Richardson Electronics, Ltd. (NASDAQ:RELL) Q1 2024 Earnings Call Transcript

Richardson Electronics, Ltd. (NASDAQ:RELL) Q1 2024 Earnings Call Transcript October 12, 2023

Operator: Good day, and thank you for standing by. Welcome to Richardson Electronics Earnings Conference Call for the First Quarter of Fiscal Year 2024. At this time all participants are on a listen only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Edward Richardson, President and Chief Executive Officer. Please go ahead.

Edward Richardson: Good morning, and welcome to Richardson Electronics conference call for the first quarter of fiscal year 2024. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer, and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power & Microwave Technologies Group and our newest business unit, Green Energy Solutions; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we’ll be making forward-looking statements. They’re based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different.

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Please refer to our press release and SEC filings for an explanation of our risk factors. Financial results for the first quarter of fiscal year 2024 were below our expectations due to concerns regarding economic conditions, rising interest rates, a lagging China economy, and the possibility of a recession across our global customer base. It was especially challenging period, given the downturn in the semiconductor wafer fab market and the timing of new orders in our Green Energy Solutions business. While sales were lower than anticipated, our gross margin improved from Q4 of fiscal 2023, and the team did an excellent job managing costs. Our core EDG and display businesses were in line with the prior year, and the company remained profitable in the quarter.

Despite near term challenges, we’ve never been more optimistic about our future. We expect the future downturn in the market demand to improve in the coming quarters, and we remain committed to our long-term strategy. Our strategy growth plan is focused on expanding our product lines, leveraging the deep relationships we have with over 20,000 customer globally. We do this by listening to our customers and helping them solve problems. We’re clearly building a name for ourselves as the technology leader in Green Energy Solutions. In addition, we continue to hear from key customers and technology partners in the semi fab equipment market that they’re at the bottom of the semi cycle. These companies anticipate growth in calendar year 2024 that exceeds sales levels during the 2022 cycle.

We’re taking steps in the interim to address the slowdown without impacting growth in these critical areas. We remain focused on increasing the percentage of our sales that come from our Green Energy Solutions business, as well as other products we manufacture. Much of this new business is project based and timing is not always easy to predict. The success of these strategies, however, supported by our sales growth, improved efficiency and higher profitability over the past several years. Our balance sheet remains strong with $25 million in cash and no debt. Throughout the company, everyone is focused on turning our inventory into cash, managing expenses, and driving toward annual positive operating cash flow next fiscal year. Bob Ben, our Chief Financial Officer, will review our first quarter financial performance.

Then Greg, Wendy, and Jens will discuss numerous opportunities within our business units, including the significant number of new products, programs, and customers that drive our optimism for the future.

Robert Ben: Thank you, Ed, and good morning. I will review our financial results for our first quarter of fiscal year 2024, followed by a review of our cash position. Net sales for the first quarter of fiscal 2024 were down 22.2% to $52.6 million, compared to net sales of $67.6 million in the prior year’s first quarter. PMT sales decreased by $9.6 million or 21.2% from last year’s first quarter, driven primarily by a decline in manufactured products for our semiconductor wafer fabrication equipment customers. Net sales for GES were down by $4.1 million or 48.4% from last year’s first quarter, primarily due to lower sales of ultracapacitor modules for wind turbines. It is important to note that the replacement of lead acid batteries in existing wind turbines is often project-based and the timing of orders is difficult to predict.

Canvys sales decreased by $0.5 million, or 5.0%, primarily due to lower customer demand in North America. Richardson Healthcare sales decreased by $0.7 million, or 22.1%, primarily due to lower demand in the quarter for parts and equipment. Total company backlog was $148.1 million at the end of the first quarter of fiscal 2024 versus $160.4 million at the end of the fourth quarter of fiscal 2023. Gross margin for the first quarter was 32.8% of net sales compared to 34.1% in last year’s first quarter. PMT’s gross margin decreased to 32.2% from 34.3%, primarily due to product mix and manufacturing under absorption. Healthcare’s gross margin decreased to 31.6% in the first quarter of fiscal 2024 compared to 36.7% in the prior year’s first quarter as a result of increased scrap expense and manufacturing under absorption.

