Richardson Electronics Ltd (RELL) 2004 Q1 法說會逐字稿

Ladies and gentlemen good morning. Thank you for standing by. Welcome to the Richardson Electronics first quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you do need assistance during the call please press star and then zero, an operator will assist you. As a reminder, this conference call is being recorded. I will turn the conference over to your host CEO Mr. Ed Richardson, please go ahead sir.

Thanks Barb. As you know we released earnings last night, for those of you who missed it it's on our Website which is www.rell.com. I have Bruce Johnson with me, who is president, Dario Sacomano who is Chief Financial Officer, and Greg Peloquin, who is executive VP of the RF and Wireless Group. Well, it was a very solid quarter, we felt, sales ended as $119.3 million, up 10% from the prior year. Normally, we look at a sequential decline in the first quarter, compared to the fourth quarter. The summer tends to be a rather slow quarter, especially in Europe, where August is pretty much a holiday month, especially for Southern Europe. But we sort of reversed the trend this year. The business was actually up sequentially about .3% when it's normally down four or 5%. So this was a fifth consecutive quarter of year-over-year growth. And we have really continued to try to balance the business. We continue to invest. Several of our competitors have deemphasized the RF and Wireless business in particular, and we took the opportunity during the quarter to add about five RF and Wireless engineers that were available from these companies, really the gate on our growth in the past has been the availability of RF and Wireless engineers and qualified engineers to staff all of our SBUs and we are taking the advantage of our economic downturn and the availability of these people to continue to add resources, which we think is working. Certainly, our sales are up and we continue to gain market share where we're hearing that many of our competitors are still showing declines. We hear from our vendors that we continue to gain market share across the board. So we've seen growth from all of the SBUs which was really encouraging. The sales run rate during the summer increased each month in the quarter. It ended with August being a record month. Sales were 48.8 million, and so we continue to see that growth, and it's, at least from the sales side, very positive. Net earnings were 4 cents, certainly not what we'd like to see, but we think good progress compared to 2 cents from a year ago, before the cumulative effect of the accounting change, which Dario will talk about. The RF and Wireless Group was up about 5.7%.

One change that you should note, and we footnoted, is at the end of the fiscal year we made a decision to take the broadcast power grid II business and transfer it from the RF and Wireless Group's broadcast business unit into the Industrial Power group. The reason for that is the Power Grid II business is primarily an aftermarket business fits very well with the IPG where they have 62 million worth of tube business and one of our largest vendors for power grid tubes is supported by IPG and it made more sense to have all that product under the IPG Group. So that basically reduced the amount of RFWC business. We have released all those numbers and Dario will talk about them. If the two businesses had still been part of RFWC their business was actually up 6.4%. As part of that, the passive interconnect business did very well under RFWC. They were up 19% in the quarter at 8.8 million, gross margin was at 27%, which was about flat with a year ago. Asia, as part of RFWC continued to do extremely well. Set a record. They were up 26% at 16.6 million. The Industrial Power Group did very well in the quarter, their sales were up 10.2% to 25.8 million. Margin was down slightly at 29.7. The broadcast tube business being combined, the broadcast business is very competitive, so that had some effect, although the overall tube business in IPG, even with the re-class, was up 11%, which is really encouraging. The overall tube business has a margin of 30.7% with the broadcast tubes included. Power components were up nicely, up 13%. And in Asia, again, which continues as a geographic region to be our star performer was up 24% doing very well for IPG. The Security Systems Division also doing very well, they were up 12.3% to record company sales of 25.2 million and they increased their margin almost a full point to 25.3%, in fact it was a full point, they were 24.3 prior to that. Canada leads the performance. The Canadian operation for security was up 20% in sales and also increased their margin from 25.9 a year ago to 27.6. Bruce will talk about this in detail, but it has a lot to do with the success we are having with digital video recorders in that market as everything goes from analog to digital. Europe for security also doing well. Their sales were up 16%. And their margin went from 26.3-29%. The majority of the Security Systems sales in Europe are Engineered Solutions sold under our private labels which are National Electronics or Capture and they've done very well in Europe with those products.

