SMTC Corporation (NASDAQ:SMTX) Q3 2020 Results Conference Call November 5, 2020 8:30 AM ET

Company Participants

Blair McInnis – Vice President, Finance

Eddie Smith – President & Chief Executive Officer

Rich Fitzgerald – Chief Operating Officer

Steve Waszak – Chief Financial Officer

Conference Call Participants

Mike Crawford – B. Riley Securities

Christian Schwab – Craig-Hallum Capital Group

Steve Kohl – Mangrove

George Melas – MKH Management

Operator

Good day and welcome to the SMTC Third Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded.

I would like to turn the conference over to Blair McInnis, Vice President of Finance. Please go ahead.

Blair McInnis

Thank you. Before we begin the call, I would like to remind everybody that the presentation will include statements about expected future events and financial results that are forward-looking in nature and subject to risks and uncertainties. The Company cautions that actual performance will be affected by a number of factors, many of which are beyond the Company’s control, and that future events and results may vary substantially from what the Company currently foresees.

Discussion of the various factors that may affect future results is contained in the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, and subsequent reports on Form 8-K and other filings with the Securities and Exchange Commission. All forward-looking statements are made as of the date of this call. And except as required by law, we do not intend to update this information.

During the call, we will also reference certain non-GAAP measures, including adjusted gross profit, adjusted net income, EBITDA and adjusted EBITDA. Please refer to the press release we issued yesterday for reconciliations between GAAP and adjusted results. Management believes that these Non-GAAP Financial Measures, when used in conjunction with GAAP financial measures, provide useful information to investors about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics SMTC uses in its financial and operational decision making.

The Company’s management believes that adjusting for the additional temporary costs attributable to the COVID-19 pandemic allows for a better comparison of the Company’s performance to prior periods, which is consistent with the Company’s financial covenants in its financing agreements. These Non-GAAP Financial Measures are used by management to manage and monitor SMTC’s performance, and frequently used by analysts, investors, and other interested parties to evaluate companies in SMTC’s industry.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and should not be construed as an inference that SMTC’s future results will be unaffected by any items adjusted for in these Non-GAAP Financial Measures.

Finally, this conference call will be available on the Investor Relations section of SMTC’s website that includes the link to today’s webcast at www.smtc.com. The Company has also posted a slide deck which interested parties can find next to the link for today’s webcast. We will be referring to these slides from time to time during our call this morning.

I will now pass the call over to Ed Smith, SMTC’s President and Chief Executive Officer.

Eddie Smith

Thank you, Blair. Welcome, and good morning. Ladies and gentlemen, I’m Eddie Smith, SMTC’s President and Chief Executive Officer. On this call with me today is Rich Fitzgerald, our Chief Operating Officer, and Steve Waszak, our Chief Financial Officer.

As I did last quarter, I want to again thank the entire SMTC team and our supply chain partners for their hard work and dedication as we continue to operate our business with the added challenges brought on by the global fight against the COVID-19 pandemic. I would also like to thank our stockholders for their continued patience and support during these trying times.

Before I provide a quick financial recap, I want to note that while we are pleased with our business execution across all facet of our operations and response to the challenges posed by the COVID pandemic, the fight isn’t over yet. Our COVID-19 prevention activities go beyond the basic requirements that are prescribed by the various governments and health care agencies. As a result of these actions, and our ability to remain focused, our facilities remain open and in operation, and we look forward to the day when the pandemic is behind us and when we expect to emerge as even a stronger and more profitable company.

As one can see on Slide 3, revenue for the third quarter was $99.5 million, up 12.3% from the $88.7 million reported in the same quarter a year ago, and up 10.1% from the $90.4 million reported in the prior quarter. Customer demand during the third quarter of 2020 continued to track to our internal plans as we expanded our customer base and increased our market share.

We’ve been successful with our end-markets diversification, dedication to putting the customer first and adapting our sales and onboarding processes to address the challenges posed by the COVID-19 pandemic. While these processes may be a little different, and perhaps take a little longer and require more meticulous planning, we expect to continue to gain market share and grow our sales funnel.