GES gross margin increased in the first quarter of fiscal 2024 to 36.0% from 35.5% in the prior year’s first quarter due to product mix. Canvys gross margin increased in the first quarter of fiscal 2024 to 34.0% from 31.4% in the prior year’s first quarter because of product mix and lower freight costs. Operating expenses were $15.8 million for the first quarter of fiscal 2024 compared to $14.2 million in the first quarter of fiscal 2023. The increase in operating expenses resulted from higher employee compensation expenses, primarily salaries. The company reported operating income of $1.5 million or 2.8% of net sales for the first quarter of fiscal 2024 versus operating income of $8.8 million or 13.0% of net sales in the first quarter of last year.

Other income for the first quarter of fiscal 2024, including interest income and foreign exchange, was $0.1 million compared to other expense of $0.3 million in the first quarter of fiscal 2023. Income tax provision was $0.4 million, or 23.7% effective tax rate versus an income tax provision of $2.1 million, or 25.0% effective tax rate for the first quarter of fiscal 2023. Net income for the first quarter of fiscal 2024 was $1.2 million compared to net income of $6.3 million in the first quarter of fiscal 2023. Earnings per common share diluted were $0.09 compared to earnings per common share diluted of $0.45 in the first quarter of fiscal 2023. Moving to a review of our cash position. Cash and investments at the end of the first quarter of fiscal 2024 were $24.1 million compared to $25.0 million at the end of the fourth quarter of fiscal 2023.

U.S. cash and investments were $8.4 million at the end of the first quarter of fiscal 2024 versus $7.6 million at the end of the fourth quarter of fiscal 2023. Capital expenditures were $1.1 million in the first quarter of fiscal 2024 versus $1.4 million in the first quarter of fiscal year 2023. Approximately $0.9 million related to investments in manufacturing, including facility expansion and the renovation of our office space. We paid $0.8 million in cash dividends in the first quarter of fiscal year 2024. In addition, based on our current financial position, our board of directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the second quarter of fiscal 2024. As of the end of the first quarter of fiscal 2024, the company had not made any draws on its $30 million revolving line of credit with PNC Bank.

Now, I will turn the call over to Greg who will discuss the results for our PMT and GES business groups.

Greg Peloquin: Thank you, Bob. Good morning, everyone. In Q1 FY 2024, Power and Microwave Technologies, or PMT, and Green Energy Solutions, or GES, continued to gain market share by developing new products and new customer relationships, while maintaining our market share with our existing customers. However, we did see a slowdown in revenue coming out of a record year in FY 2023, which was mainly due to the semiconductor wafer fab industry slowdown and timing of a number of very large project-based GES opportunities. PMT sales were down year-over-year by 21%, primarily based on the semiconductor industry slowdown, which started late in calendar year 2022. Again, it is very important to note that we have not lost any market share in this business segment.

And through excellent customer relationships and communication, we are hearing that sales will reaccelerate in the back half of calendar year 2024. And that 2025 is anticipated to show record demand and sales. We are well positioned to manage this business as the customer demand increases. GES sales were $4.4 million in the quarter, down $4.1 million from the prior year due to timing on several major project-based opportunities. During the quarter, we added several new customers and increased our market share with customers needing our niche patented Green Energy products. We have many highlights in Q1 for our GES Group, beginning with the wind and energy market. During the quarter we added over $1 million in bookings with several new customers for our flagship ULTRA3000 product, increasing our backlog in this product line to over 12,000 units.

All of our existing wind customers are significantly expanding their budgets for lead acid battery replacement within their GE turbines over the next couple of years. Their market potential for the ULTRA3000 remains at more than $150 million. The product is reliable and we are enjoying great success and continued relationships with our Tier 1 owner-operators. GE Marketplace, which targets more than 800 wind farm management companies, has also started to produce orders as we work directly with GE farm owner-operators, site managers, and technicians. With over 41,000 units in the field, three patents, and exclusive relationships with the largest owner-operators in North America, we continue to be very excited about this product, technology, and opportunities.

Our beta testing of our patent pending Ultra UPS 3000 with Siemens and other owner-operators of GE and Siemens Wind Turbines is underway and going well. The Ultra UPS 3000 replaces lead acid batteries in the uninterrupted power supply, or UPS, that sits at the base of every wind turbine. We’re moving forward to testing on other wind turbine platforms, such as Senvion, Suzlon, and Nordex. Once we begin production, we anticipate expanding to other markets and applications as this product works anywhere a UPS is used. Our ULTRAPEM or multi-brand pitch energy module is in beta testing with Suzlon on an OEM basis. This opportunity is for more than 7,000 turbines in India alone and several thousand more in North America. This product is also in final testing with a number of owner-operators in Latin America and North America, which have an SSB pitch system.