Display Systems group led the SBUs with the largest sales increase. They were up 21% in the quarter to 16.1 million. Marginal is down slightly, about a half a percentage point to 26.5%. Their growth was led by the medical monitor business which was up 54% in the quarter, with sales 6.4 million, margins down slightly, but really some excellent seams growth. And overall DSG, the Display Systems group was up 24% in the U.S. to 12.3 million. So they've really been doing extremely well. Sales by geographic area, North America was up 8.5% to 63.6 million, margin was up just slightly at 26.8%. Was led by Canada, that was up 21%, and a lot of that dealing with security, to 17.6 million, and the U.S. was up about 4% to 46 million. Europe, even in a period which is normally slow for Europe because of the August shut-down, Europe was up 10.6%, 24.8 million. More importantly, they increased their margin from 26.5-29%. Spain led Europe, Spain has always extremely consistent performer for us, and Spain was up 36% during the quarter. And finally, Israel turned the quarter. We had seen declines in Israel for if last couple of years and Israel was up 30% in the quarter. So we're encouraged by that. Asia Pacific, as I mentioned, continued to be the star geographically. They were up 24% with a record quarter at 21.5 million. Margins still below our company average, but we're really pleased with the sales growth. China was up 105%. So China has its own economy, just keeps perking along, and our model is really well accepted there. The Southeast Asia did well Singapore and Thailand up 36%. Latin America, hopefully we finally found the bottom. Latin America was up a fraction of a percent, at 5.1 million. And I'm off this afternoon to Mexico and then to Brazil, and we're really working hard at reorganizing Latin America and hope to see some good growth there in the future. So with that Al turn it over to Dario to discuss the P&L and balance sheet and Bruce will go over bookings and highlights of the quarter with you.

Just to reiterate one comment that Ed made which is that the 119.3 million in sales which is essentially flat to Q4 '03, really it does break our traditional seasonal pattern of being down 4-5%. And in addition to that we really had good momentum within the quarter. Sales built leading built leading to a record August, about a point above our August of fiscal 2001. So we had a record August. That's encouraging. Gross margins were at 24.4%, that's up 30 base points from Q4 of '03, sequentially, just primarily driven by good business mix. The degradation of 60 basis points from the prior year really reflects a continued delay in substantial Engineered Solutions growth in RFWC and DSG. SG&A at 25.8, that's 21.7% of sales, which was down from 22.3% of sales from the prior year. Half of the an absolute dollar increase year over year of 1.6 million can be attributed to currency which was offset in sales and margin benefits. And then the remainder of the increase in expenses is associated with commission on hire sales and some PeopleSoft implementation expenses. In the category of other expenses, basically flat at 2.5 million, the majority of that number was interest at 2.4 million. And that leads us to an EPS of 4 cents compared to 2 cents in the year-ago quarter, before the cumulative effect of our FAS 142 goodwill adoption last year. So if I turn to the balance sheet it was actually very good performance. Cash as 18.1, up 600 K from year end. Accounts receivable at 85.1 million, that represents 59 days of sales outstanding. That's flat with Q4, but down from the prior year, which was at 66. Inventory, good performance at 93.6, it's actually down $2.3 million. That represents 94.5 days which is down from Q4's 97 days. If you look at the prior year numbers restated for the reserves we took at the fourth quarter we were sitting at about 106 days a year ago so good performance on inventory. Property at 30.7 million, combination of capex at 1.3 million offset by depreciation at 1.5 million. Accounts payables at 28.7 million represents 27 days, that's up from 22 days in Q4. And that's mostly due to just quarterly cutoff versus payment timing. I would expect our days to be more normal at around 25. Debt, 134.6, down 3.8. And if you look at the whole thing, the bottom line overall, free cash flow for the quarter of $3 million, $2 million of it going to debt repayment. So with that I'll pass it over to Bruce for some highlights.

Thank you Dario. I'm going to give you an update on bookings and highlights of each one of the SBUs first of all I'm happy to say that the booking trend also outperformed our traditional seasonal sales pattern. And for the company, sequentially we were up 6.5% in bookings, and 5.1% over the prior year. RWC was up sequentially 8.5% but below the prior year by 4.5%. However the most significant event with RWC which Ed touched on is during the quarter, RWC's major competitor consolidated their RFP division into their generalist semiconductor group. This happened both in North America and Europe, thus reducing their specialty focus on the RF Wireless market. A major opportunity for us. In GNM, which is our engineering entity solution in Italy they designed and manufactured a new UHF digital broadcast pallet and samples are now being distributed to potential customers through out Europe. We booked our first order this week for $200,000 and we are very optimistic about the potential for this device. Aneriin which is a major passive component vendor provided us with a global franchise which is a key strategy within Richardson an we also signed a worldwide franchise agreement with Huber & Suhner. Both of these vendors represent world leaders in passive components for the wire and wireless industry. Turning to IPG, very strong performance, bookings are up 15% sequentially, and almost 19% over the prior year. And during the quarter they were appointed as both a distributor as well as a factory rep for a major vendor, Cornell Duvalier, passive component vendor, for most of Europe, Latin America, the Russian federation, and South Korea. They selected us due to our engineered focus and strong relationship we developed with them as a key vendor partner over the years. Security Systems was up sequentially 5.3% over the prior year by 8.2%, and as Ed mentioned, the strong sales were led by both Canada and Europe, and also this continued evolution to digital technology which we're taking full advantage of primarily through the development of appropriate digital and new products.

