space, we have, you know, thermal controls, you know, exposure there that you might find deployed within some of the data centers that are going up today.
Okay. Thank you. In terms of win rate activity between existing and new customers, and why you win for each, and can you also talk about lift and shift business, the company has won, what's led to that, and in which markets?
Yeah. Yeah, I'll cover the lift and shift element of it, and then Paul can kind of talk a little bit more broadly about the win rate. Within the lift and shift, and particularly, you know, the lift and shift that we referenced on the earnings call, last earnings call, was really related to a medical customer. Because of the high complexity and the regulated nature, it fit really well into our wheelhouse. In addition, you know, we've talked a lot about our customer obsessive culture, and this kind of speaks to that, you know, the ability to partner across the organization in order to adapt to, you know, kind of changing requirements.
Our ability with, you know, engineering and some of the other, highly complex solutions that we offer to our customers, we deliver that end-to-end solutions on time. When you kinda combine these factors, that's what positioned us to win this business. I'll let Paul kind of speak to the win rate more broadly.
Yeah. I mean, a lot of the same attributes that allowed us to pick up the lift and shift that we've been talking about in the market publicly. It, you know, they're in common across the rest of the business in terms of, you know, access to management and the kind of customer focus that we have woven throughout the DNA at Benchmark.
I'd also have to say that it goes back to when David joined, as I mentioned, coming up on three years ago. He started reorganizing the go-to-market that really had us focusing much more on depth, as you know, depth and breadth within our existing customers, as well as new customers. That is starting to show at the top line. Now, clearly, there's a lag between bookings and revenue, but you're starting to see some of that, some of those prior bookings and current booking success starting to flow through the revenue line now. It's, you know, they're all interrelated.
You know, that shift in the go-to-market gets us closer to our customers' needs in partnership with our customers. What spills out of that is, you know, better breadth and depth within our customers, existing and new.
Okay, thank you. Talking about top line, how are you thinking about growth in 2026, in total for the company and also by sector?
Yeah, thanks, Anja. We've not formally guided 2026. You know, we initially said, you know, mid-single digits in our last earnings call, although we increased it to, you know, maybe a little bit higher end of that mid-single digit type of, you know, range if you will. Just more so as a reminder, you know, David did say that we will elaborate, you know, on our next earnings call or specifically our Q1 earnings call, give you a little bit more context around, you know, 2026. I guess maybe, more broadly if, you know, Paul, if you wanna add anything, that'd be great.
Yeah, I mean, if you want to tier. Thanks, Arvind. If you wanna tier kinda how we're thinking about the different sectors within the profile that Arvind just laid out, you know, we'd have to put Medical and Semi-Cap probably at the top of the list. The industrial is probably in the industrial and AC&C.
They are kind of in the mid, and then A&D are probably towards the bottom of that list in terms of our expected profit contribution in 2026. Now, a couple of them could surprise us. You know, I kind of alluded to we have some really good momentum in AC&C. We're waiting to see how that backfills in the back half of the year. That could wind up surprising us too, you know. Then, you know, unfortunately, in recent weeks, you know, there's been no shortage of sound bites around upward pressure on certain areas within defense. You know, we'll wait to see what that translates to, you know, for us. That could also be something we'll have to revisit throughout the course of the year.
Okay, thank you. Talking about the current events, can you discuss the geopolitical climate and the impact it's having on your business?
Yeah. I'll cover the more so the component pricing availability aspect of it. You know, from a supply chain, more specifically within the supply chain kind of environment, you know, we're seeing pockets of impacts in memory. You know, but more so, that's there. We're also watching some motherboards and analog components. Given some of the comments in the marketplace, we're not necessarily seeing those impacts. The more important thing here is, you know, we've invested in expanding our procurement team over the last few years that's really dedicated and focused on this. As I mentioned, you know, customer obsessive co-culture, we have very close relationships with our customers and also our vendors to manage and fulfill current demand forecasts.
you know, it's this proactive nature by some of these things, right? you know, just to kind of put a little finer point on, you know, as we've demonstrated even, you know, two years ago when we had the supply chain premiums, you know, most of our contracts allow us to pass some of these cost increases to our customers. you know, so kinda that's sort of the state of from a supply chain standpoint. I don't know, Paul, if you wanna elaborate on energy and demand.
I mean, the supply chain is, you know, those kind of concerns or kind of watch items were existing prior to the actions in the Middle East over the last couple of weeks. They haven't accelerated or decelerated, you know, as it relates there. Specifically regarding the Middle East, we have no direct exposure there from a manufacturing or necessarily supply chain perspective.
Obviously, we're, you know, we as probably everybody else would prefer, you know, hostilities to cease as soon as possible, and we'd prefer to see oil at, you know, $70 again as soon as possible, because ultimately that will flow through, and we'll all have to take that into consideration just from an overall demand perspective. But, you know, directly in terms of input costs, you know, vis-à-vis energy, or, you know, or supply chain specifically related thereto, or disruption of manufacturing, you know, we have little to no immediate exposure.