During the third quarter of 2020, we continued to operate as a COVID-compliant safe workplace and incurred $1.3 million to protect our employees and their families. Adhering to the health and safety action plans that we discussed on our previous conference calls, and by carefully managing our expenses and business operations, we were able to once again generate improving bottom line results, including an adjusted EBITDA of $7.5 million, or 7.6% of revenues that enabled us to report EPS of $0.04 and an adjusted EPS of $0.13 per share as noted on slide 4.

I am pleased by the trust our customers have put in us as our business development teams continue to expand SMTC’s market share and expand our sales funnel. We have been successful in securing $46 million in new awards and bookings during the third quarter, primarily from five new customers and one existing customers in the Aerospace, Defense and Industrial IoT markets.

Let me quickly share with you just one example of why we are winning new customers and expanding business with our existing customers before Steve discusses the Q3 financial results and provides our outlook for the balance of the year and our initial expectations for 2021. Recently, after an extensive supplier evaluation process that involved dozens of EMS providers, and because of our track record of superior supply chain management, we were selected by a leading multi-billion-dollar a year international supplier of sophisticated hardware and software products, as one of their two global preferred suppliers.

This customer, who provides products to a variety of growth industries, including many we are targeting such as Aerospace, Defense, Industrial IoT, Test and Measurement, and Medical and Safety, also values our leadership team’s ability and willingness to develop flexible, innovative and strategic solutions to its complex manufacturing requirements. Manufacturing for this customer award started in Q2 2020 and will continue into 2021 at four of our facilities in North America.

I want to thank Rich who has decided to pursue other opportunities for his leadership and guidance over the past three-and-a-half-years, during which time SMTC tripled in size with increased profitability and customer satisfaction. Rich will continue in his current COO role during the search for his successor which is expected to be completed by the end of the first quarter of 2021.

Steve Waszak, our CFO, will now discuss our third quarter results in more detail. After Steve’s remarks, I will provide some additional commentary before we open the call to questions. Steve?

Steve Waszak

Thank you, Eddie. Now let me discuss our financial results, which you can see, on Slide 5. Revenue in the third quarter of 2020 was $99.5 million, compared to $90.4 million in the prior quarter, and $88.7million from the third quarter a year ago. During the third quarter of 2020, we had two 10%-plus customers that accounted for 11.7% and 11.1%, respectively. As Eddie noted, we are pleased with the top-line growth and strength provided by our end-market diversification and believe that we’ll continue to gain market share as we manage though this COVID-19 pandemic.

Our gross profit for the third quarter of 2020 was $11.1 million or 11.2% of revenues. This compares to $10.7 million or 11.8% of revenues in prior quarter. Our Q3 2020 adjusted gross profit was $12.5 million or 12.6% of revenues excluding $354,000 for non-cash amortization of intangibles, recorded in connection with our acquisition of MC Assembly, $1.3 million of COVID-19 related costs, and $261 thousand of non-cash unrealized foreign exchange gain on unsettled forward exchange contracts. The $1.3 million in incremental cost incurred to address COVID-19 issues includes-temporary labor in-lieu of at-risk employees required to stay at home, cleaning and disinfecting, and health care monitoring.

In comparison, our Q2 2020 adjusted gross profit was $11.7 million or 13.0% of revenues. Selling, general and administrative expense for the third quarter of 2020 was $6.7 million, a reduction compared to $7.1 million reported in the second quarter of 2020. The lower SG&A expense in Q3 relative to the prior quarter was primarily due to reduced professional services rendered related to SOX compliance. As a percent of revenues, SG&A expenses decreased from7.9% of revenues in the prior quarter to 6.7% of revenues in the third quarter of 2020. In comparison, SG&A was 7.4% of revenues in Q3 2019.

We reported net income of $1.2 million in the third quarter of 2020, compared to$995,000 in the prior quarter and a net loss of $5.7 million in the same quarter a year ago.

Adjusted net income in the third quarter of 2020 was $3.8 million. In comparison, we reported adjusted net income of $2.4 million in the prior quarter and adjusted net income of $2.1 million in the same period a year ago.