Display Systems again as Ed had mentioned sequentially we're down in bookings by 8.3% but ahead of last year by 11.5%. And our medical business unit continues to perform at record levels. And that we've now experienced three consecutive quarters with over 50% growth compared to the prior year. And turning to the area geography, in North America sequential bookings were up 4.7% and ahead of the prior year by 2.2%. In Europe, due solely to the holiday shut down, as Ed had mentioned, declined sequentially 7.1%, but they were ahead of last year by 7.6%. Asia Pac is on fire. 48.5% increase sequentially, 16.8% over the prior year. Korea and China led the way. Ed mentioned this. Korea achieved a 17 month high in July in both bookings and billings which they then turned around and topped in the month of August. China achieved an all time high booking month in August which was 97% over the prior year, and 40% sequentially over July. And much of their success has been derived from continued growth in avionics, and aerospace. And our design into production wireless business nearly doubled in the quarter as well, also contributing to the very positive results. And lastly, Latin America still soft, 4.7% decline sequentially. And 4.2% below the prior year. Ed.

Thanks, Bruce. Well, we were overall very encouraged by the quarter. The engineering activity continues to be at the highest level in the company's history. We've added additional engineers to support the customer demand for our Engineered Solutions strategy. In one way, it certainly drives the SG&A expense up, as we include our engineering cost in SG&A. We actually recover that cost when we sell the components, or the assemblies that our engineers are designing. So we find ourselves in a situation where we have many design wins, and the engineering activity is at the highest level ever with a lot of cost involved. Now, if we can get those design wins to turn into production, then we recover our engineering cost and, of course, the profits from selling the components and the assemblies. So if we can just continue the sales increase and get this economy to help us a little bit, we think that there's no question that our strategy and model is working very well. We're getting increased demand both from our customers, which we talk about a lot, but also from our vendors. More and more of our vendors are supporting our model, and as other companies have deemphasized the RF and wireless business in particular, also true in display, more and more the vendors are turning to us to give them a technical channel to market on a global basis. I know all of you are always looking for guidance on future quarters and earnings. Visibility continues to remain rather poor. Several years ago, customers were giving us schedule orders, sometimes out a year. Today we're lucky if we see scheduled orders that are 90 days out. And the long-term visibility still remains very, very poor. But based upon the solid billings that we've seen in the first quarter, we anticipate the normal seasonal patterns, at least to continue, and that would say in Q2, that our sales would be up 9%, which is the historic pattern sequentially from Q1. We also think we have a pretty good control on gross margin. And SG&A, so gross margin will remain about flat as we continue to be aggressive out there on selling products, and SG&A should remain about 20.5%. I wish we could give you more than that, but that's about where we're today. And again, we're encouraged. We think, anyway, we've seen a slight turn in the economy, and things improve, certainly our model is out performing the market, and our job now is just to continue to execute, and maximize the opportunity that's out there. So Barb, with that we'll open it up for questions.

Very good. Ladies and gentlemen if you would like to ask a question please press star 1 on your touch tone phone. You'll hear a tone indicating you've been placed in queue. You may remove yourself from queue by pressing the pound key. If you are on a speaker phone pick up the hand set before pressing the numbers. Star and 1. Rob Damron from 21st Century. Go ahead.

How are you?

Good.

Just a quick question on the Sales guidance, as you mentioned Ed sales expected to be up 9% in the next quarter. That just seems pretty optimistic, given the -- how strong this latest quarter was. You normally get the seasonal slow down in the August quarter which makes for I guess a little easier comparison going into the November quarter. But since sales were so strong this past quarter, I guess you must have some confidence that the November quarter's going to be pretty strong.

Well, you know, I think we feel good about the first quarter, and there's a lot offing activity, as we alluded to, we've added a number of RF and wireless engineers that have come from one of our competitors who bring excellent relationships with some existing customers to our company, and I guess just overall, we're really feeling good about the way things are going, and to get back to our normal seasonal increase in 9%, I think is achievable.

Okay, well, that's great to hear. Second question is regarding the change in compensation structure. I believe you implemented this just in the last few months, compensation on return on assets as opposed to on margin. And just want to kind of get the feeling of -- or have you seen any change in behavior from the -- the SBU managers as a result of this change in compensation and do you believe that we'll see, you know, better balance sheet management going forward? Obviously you had nice balance sheet management this quarter. But should we see continued improvement going forward as a result of this change in compensation?