In the EV and diesel locomotive segment of Green Energy Solutions, due to supply chain issues our superstructure builds for Long Island railroad and Burlington Northern electric locomotives will be completed in late Q3 and Q4 of this fiscal year. We have received beta orders for a patented ULTRAGEN3000 starter module with two large diesel and EV locomotive manufacturers. We’ll be doing the beta testing in 25 trains in Q3 FY 2024. It is important to note that we are exclusive with both of these customers. We continue to identify other niche applications in this patented technology. We are in beta testing with several refrigeration truck manufacturers where the ULTRAGEN is replacing lead acid batteries. There are currently 500,000 refrigeration trucks in North America and we estimate this market opportunity to have a TAM of $200 million.

There are numerous other markets that this product will be applicable to, such as construction equipment, including excavators, loaders, and backhoes. After a record Q4 and record FY 2023, shipments slowed in Q1 and we expect this trend to continue in Q2. With bookings and new products along with the forecast and backlog from our project-based customers, we feel that Q3 and Q4 will be extremely strong for Green Energy Solutions. We have not lost any market share, and we continue to increase our market share with new products, applications, and customers. Now turning to PMT, which includes EDG, our legacy tube business, and PMG, our Power & Microwave Components Group. Sales decreased 21%. Sales were $35.7 million versus $45.3 million in Q1 last fiscal year.

This decline was due to the major slowdown in the semiconductor wafer fabrication equipment business. The decline was somewhat offset by growth in our laser and broadcast tube business which remains steady. We also saw strong bookings in our RF business. The team has been supporting the semiconductor wafer fabrication business and its customers for well over 25 years. This business has always been cyclical. We anticipated the slowdown in 2023, but again, expect the business to recover in the second half of calendar 2024. Our engineered solution strategy is driven by our global technology partners, such as [Qorvo] (ph), Maycom, Anokiwave, Ellis Materials, Amo Greentech, [Novidis] (ph), and Fuji Electric. Key tube manufacturers and partners include CPI, Talus, Nisshinbo Micro Devices, and Photonis.

Each of our global partners helps us meet and manage customer requirements. Our team has done an excellent job identifying and cultivating these relationships. We will continue to add technology partners who fill technology gaps in our offering and support our growth. Often, through these partners, we identify opportunities for new products, and we design and manufacture in-house, increasing the value we provide customers and allowing us to capture more revenue and increase our customer base. These long-term relationships are extremely strong and we work with them on strategic long-term purchases to keep our customer sources of supply continually in motion. We negotiate special payment terms and shipping schedules to help improve cash flow.

In addition, having inventory on hand allows us to capture and maintain market share. We also continue to invest on infrastructure to support our growth. We are bringing on talented design and field engineers and making investments to enhance our manufacturing capabilities. Our growing in-house design engineering and manufacturing teams are doing a great job supporting the increased demand for current products and new product designs. I am pleased with the progress. And with this team, we will continue to identify, develop, and introduce new products and technologies for Green Energy and other power management and microwave applications. Our growth strategy has been proven to be highly successful over the years. We will continue to develop new products as well as increase our customer base revenue and profits by capitalizing on existing demand creation infrastructure.

Our belief in the future based on our customer forecast requires us to strategically invest in inventory that positions us to fill the pipeline, and ensure we can meet our customers’ needs through close collaboration with both our customers and the suppliers themselves. I cannot stress enough the value of Richardson Electronics model to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power and energy RF and microwave and green markets. We have developed a strong business model including legacy products and new technology partners that fit well with our engineered solutions capabilities. Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities as they arise.

The execution of our strategy has never been better. There’s no question our customers and technology partners need Richardson’s products and support more than ever. We remain excited about the future as we find opportunities and build our market share for PMT and GES with new products and customers. Our team will continue to work closely with our customers throughout the beta testing phase for these exciting patented products. And with that, I’ll turn it over to Wendy Diddell to discuss Richardson Healthcare.

Wendy Diddell: Thanks, Greg. Good morning, everyone. First quarter sales for the Healthcare division were $2.6 million, down 22.1% versus the first quarter of last year. Sales were down in all product categories, reflecting lower demand for parts and services throughout the most recent summer months. In the quarter, we sold all of our repaired Siemens Stratton Z tubes, helping improve our gross margin to 31.6%. While this was lower than the prior year’s first quarter, this is a significant improvement from the fourth quarter margin of 23.7%. On a year-over-year basis, gross margin was negatively impacted by higher scrap costs in the quarter. We continue to make good progress on the Siemens repaired tube program. This is a series of four tube types, including the Stratton Z, MX, MXP, and MXP-46.