Adjusted EBITDA in the third quarter of 2020 was $7.5 million, or 7.6% of revenues, compared to adjusted EBITDA of $6.4 million or 7.1% of revenues in the prior quarter and $6.3 million or7.1% of revenues in the same quarter a year ago. Reconciliations of adjusted net income, adjusted gross profit, and adjusted EBITDA are included in the press release we issued after the market closed yesterday.

Now, I’d like to comment on the Balance Sheet and other key financial metrics that were reported for the third quarter. As you can see on slide 5, our cash-to-cash cycle averaged 81days, compared with 82 days during Q2 2020. Third quarter 2020 DSO was 59 days, DPO at 75days. Inventory turns for Q3 2020 were 3.8 turns, compared to 4 turns in Q2 2020.

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Capital expenditures were approximately $1.4 million gross in Q3 2020. Net debt in the third quarter of 2020 was $85.9 million compared to $84.6 million in the second quarter. Both periods include $3.6 million for the extension of the Company’s Fremont, California facility lease in February 2020. In comparison, net debt was $84.4 million in the same quarter a year ago.

Net debt, excluding our finance and operating lease obligations, at the end of the third quarter was $68.9 million, compared to $68.4 million at the end of the prior quarter. As of September 27, 2020, our debt-to-trailing-twelve-month adjusted EBITDA ratio, excluding leases was 2.55, significantly lower than the 4.67 when we acquired MC Assembly in November 2018. Including capital leases, our debt-to-trailing-twelve-month adjusted EBITDA ratio was 2.94, which is in-line with our public company peers. We continue to expect that we will be able to further reduce our debt-to-EBITDA ratio exiting in 2020.

Our financial priorities during this COVID-19 pandemic remain focused on tight control over expenses, carefully managing our working capital and leveraging fixed-costs as revenues expand, and managing strong relationships with our partners to ensure financial flexibility so we can adjust as needed and support our operations through the continuing COVID-19 pandemic and uncertainty that creates. At the end of the quarter, and subject to debt covenants, we had $30.5 million available under our asset-based lending credit facility. To ensure covenant flexibility, as we continue to navigate through the continuing COVID-19 pandemic, we recently also further amended our credit facilities.

As noted on slide 6, based on the current demand and supply chain visibility, and assuming our facilities continue to operate at currently planned levels, we are reaffirming at the higher end of our prior guidance issued on August 5, 2020. We now expect revenues to range between $195 million and $205 million and adjusted EBITDA to range between $14 million and $15 million for the second half of 2020.

Further, with continued sales momentum and planned operational efficiencies, we currently expect 2021 revenues to range between $430 million and $450 million with adjusted EBITDA to range between $33 million and $37 million, consistent with the revenue and adjusted EBITDA margin targets in our long-term financial model. Based upon our revenue outlook, we expect improvements in our cash-to-cash days as we move through 2021.

With that said, here’s Eddie for some additional comments on our business and thank you.

Eddie Smith

Thank you, Steve. Q3 was a strong quarter. Our operations and supply chain teams continued to perform exceptionally well working around the challenges presented by the COVID-19 pandemic. If you are following along with our posted slides, turn to Slide 7. I am pleased that we are starting to see an acceleration of customer programs moving through the customer certification process, into new product introduction phase and entering production that will continue to ramp in 2021.

Over the last two quarters our engineering and production staff in Boston and Fremont successfully launched 11 new product introductions, or NPI, programs. Our business development and sales team continues to expand our business with $46 million in new customer multi-year customer orders in Q3 from five new customers and one new customer.

As noted on Slide 8, we remain focused on growing our market share in key markets that play to our strengths, including Industrial IoT, the regulated medical markets, and markets of customers supporting the defense and aerospace industry.

During the third quarter, we continued to see robust strength with some defense and space programs, which offset softness in commercial avionics. We also benefited from a rebound by our semiconductor customers. These markets provide a stable and solid base to profitably grow our business in the years ahead.

As Slides 9 and 10 illustrate, we are making progress and remained focused on achieving and maintaining a leadership position in terms of operational performance among our Tier III EMS peers, including revenue growth, gross margin, EBITDA margin and net margin percentage.