I'm sure we will. And I'll let Dario comment on the specifics.

I think there's definitely been, you know, more focus. We've always focused on inventory but our awareness of inventory management has been heightened in the change in incentive structure and I'd like to think that, you know, some of that change helped us to get to 94.5 days. And I hope it would continue. It is a quarterly incentive so there is no reason to think that our focus is going to change.

Is receivable in also in that calculation for managers or just inventory?

The incentive piece is just inventory at this time. We look at a total ROA picture by SBU but at this juncture this is not part of the incentive scheme just because we are trying to get our allocation schemes and data right before we step into that which we'll probably do for next year.

Okay. And then just last question. Regarding the gross margin trend, Asia for all good Reese opens seems to be the fastest growing segment, sounds like that's probably going to continue to be the fastest growing segment going forward but yet that is a lower gross margin business. And I know the company's stated goal is to continue to improve gross margins. So is that going to be difficult to see the gross margin improve going forward, if Asia continues to grow as a percentage of sales?

Rob, normally what happens, obviously, in a geographic basis, Asia's our newest market, although now it's getting to be four or five years old. Certainly China, in particular. And when we go into the customers, we lead with the components, the design end of components. And once the customers get comfortable with our engineering ability we sort of move up the food chain and start working with them to design circuits, and then supply amplifiers and pallets when the margin is a full ten points higher. Day one first we sort of have to buy market share to get the customer's attention by selling them components. Then we design in components which improve slightly and then ultimately once we get a complete partnership with the customers we can use our Engineered Solution strategy with amplifiers and pallets to move up and improve the margin. So we're probably a couple of years away from that but that's normally how the process goes.

Okay, that helps. Thank you.

Next question is from the line of Greg Ramsby from de Prince.

The comment you made about your major competitor reducing their focus on RF, specialty RF wireless. And the comment you made about that being a major opportunity for you guys. Could you talk about that a little bit more in terms of what exactly have they pulled back from, and are you already seeing, you know, are you already gaining market share, stuff like that, please?

Yes, well, we understand in North America that can tell you specifically, but that that business was somewhere between two to 300 million in sales. And they've chosen to eliminate the specialty division in RF and wireless, and pull part of it into their passive group. And part of it into their semiconductor group. And deemphasize the technical sell. And once that's done, and the customers are really looking for engineering and technical service, and the vendors are as well, so -- and they also released, I don't know what the total number of people that they released. Greg, you probably know more than I but there were probably 90-some people in that group?

It varied depending who you talked to but nearly 70% of that organization is no longer part of that company. And we hand-picked through inputs from our key tier 1 suppliers and our partnership with some of our reps and picked up the number of key people from that which will coordinate the activities, not just in North America but also in Europe.

With that, we've added a number of RF engineers from that group group who of course want to be with a company that specializes in RF and wireless. The other thing we've heard is their major vendors that were supplying products to the group are very unhappy. One of the largest vendors has told us that since this consolidation was completed about three months ago, that their business is down 50% with that company. And in telling us that, they've also expanded our agreement with them to cover larger geographies in the world. And we're seeing that across the board. Other vendors who are RF and wireless specialists had both passive and active components which were covered by this specialty group, have now been told that part of their product line is going into the passive group and part of the product line is going into commodity semiconductors. And they're really displeased with that. So all the referrals are coming to us where we can give them technical support. So we think it's a major opportunity. But we really have to execute now. We have to take advantage of it.

Okay, thanks very much.

Sure.

Next question comes from the line of Walt Liptack from McDonald Investment. Go ahead please.

Hi guys.

Hi Walter.

My question is a follow-on to the earlier question. The revenue guidance you gave 129, 130 million in sales in the last quarter, your press release you also commented that EPS would be up in a sustainable manner. Are you talking about second quarter EPS up somewhere around 70%?

We didn't actually give guidance on EPS. But it will -- you know, it should obviously follow the sales. You know what kind of leverage we've got in the model and Ed mentioned what he thought gross marriage and SG&A was so --

Okay. That's fine. We can back into it. The other question is, you mentioned that the design work is up at an all-time high, but it seems like, you know, you need to get the gross margin up by getting some of these orders. Can you quantify the design work that you've done, I guess in millions of dollars, what's the opportunity there?

Well, you know, the last number I heard is a large one. But I think the last time we analyzed this we had like $90 million worth of projects we're working on. Has anybody updated that?