The Siemens CT install base is considerably larger than the install base for our ALTA tubes and there are no third-party replacement options for these tube types. The repaired Stratton Z is in full production and performing well in the field. We expect sales to rise gradually in the coming quarters as we expand our production team in the repair process and add more tubes to inventory on a consistent basis. We also continue to make good progress on the repaired Siemens MX series. We know demand is strong based on discussions with our customers. While we anticipate launching the first repaired MX series tube around the end of the calendar year, supply will be limited due to recent challenges we are experiencing replacing a critical component.

It is important that we get it right and we believe we are on track to do so. This will delay having sufficient inventory to meet customer demand until FY 2025. While our engineers work on the Siemens repaired tube program, we continue to work our way through the local registration process for reloading tubes in Brazil. We still anticipate this program may have a small, yet positive, impact on our revenue in FY 2024. We remain cautiously optimistic that the ongoing development efforts within the healthcare business will enable the division to achieve its goal of breaking even in the fourth quarter of this fiscal year. I will now turn the call over to Jens Ruppert to discuss the results for Canvys.

Jens Ruppert: Thanks Wendy. And good morning, everyone. Canvys engineers, manufacturers and sells custom displays to original equipment manufacturers and industrial and medical markets throughout the world. Canvys’ performance remains strong with sales of $9.9 million for the first quarter of fiscal 2024, down slightly from $10.4 million during the first quarter last year, and up from $9.2 million in the fourth quarter. First quarter sales reflected stable custom demand globally, and we finished the quarter with a backlog of $42.6 million, which remains strong. Gross margin as a percentage of net sales was 34.0% during the first quarter of fiscal 2024, compared to 31.4% during the first quarter of fiscal 2023. The increase in gross margin was primarily related to a more favorable product mix.

During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these applications include: ophthalmology, laboratory equipment, video documentation systems, robotic assisted surgery, and surgical navigation. In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes large-size industrial printers, displays used in the public transportation space, human machine interfaces for packaging machines, and industrial automation, tailor prompting, talent monitors, and clocks used in the broadcast market. Over the near term, we expect increasing interest rates and continued high inventory levels will have a short-term impact on our business.

Customers are forecasting more conservatively and only placing orders when the inventory is at a minimum level. We haven’t lost the program, but we expect sales to vary quarter-to-quarter depending on our customers’ inventory levels. Given the number of projects currently in the engineering stage, we believe sales will re-accelerate towards the end of this fiscal year. We are proud of the efforts and innovations of our talented engineering team and the ability to design products that help create productivity and value for our customers. During the quarter, we further advance our high-end 4K display offering by adding a special film to the LCDs to ensure a super low refraction. The monitors have been evaluated by large medical companies with very positive feedback.

From the variety of customers and applications, as well as the value of orders from existing and new customers, it is clear we offer our global customers outstanding products and localized service. While our sales organizations is focus on new opportunities, I stay focused on improving the operating performance of the division. Maximizing cashflow and improving Canvys’ probability is an ongoing priority as we continue to work closely with our partners to meet the demands of our customers. I will now turn the call back over to Ed.

Edward Richardson: Thanks, Jens. We understand the near-term challenges you face, but we remain confident that Canvys will continue to grow, given its stronger relationships and recognition as a leading custom display solutions provider. To conclude, we’re excited about the direction we’re headed. We remain committed to our employees, our customers, our suppliers, and our shareholders. We’re investing in our growth initiatives with an emphasis on engineered solutions that improve sustainability. We’re a GES business just getting started. The products we manufacture are used in aftermarket applications, and we have solutions that improve operating efficiencies and help companies achieve their green energy goals. Much of our legacy business, including EDG, is reoccurring revenue for consumable products.

Within the launch of the Siemens repaired tube program, we anticipate improvement in our healthcare business, helping strengthen our bottom line. We’ll protect our cash and focus on improving inventory turns. Finally, we’re confident that we’ll emerge from the challenging period stronger and better positioned to grow in sales and profitability later in the year. We continue to believe it’s not a matter of if, but when. At this time, we’ll be happy to answer your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment for our first question, please. And our first question comes from Anja Soderstrom from Sidoti. Your line is now open.