In short, we are on track to, and potentially, exceed our internal plans. We remain focused on deleveraging and prudently managing our balance sheet, generating returns for our shareholders that rank us among the top of our peer group, as we stay committed to being a very customer-focused company that provides superior service together with operational excellence.

With that, Steve, Rich and I will take questions from those on the call today.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Mike Crawford with B. Riley Securities.

Mike Crawford

Eddie and Steve, you have $176 million of new orders from new customers or new programs with existing customers in the trailing 12 months. But what about orders overall, including with existing customers with existing programs?

Ed Smith

Yes. So Mike, some customers like, so we build for some customers, commercial avionics. Those customers have gone really to zero, and I don’t expect them to come back for quarters, maybe even years. And so this $176 million that we referred to $179 million, some of that is replacing business that’s gone away. Same as in the payment system area, right? People not going to restaurants in certain states, reduce capacity in that makes it where the payment systems have dropped off dramatically. So I would say in a normalized year, that would lead to significant growth. But because of the pandemic in certain markets being more effective than others, it’s leading to, we’re showing double-digit growth, but it’s not the 20% or 30% it could be if we didn’t have COVID.

Mike Crawford

Okay. And then if you had to prioritize between, say, expanding capacity at Chihuahua, or in another of your facilities, or adding manufacturing footprint in Southeast Asia or pursuing external M&A; what seems most important at this point?

Ed Smith

Yes. So because of some of these new awards that you just referred to, we will expand our footprint in Mexico in our current facilities, which we own. We have 17 acres. We only built on eight of those. We are looking at what we should do with those other 8 acres or and what type of expansion. So if you were to show up at our facility, you’ll see that there’s some expansion going on now in a smaller way. But over time, we will need to expand. Our sales, when we talk about our sales next year, our facilities in Mexico next year could do over $250 million or more in Mexico. So first — number one priority would be to expand in Mexico. Clearly, not being in Southeast Asia and Europe is not where we want to be. I’m not actively out looking for acquisitions today. But as we get through this COVID, obviously, I’d like to be there. I would try to avoid a greenfield, but if I have to, maybe at some point, we’ll look at that. But today, I’m not there, Mike.

So I’d say, expanding our current facility in Mexico would be number one. And then looking at what markets we want to be, number two; and then M&A would probably be closer to number three. But clearly, things come across our desk every day about people looking to sell or merge or do different things. We look at them, but there just hasn’t been anything that’s excited us yet.

Michael Crawford

Okay. And then last question is just based on your guidance for fiscal ’21, it looks like in the second half of the year, you should be — you have the potential to exceed 8% adjusted EBITDA margins. And I’m wondering if that is where you see the long-term model with the existing footprint, maybe with some expanded space at Chihuahua, or if you have any changes to what you think you can get out of this company.

Edward Smith

Yes. As we expand and scale matters in the EMS space, so clearly we want to be over 8% next year, and so you’re right on with that. Can we get it to 9% or 10%? Obviously, that becomes a little bit more driven by how do we expand. Do we expand organically in our existing facilities? Do we pick up a new facility? But I would be disappointed, Mike, because, if you know me definitely as you do, I would be disappointed if at some point we can’t start touching 9% or even getting over 9%. But clearly, let’s first get to 8%, and then we’ll move from there.

Michael Crawford

All right. Thanks so much.

Operator

The next question is from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

Christian Schwab

Hey. Congratulations on a good quarter and execution here. As we look to 2021, kind of really strong double-digit growth in this environment expected, can you walk us through your confidence in that? Is that based upon all the new wins that we’ve won in the last 12 months? Is there market share gains? Or is it a continuation of extremely strong growth expected in the aerospace and defense market? I’m just trying to better understand that. It doesn’t sound like some of the businesses that have been weakened by COVID are going to improve next year, in your opinion.