It stays pretty close. That's a factor at the resale. One other thing Walter that we're seeing, especially this quarter, is as you know internally, we track and we have an internal design registration program that we track every design worldwide by part number, by application code. And we are currently book orders, receiving orders on design wins from 12 to 18 months ago. So the positive thing in terms of why we're very happy with the consistency is the base business is coming back. Last year, we did well compared to the market. But we had a lot of the nice big hits, lot of nice large orders for new wireless applications. And we're currently getting orders off the transom that are from design wins from 12 to 18 months ago. So that's the real highlight is the base business seems to be coming back.

Okay. Besides the economy what do you see is the reason that your customers are still a little bit reluctant?

I think that's the way the downturn happened. I think customers are reluctant and have corporate edicts internally not to have any outstanding POs outside of three months. We've had suppliers and customers both tell us that okay, you know, we have a 12-month booking, we have a 12-month backlog, here’s a three-month order, come back in three months and we'll give you another three months. They have an internal edict not to have anything outstanding outside of three months because of how the downturn happened two years ago.

Okay. And the $90 million opportunity does that include home compensators, any update on that you know potential product?

No, it really doesn't because that was hired to quantify. We have put our first samples into one major customer for prototype approval. We have a working unit, and I guess it's trying get it marketed right now. I really feel that could be a business in and of itself, if we could be successful with it. But to try to quantify what the number is, I couldn't do that.

Okay. And then I guess the question for Dario, question for Dario, you mentioned in the discussion of SG&A that there was some other SG&A items including the PeopleSoft implementation and new hires. Can you quantify those in dollar amounts? And then on the PeopleSoft implementation, is that done, or is that a recurring expense?

No, it's a recurring expense. It's about 200 K in the quarter. Again, it was $1.6 million year over year. Half of that was currency which, you know, will probably remain. And then 200 K was PeopleSoft, that leaves us with about 500 on commissions and labor and incentives.

Okay, grate. Okay, thank you.

Thanks Walt.

Next question is from the line of Sherene Cadry Pilot Advisors. .

Very impressive quarter.

Thanks Sherene.

I was curious, when the business comes back in the higher margin products, do you have a sense of what kinds of margins those will be versus the base lower marriage business in the new sort of as we come out of the resection recession?

Greg is the pro in that area.

Hi how are you?

How are you?

Good. We have an internal number of a number mum of 30% margin on all Engineered Solutions opportunities. The major programs, the in-home compensators, the jammer which we're selling into Latin America and some of these other projects are -- meet that criteria.

Uh-huh.

So it's just a matter of percentage of our total sales that are Engineered Solutions as opposed to component business, which will continue to grow, which will always be a large part of our business. We have that percentage to change. So again, we really don't address anything that's under 30% margin in terms of reserve solutions.

Got you. Also just so I want to be clear and I think you were pretty clear, but as these orders get booked you're really going to also leverage your SG&A because you're adding cost with no real revenue right? Not only have you hired more engineers but you're spending more money to get these design wins that aren't turning into revenue?

That's right. We have all the sunk cost already incorporated in SG&A and that's the bad news. The good news is once the order comes through, the margin is much higher.

Great, thank you.

Next question is from the line of Nick Dempsey from Barrington Research.

Good morning, gentlemen, good work.

Thank you.

Did you put out a cash flow statement? I didn't get one in what I saw, Dario, could you give the depreciation amortization and capex?

Yes. No, we didn't put out a cash flow. But there is a balance sheet there. I mentioned --

Thank you.

Capex was 1.3, depreciation was 1.5. There was another 500 K worth of amortization, and then interest was 2.4 million.

Okay.

Okay?

Yeah. Headcount?

Headcount, we ended the quarter at 1093, 1093.

Okay. Your convertible debt is under three years away from maturity now. What is your strategy? The stock would have to double for to you get that converted.

Well, we're looking at it very closely. You know, that is a current topic of discussion, and we --

I'll bet.

We intend to address it now in this fiscal year. And we're not sure yet. We're looking at various alternatives. We have a board meeting in a few weeks. But it's certainly something we want to address this year, before we get too much further along.

Okay, good, thank you.

Thank you again. Any additional questions please press star 1 at this time. There are no further questions at this time. Please continue.

Okay, Barb. Well, that should conclude it. We thank you very much, and we're in -- all of us happen to be in the office, which is unusual, at least for the next few hours. So we're happy to answer any questions that you'd like to call in later. Thanks very much.

Ladies and gentlemen this conference call is available for replay beginning today at 12 30 p.m. central time through December 18th at midnight, access the AT&T replay system, call 1-800-475-6701, the access code is 698490. That number again is 1-800-475-6701. The access code 698490. That concludes your conference for today. Thank you for your participation in using AT&T executive teleconference. You may now disconnect.

Thanks.