Are you able to pass those increases on to your customers, or do you have to absorb them?
Yes, I think Arvind has a lot of experience on that. The majority of our contracts are structured so w e're able to pass along cost increases to our customers. Anja, I know you're familiar with it 'cause it wasn't that long ago that we were in the realm of the supply chain premium world, whereby, you know, we had inflated revenue at zero margin dollars, and that was a straight pass-through to our customers at, you know, at cost. Elevated cost, but cost nonetheless.
Yeah. In terms of free cash flow, it has been strong for you the last few years. How are you thinking about that going forward?
Yeah, Anja, so from that standpoint, you know, we're thinking, you know, the way we're thinking about it is, you know, $70 million-$90 million kind of range for our free cash flow. That includes CapEx, particularly in 2026, and, you know, the elevated 2%-2.5%, but that's really to drive growth, particularly in Semi-Cap. You know, from a working capital perspective, you know, we expect to improve upon our five turns inventory, which, you know, we exited in 2025 as such. A key important point here is, you know, we've had, you know, a longer-term history, we've had five turns. So, we've been there, we're getting back to being there, and we wanna improve on that, so that's gonna be one of the fundamentals that drives cash flow.
In addition to that, optimizing our cash conversion cycle through improvement in payables, receivables versus payables. When you factor those things, that's what's really the underpinning of that $70 million-$90 million of free cash flow.
Okay, thank you. We talked about the operating margin before. What kind of capacity utilization do you have, and what potential do you need for expansion to drive more revenue growth and achieve that margin profile?
I mean, we haven't specifically spoken to what our utilization rates are, just given that's a closely guarded figure within this industry. Certainly, we trust everyone on this call, but we don't necessarily trust our competitors. That having been said, we have a capacity in place today and sufficient to be able to support revenue well within the $3 billion range, if not the higher end of that $3 billion range. That's obviously, you know, inclusive of some of our planned first half CapEx around that PT4 facility that Arvind alluded to within that 2% or 2.5% envelope. We feel pretty good. We feel pretty good there.
Again, that would go back to a margin profile, which we again view as to be pretty consistent for us. You know, whereas it's the revenue scale at that top line and the efficiencies at the expense to revenue EOR ratio that we think is gonna be the lever point to watch for us, in the coming, you know, in the coming periods.
Is that the $3 billion you're targeting to achieve the 5.5%-6% operating margin? Or would you-
We haven't specifically put a number out there. I think we'll leave that for my new CEO to broach that. I don't know if I'm gonna get in front of him. I don't know if that'd be a career-ending move to get in front of him on that. We'll leave it at that. I mean, if you look at our history as we put out historical targets, we tend to achieve it, you know, during a seasonally strong Q4, and the following year achieve it a couple times, and then the next year that's the run rate.
It's been a good steady progression, and I think that with a little help and a tailwind in our sales vis-à-vis having multiple of our sectors moving in the right direction simultaneously, you know, we might be able to accelerate that in all things, all things being equal.
Thank you. Given the cash flow profile, how are you thinking about allocation, and can we expect any changes there?
Yeah. No real changes here, Anja. Similar, same or similar playbook. I would say, you know, we're gonna continue to support the dividend. We're gonna continue to buy back shares to offset dilution. We're gonna continue to pay down debt. As we've talked about, really investing CapEx to drive growth at that 2%-2.5%, particularly this year. Within M&A, I'm gonna let Paul kind of allude to that. Paul, you wanna mention anything on M&A?
Yeah. M&A obviously, we've been very selective in M&A for a number of years now. Meaning we haven't really acquired anybody for a while. We see deal flow all the time and consider a lot of things very carefully. We would anticipate over the next year or two years that we may be a little bit more active than what we have been historically, but within a very tightly disciplined envelope both in terms of anticipated returns, accretion versus dilution, and keeping to our knitting vis-à-vis our very consistently stated and executed towards strategy of you know within the markets that we serve today.
Again, that's not a change other than, you know, potentially we, you know, we may actually be a little bit more active in the coming periods. Always easier to say, you know, given the opportunities out there, because there is plenty of deal flow to be looked at.
Okay, thank you. We're actually out of time, so I wanna thank you, Arvind and Paul and everyone in the audience who tuned in. I know you have a pretty hectic one-on-one schedule for today, but if anyone in the audience would like to catch up with management, you can reach out to us at Sidoti or the company directly. With that, I'll hand it over to you guys for some closing remarks before we close it down.
Well, I wanna thank you again, Anja. As always, this is a great conference. You're right, it is a very full one-on-one day. Thank you for your support and the platform and your time today, and to you and everyone on the call.
Yeah. Thank you, Anja.
Thank you. Thank you. Have a good rest of your day.