Edward Smith

Yes. So that’s the greatest question. Most of that, if not 90% of that growth will be new customers that we’ve obtained over the last 3-4 quarters ramping up. So we had announced at some point, a large defense aero win. We’ve announced different wins. So Christian, we’re probably better in backlog this year than any year since I’ve been here in terms of orders and backlog going into the next year. And that’s actually why we decided to guide this early. Because if you remember, we normally guide in December, the first or second week in December. But we decided to guide early, because we have most of that either locked up through forecasts or orders. And so we thought it was appropriate to put it out. But most of that’s new customers or new programs with existing customers. I believe the existing customers will stay flatter this year than in previous years. And some of that aerospace commercial avionics business will stay away. I don’t see the 737 ramping back up this year and some of the other programs. So it’s mostly driven by new awards and new customers.

Christian Schwab

Okay. Great. And then just a great segue into the long-term model where you think you could grow this business over time at a 15% to 20% top line growth. Is that, I just want to make sure I understand that. Is that an organic growth number? Or is that assuming that over time, there’ll be potential future M&A?

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Eddie Smith

Yes. It’s a good question. Right now, the 15% to 20% will be organic. And what we do have in our house and our structural strategy, some data to take a look at M&A. But I don’t see us doing any of that for a bit here, unless something is so striking we’ve said, hey, let’s do it. I think that Q1, we’re bringing on a lot of customers in Q4. We’re bringing on a lot of qualifications in Q1. And so I don’t want to be distracted while we bring them on.

Once we get the couple of big customers on, we’ll probably take a look and see what’s out there and see if there’s something of value to us. But right now, that’s really clearly defined, Christian, by organic growth, but I would say a couple of years out as we gain some pretty significant scale. I don’t think you can grow 20% or over $100 million without some sort of M&A somewhere along the way.

Christian Schwab

Great. And then my last question has to do with gross profit margins. As we are doing a material ramp of new customer-driven growth next year, are you confident that as we ramp up these new programs that you’re prepared for that to be efficient? Or should we assume that there could be some hiccups as we kind of ramp all these new programs up at the same time, how should we be thinking about that?

Eddie Smith

Yes. It’s a great question. So normally, at the front end of a program, there are additional costs to that front-end of the program. And I think it won’t kill our gross margin, but it will probably keep it flat to down a couple tenths of a point as we ramp up through Q4 and Q1. So you’re never efficient the first day you add a large customer on. It normally takes a couple of quarters to get that efficiency. I would tell you that it’s probably a couple tenths of a point in Q4-Q1 and then ramping up to a very strong gross profit in Q2, Q3, Q4 next year.

Operator

The next question is from Craig Woods, Private Investor.

Unidentified Analyst

Yes, Eddie, if you could elaborate a little bit on the potential expansion plans in Mexico, I’m just wondering if we’re going to be able to do this. If we do need to do this, are we going to be able to do it fast enough to keep up?

Ed Smith

Everything that I’ve told you in terms of keeping up, we have plans for. So yes, in terms of keeping up, I don’t think there’s any issue there. In terms of expansion plan, we’ll announce at some point, what we’re going to do and how we’re going to do it so that everybody will be prepared. But, so I’m not prepared today to give you all the specifics. But we are clear that we’re going to have to expand in Mexico as we go here.

Unidentified Analyst

I guess I do have one other question. I think I touched on this on the last call about if there was any potential of losing any of you guys. And now it sounds like we might be. I don’t know if I heard you right, that we might be losing Rich. And I’m just wondering if you could elaborate on what plans we might have to replace him. If that is what I heard, I’m not sure if I heard that right.

Ed Smith

No, you heard that right. Rich, for personal reasons, has decided to make a change. This is, first of all, very sad for me. Me and Rich have been together, off and on 3 or 4 times over 20 years. And so we have started a search for a new COO. Rich has been kind enough to say that he would stay through Q1, which will get our customers on-boarded and a few of the projects done. And so I appreciate that from Rich. But life changes. Me and Rich have been through this together. Like I said, we’ve worked 4 times together. So I hope in the future, and we get another chance to do that. But Rich has made the decision to move on at this point.

So Craig, these things happen and we work through them. I have a list that if you want to use the old terminology, I had a Rolodex that I went through, and I’ve made a list of people that we have started reaching out and talking to, and we’re hoping to have the search done by the end of Q1 in that fix.

Unidentified Analyst

He will be with us through the entire first quarter?

Ed Smith

At this point, yes. So yes.