Anja Soderstrom: Hi, and thank you for taking my questions. So first, I’m curious for the [GES] (ph) that came in quite softer than I had anticipated. Can you just talk about the timing there? Was it something that was just shifted into the second quarter or is it just these larger projects that you are seeing longer sales cycles of or how should we think about the second quarter for GES?

Edward Richardson: Yes, it was a combination of two things. First of all, the Phase I orders that people in terms of setting their capital budgets, how many farms and how many turbines they were going to start to implement taking out the lead acid batteries with our ULTRA3000. That phase was expedited. The team did an absolutely fantastic job getting the product to the customer in our fiscal year and in the dates they needed it. That was completed. They’re installing them over the next couple of quarters. And according to each one of them — and we are tied in with every major owner operator of GE wind turbines in North America, the Phase II will start early 2024. So in essence, the first quarter of calendar 2024, we’ll start seeing the bookings for Phase II.

And right now, it looks like, for example, our backlog today is about the size of our sales last year. So we’re looking to grow in this fiscal year. The exact timing of how much we’ll ship in Q3 and Q4, this project-based business is very hard to do that, but inputs from the customers is, that’ll kind of be the progress going forward.

Anja Soderstrom: So the second quarter is expected to be at the same level as the first quarter sort of?

Edward Richardson: It’ll be very close to the first quarter shipments.

Anja Soderstrom: Okay, and then on the flip side, the PMT was stronger and with sub-growth sequentially. What’s driving that and how is that continuing into the second quarter?

Edward Richardson: Yeah, both the tube business and then the RF and wireless component business did good. The RF and wireless component business received a lot of strong bookings in Q3 and Q4 of last fiscal year. And so we had very strong shipments in there. Their backlog grew and they grew year-over-year in Q1. On the tube side, we had real strong growth in our laser tube market and also we had a large business with some replacement business [indiscernible] 354. So that’s just very consistent business. It goes up and down 5% or 6%, but with the recession coming on and this being replacement business, it’s not 100% recession proof, but it’s because it’s repair business, we seem to have consistent numbers throughout the year. So we’ll probably see the same type of growth that we saw on Q1, and now in Q2 throughout the year.

Anja Soderstrom: Okay, thank you. And then inventory seems to be managing that well for the quarter. How — what’s included in that inventory and how are you going to need to start building that in anticipation of these large orders that you expected in the second half?

Edward Richardson: Yes, there was two main increases in the inventory, very strategic purchases. One was some long-term, lifetime buy orders to support our customers on product that’s being discontinued over the next couple of years to make sure our customers we’ve had for 20-30 years have a source of supply. And the other part of it was, four months ago we had zero inventory on the ULTRA3000 and many of the GES products. So we’re trying to build up inventory where we have a quarters — a minimum of a quarter’s worth of inventory because just like it’s hard to predict these project-based orders, When they come in, typical customer, they want them the next month or the next week, so we went through two years of daily calls and the supply chain issues, and we can’t let our customers down, and we did an amazing job, as you saw with the numbers from FY 2023, supporting their Phase I builds, both in the locomotive and wind turbine business.

Anja Soderstrom: Okay, thank you. I’ll get back in line.

Edward Richardson: Thanks, Anja.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of P. Ross Taylor with ARS Investment Partners. Your line is now open.

P. Ross Taylor: Thank you. I very rarely get the full name. A couple of things first. Revenues were down about $10 million in the semi-cap equipment space. That carries probably about your best margins in your firm. So would it be safe to assume that on operating profit basis that probably hit you guys by something in the neighborhood of around $5 million?

Edward Richardson: On the operating profit.

Robert Ben: That’s probably a fair assumption. It might be a little less than that, but that’s about correct.

P. Ross Taylor: Okay. Do you have any ability to reduce the other costs associated below the operating profit line when you see a drop like that?

Wendy Diddell: So — Hi, Ross, it’s Wendy. We had a few layoffs that we were able to take some costs out there. We had some people voluntarily take furloughs. We were able to take some costs out there. Our plan is considerably higher than where the sales actually came in, so we have savings in the incentive area. We certainly hold off on adding any non-critical ads to staff. And in general, we look at things like travel, can we cut back on that? Marketing, can we cut back on that? But you’re not going to see a $5 million reduction in SG&A.

P. Ross Taylor: Okay. So it’s safe to say that probably cost on an operating basis $0.35, $0.40 a share. You’re being told to look for fiscal 2025 that would be at record levels better than you saw last year, is that true?