Unidentified Analyst

Okay. I sure hope that works out. I hate to say it looks like my fears of what I asked last time, unfortunately, they’ve been realized. I kind of had a feeling that something might be going to happen, and I wish I was wrong, but unfortunately, I’m not. But anyway, I’m glad you got plans to deal with that. So you guys did real great here this quarter. I’m really appreciative of the work you’ve done.

Operator

The next question is from Steve Kohl with Mangrove.

Steve Kohl

First off, I want to congratulate you on an excellent quarter. Obviously, we all know that COVID hasn’t been easy on many different fronts. And it’s rare to actually have a company come through when they say they’re going to. So congratulations on that. I did briefly want to also call out Rich. I think when I look back at SMTX to when you guys came on, the Company was in a far different place, as you guys know. And I think at this point, I can’t recall a time where I feel as good about the Company than I do now, or the plants have operated as well as they have now. And I know Rich has worked tirelessly to make that happen along with the rest of the team. But I think even more importantly, and my last point on this is that I think it’s having the people behind them to drive the Company.

And I think I certainly wish him the best of luck on his future endeavors. So good luck, Rich. I think in terms of a couple of questions, since I always, as you know, I’m going to have a few of those. Let me turn a little bit to the balance sheet. I know Steve has talked a little bit about kind of the EBITDA numbers, the adjusted EBITDA leverage numbers, which I think are relevant. I guess I’m trying to key on a couple of things.

One is the absolute debt level and kind of free cash flow generation in terms of how we see that playing out. And how does that dovetail in with some of the plans that you guys have talked about in Mexico, for example? And I know you haven’t talked about specifics, but presumably, that expansion is going to cost some amount of money. How does that tie into kind of the — some of the leverage ratios going forward and also our absolute debt levels.

Steven Waszak

Yes. So Steve, this is Steve Waszak. So as you saw, the absolute numbers in debt levels are constant across the last couple of quarters, which through COVID and through our increase in some inventory as well as we’ve got about $2.1 million of COVID costs through the year; we’ve probably had more pressure on some of the cash and we’ve been able to keep debt levels constant. So we’ve been working hard on that.

And so we’ll continue to leverage that. We watch it daily. We do our 13-week cash flows. With that, our collections are actually have been — each quarter have been a little stronger than the prior quarter. So that’s helped us a lot. We’ve done some good work around — Rich has done some good work around structuring some of our contracts with the aerospace defense in terms of payment streams that mirror when we have to acquire or bring on materials for these longer-term contracts. So all in all, we manage it on a daily basis. So you can see our history has been — we’ve been able to keep debt constant over the last 2 or 3 quarters in the midst of COVID in this whole process.

As we look forward, as Eddie talked about in terms as we look towards expansions and that, we’ll look at what alternatives are relative to generating the right sources and uses to manage through that. So it’s something that we have tremendous rapport with our banks, and we talk to them constantly about how we manage the operations. And the other thing with the growth that we talked about for next year, between 430 and 450, we’ll continue to put a bright light on working capital. So it’s top of mind, but we don’t expect it to increase on an absolute level basis. And by doing that, our debt leverage ratio will continue to decline relative to quarter-over-quarter based on having more EBITDA, higher EBITDA relative to the constant debt level from that perspective.

So in a macro sense, that’s where we’re at. We do work hard at it, and we do monitor it, like I said, almost daily. And certainly weekly with the updated week — 13-week cash flows and everything else.

Steven Kohl

Right. Eddie, did I hear this right on the new — when you look at new orders, was it largely just from existing customers and new programs versus

— was it just one new customer? Did I get that right or did I not get that right?

Edward Smith

It is largely new customers, new programs.

Steven Kohl

New customers, new programs?

Steven Waszak

Yes, Steve, you had it inverted.

Steven Kohl

Okay. It’s late here, so I did a hike and almost died today, so it could have had something to do with that, but maybe mixing some things up. But what do you guys — when you look at some of the areas that you’re targeting, I know, obviously, we talked about avionics being difficult and obviously, defense being a focus. Are there other segments of the market that you see as offering particular potential for you guys to target as we go out over the next year or 2? And where are we, how are you targeting those? And do we have some things in the pipeline? Or what can you speak or provide color there on?

Eddie Smith

Yes. So we have a pipeline, and we really go for 2 types of customers as a general rule, Steve. Highly regulated, which aerospace, defense, medical, all fall into the highly regulated markets and there’s others; and highly complex work, which semiconductor, capital equipment, those type of things. They need a certain complexity. They also need certain quality levels that are above and beyond the normal. And we look for those because we believe we get a higher-margin for doing those things. So yes, we look for certain types of customers. And right now the pipeline is strong in those sets.

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Operator

The next question is from [David Canon] with [Canon West].

Unidentified Analyst

Congratulations, great execution. And just would like to wish Rich Fitzgerald well, I appreciate your impact on the Company and whatever you do in the future, I wish you much success. So you kind of touched on this, but in terms of the organic growth, both in bookings and in the quarter, can you speak a little bit to those sectors where you’re seeing the strength?

Eddie Smith

Sure. We’re seeing a lot of strength in the defense aero market we’ll continue to grow. Two years ago, we were zero. Last year, we were at 5% or so. This year, I expect that to be 15% to 20% of our revenue. So we’ll continue to grow in the defense aerospace market significantly. We also expect to grow in the power market. And we think that, that’s a market for us that excites us. So when you look at the industrial IoT, power and clean technology, that will continue to grow. And then the third one that has really given us really good growth is the semiconductor capital equipment market. We’ve added 2 new customers in that market.

One was a division of one of our existing customers. So we’ve landed-expanded there. One is a brand-new semiconductor capital equipment customer, and that one is a pretty significant win, too. So we’re pretty excited about next year and the new customers and the expansion in our customer base. But clearly, we’re expanding where we want to. We’re expanding in the defense market. We’re expanding in semiconductor capital equipment and in the power, industrial IoT market.

Unidentified Analyst

So, Ed, my follow-up on that is, when one looks at those sectors, one can’t say they’re going gangbusters right now. So it appears as if you have a differentiated value proposition to these customers and you’re gaining share. Could you kind of summarize what that is versus some of the people that you’re going up against? And if I’m wrong, just please correct me, but it seems as though you’re gaining share and that you’ve got a value proposition that the customers are finding attractive and allocating more business to it.

Eddie Smith

Yes. I think it’s really a couple of things. One is, we are no doubt about it gaining share and winning new customers is the easiest way to check off the box if you’re gaining share, right? It’s a new customer. So somebody is losing it when you’re gaining it. So we’re excited about that.

I think driven by, first of all, our supply chain and our supply chain flexibility. So during COVID, we have not had some of the issues some of our competitors have had. And I think our customers see that flexibility and people who haven’t done business with us, want to be part of that because they say, hey, these guys have been really flexible with their existing customers, we’d like to have that same flexibility. So supply chain is one, and operational excellence.

We have a great leadership team through all our factories now. Each factory has somebody who’s been around the industry, has a lot of experience. And that wins us a lot of business. And then in the end, as we have success, people are talking about it. And people leave companies and they go to a new company and they call us and say, hey, we like what you did at our old company, come in and do that here. So I think supply chain, operational excellence and then the last is, I think, reputationally right now, because we haven’t closed down during COVID, because we haven’t had the issues of our competitors, we’re winning more business and taking market share.

Unidentified Analyst

Okay. And then just sort of a general industry question, this is my last question. I don’t want to monopolize. But given your execution margins, organic growth, it seems as you’re not getting credit for differentiated performance as a company. In the industry in general, right now, what you’re seeing; what are multiples — not saying that you guys should sell the Company per structure, but in the public market now, what are multiples you think that both strategic and financial buyers are paying, given that we’re in such a low interest rate environment? Because on one hand, we’re not getting a good multiple based on your guidance, which you’ve executed well on in the past. What do you think — what are some of the numbers out there that you’re seeing?

Ed Smith

Yes. This is probably the most intricate question that me and the board discuss all the time to how do you get the true value of the Company. But clearly, at 5.5 times EBITDA, I believe were undervalued. There’s people in the industry at 8 times, and I think the top is probably low double digits, 10 or so. So we should be probably somewhere between 5.5 and 10 — I think 7.5 or 8 seems to be a reasonably valued. But we’re not there. And so I think — I’m hoping that over a couple of quarters of performance and significant growth, that that will happen. But clearly, it’s a little frustrating. We’ve grown double digits every year organically other than this year, which is COVID. And even in a COVID environment, year-on-year, our growth will be 7% or so.

And there’s not many companies that could say one year, they grew 56%, the next year they grew 28%, then 7%. And now we’ll be back on the double-digit growth next year [indiscernible]. And so to get such a low multiple is a little bit frustrating. But clearly, I think, at some point, the true value will come out.

Unidentified Analyst

Okay, well, I’m a patient shareholder, and I have confidence in you guys.

Ed Smith

Thanks, David. We would like it to happen to borrow, but unfortunately, that’s just not the way the world works.

Unidentified Analyst

Okay. Thank you.

Operator

The next question is from George Melas with MKH Management. Please go ahead.

George Melas

Good morning, gentlemen. I’m fairly new to the story. So I’m going to — I have three questions and maybe they’re a little bit basic. But the first one is the new customers that you’re winning, the new programs, are you getting these primarily from other contract manufacturers or from company factories? Or is it sort of new programs where they’re looking for a new manufacturer to do the program, but you’re not taking it from anybody else?

Edward Smith

We are taking them from our competitors.

George Melas

So from existing contract?

Edward Smith

Yes.

George Melas

Okay. Great. Okay. And then two quick questions on the financials. I’m somewhat confused by the interest expense. I don’t quite understand why it’s so high. And then maybe you could comment on your CapEx expectations for next year.

Edward Smith

Sure. I’ll let Steve answer both of those.

Steven Waszak

On CapEx, we typically run between 1.1% to 1.25% of revenue. So we’re still developing our plans for next year. So we can’t comment on it specifically yet. We’ll get there in the next 30-60 days, we’ll lock it in. So that’s typically what we drive on CapEx, split between new and maintenance CapEx.

And then on interest expense, we have about a 10.5% on the Term B, I mean on Term A — sorry, on the Term A, Term B has been retired, so Term A is about 10.5%. And then the ABL is in that range of 4% to 5%. It’s LIBOR-based, so it’s in that range of between 4% and 5%. So on a blended perspective, we’re probably somewhere in that 8-8.5%, 9%. And then on top of that, we have some leases that are at some higher rate.

So that’s typically where we’re at. We’re in that range, and we’ve been in that range for a bit in terms of where we’re at. So until we refi, which we certainly look towards reshaping this debt. We continue to look towards, can we get it to a full ABL to get to a lower interest rate, things like that. How can we capitalize on some of this stuff to get to a lower interest rate? We’ll continue to go there. But we’ll be at these rates for a period yet in terms of the interest rates. Don’t disagree with you, we think it’s high. But those are the instruments we have in place today.

George Melas

But you can refi the A after November of this year, basically soon within just a 1% penalty, and is that something that you would consider?

Steven Waszak

Yes. It’s really we can refi the A. It’s a 3-2-1. So it’s at 2 right now. So we refied it a period back. So every August, it triggers into that 3-2-1. So we’re in that 2% range now. And certainly, we have to have the right capabilities to do it relative to our cash flow, relative to our assets, relative to our growth and all that. So I don’t see it happening immediately after November. But certainly, it’s something we scan the market for at all times to work with both our — we have a tremendous relationship with both the revolver and the term debt. So we talk to them continuously about how do we manage this debt to first and foremost, support the growth of the Company, because it is a working capital-intensive industry. And then second, we look at the cost of capital, which is important as well.

George Melas

Great. Thank you very much. Appreciate it.

Operator

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

Eddie Smith

Thank you, operator. First of all, in closing, I want to thank Rich for his dedication over the last couple of years, and to let him know that he will be missed. I want to once again thank our employees, leadership team, business partners, distributors and our stockholders for their continued support and look forward to reporting our progress to our various stakeholders as we go forward. Thank you, and have a great day.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.



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