Richardson Electronics Ltd (RELL) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third quarter earnings release conference call. At this time all lines are in a listen-only mode. Later there will be an opportunity for questions. Instructions will be given at that time. If you should require assistance during the call please press star then zero and as a reminder this conference is being recorded. I would now like to turn the conference over to our host, Chief Executive Officer Ed Richardson. Please go ahead.

Good morning. I have Bruce Johnson with us, our President. We have Dario Sacomani who is Chief Financial Officer and Greg Peloquin who is Executive VP of the RF & Wireless Group. Our very conservative Chief Financial Officer would like to start by reading you a Safe Harbor statement and then we will go into the highlights of the quarter.

Before we begin I would just like to remind everybody that we will make certain forward-looking statements just to help you better understand our financial results and competitive outlook. Discussion of our future plans and other statements in this call that are not current or historical facts are forward-looking statements. These involve known and unknown risks and uncertainties that could cause the actual results to materially differ from historical results or from any future results expressed or implied by any forward-looking statements. Factors that could cause actual results to differ materially include those listed in risk factors in our registration statement on form S-1 filed with the SEC on March 12, 2004. We do not under take any obligation or plan to update these forward-looking statements even though a situation may change. I just want to add, so everybody knows, the company does plan to present at the McDonald Conference on June 10 in Boston at the William Blair Conference on June 23rd or 24th in Chicago. With that I will pass it over to Ed.

Thanks, Dario. Well, it was certainly a very solid quarter. We released earnings last night as you know and if any of you missed the release it's on our website which is www.rell.com. We really had record activity during the quarter in reference to new projects and Bruce will go through the bookings which were also running at a record level. And the momentum continued all quarter long. February was the best February in sales in the history of the company. So we are really pleased with the overall progress. Sales ended up as a record third quarter at 127.3 million up 7.9% from the prior year. It was the seventh consecutive quarter of year-over-year growth. And gross margin was up almost a full point at 24.8%. So we started to see some of the engineered solutions activity kick in which is at a higher gross margin and some of the Asia Pacific business also increased in gross margin which Bruce will tell you about. So we reported net earnings of 7 cents a share which was up from a year ago when we reported a lose of 1 cent per share. The RF & Wireless Group under Greg's management did extremely well. They were up 8.7% in sales at 56 million. It was a nice trend. February was the best month of the quarter for them. They were up 14.7% in February as well. More importantly the margin was at 23.5% up from 21.9 a year ago. The network access business of the RF and wireless group was up 24% with sales at 21 million. Margin there at about 25 percent, just about flat. The passive and interconnect group showed a real nice increase. They were up 34% with sales at 12.1 million and margin at 26%. Asia Pacific continues to be the growth area for RF and wireless. Asia was up 27% with sales of 17 million and margin at 21.4, still the margin in Asia is low and we look for that to improve over the long-term for sure. IPG was really the leader, the Industrial Power Group. Sales were up 17.7% to 27.5 million. They are also the highest gross margin strategic business unit we have. Their margin for the quarter was 30.5%. They are really led by power components. These are SCRs and IGBTs, power semi-conductors and assemblies. That business is up 29% to 8.7 million, nice margin also at 26.2. The two business, believe it or not, the trailing edge of technology was up 13% in the quarter at $18.7 million and, again, just about the highest margin business we have at 32.8%. Interesting portion of that business is Magnetrons that we design and assemble into CW Microwave assemblies that are used in the semi-conductor wafer fab business. And it's a real early indicator of the semi-conductor business coming back strong. We saw a major increase in that business during the quarter. In Europe business was up 35%, the sales were at 7.6 million and gross margin also up really very high at 32.2% for IPG. The securities systems division was up 8.9%. We have 25.3 million in sales and gross margin continued to increase slightly at 25.3%. They continue to exceed the RF and wireless gross margin and Greg is going to tell you how he is going to fix that for us shortly. The United States was up nicely which is a turnaround for the securities systems division. They were up 25%. Their margin at 23.3 still needs some improvement but nice growth and that continued in February. Canada continued to do an excellent job. They've really held sales up for the past two years for the Security Systems Division. They were up again 11%. Sales at 12.1 million in Canada with margin up also at 27.5%. The display systems group was the only strategic business unit that was down. They were down about 6.8% in the quarter at 16.8 million. And, again, this business becomes more and more project based as we move further and further into engineered solutions and it was a lack of projects in the quarter that had the decline. The good news was that sales for the Display Systems Group in February were up 27% and that trend continues in this month. So it looks like the project based business will start to ship out in the fourth quarter and their sales should improve. The custom display business, which is really Pixelink group, was the one that was down and they were all project based. They were down 27% during the quarter at 3.3 million. On the other hand, specialty displays, which are the large screen devices over 25 inches and up, a lot of products used in digital signage and projects of that nature was up 35% in the quarter at 2.1 million. By geographic area North America was up 2.3%. We are seeing more and more activity where the designs, especially in RF and wireless, are done in North America or possibly in Europe. Then the production has moved to Asia. So that's affected our North America sales for sure but lots of design work here continues to be done. Sales in North America were 68.4 million and margin was up slightly at 25.9%. Our Canada really carried North America. They were up 13 percent, again, a lot of that has to do with the Security Systems Division excellent performance in Canada. Canadian sales were 16 million at 27.7% gross margin in the quarter. Europe was up about 10% at 29.2 million and their margin was excellent. They increased from 27.8% a year ago to 29.2% in this quarter. It was led by Italy. Italy was up 57% to 5.2 million. And their margin increased from 26.9 to 28.1. Spain was also up. Spain was up 13% to 3.1 million. And their margin was excellent at 31.7%. France was up about 11% at 5.1 million in the quarter in sales and gross margin there was the best in Europe at 34.9%. So margin was up across the board in Europe which is excellent. Asia Pacific continued to lead the geographic areas of the world. They were up 26% to 23.6 million. They also improved their margin by about a half a point. Margin in Asia was up 23.9. Still led by China. I had the opportunity to visit China again during the quarter. We have a terrific team there and they just continue to increase sales every quarter. China was up 108% in the quarter to 6 million. Also Taiwan was up. Taiwan was up 70% to 2.6 million. And Taiwan's margin was at 25.3%. Latin America finally turned the corner in sales. They were up 8.6% at 5.4 million, although their margin was down at 22.9. Mexico was really the area in Latin America where we showed the growth. We've just put a new regional sales manager into Mexico and he's done a fine job right out of the starting gate and the overall sales there were up 24%. So with that I will turn it over to Dario first to discuss the P&L and the balance sheet and then Bruce will go through the bookings and the highlights for you.

Thank, Ed. Well, Ed covered the sales in detail but just to summarize, again, 127.3 million for the quarter. That's up 7.9% year-over-year Q3 and on a year-to-date basis we are up 8.4. One thing I do want to point out is that being essentially flat sequentially is pretty good performance compared to our normal seasonality which would us down 3 to 4% sequentially. Ed mentioned gross margins at 24.8%, that's up 90 basis points from the prior year and flat on a year-to-date basis at 24.4. So we have good momentum driven by improving margins in our FWC to improve mix of network access and passive interconnect products. SG&A is at 27.1 million, that represents 21.3% of sales. That's down from 21.6% of sales in the year ago quarter and on a year-to-date basis we are at 20.9% of sales compared to the prior year at 21.5. Other expenses 2.9 essentially flat from the prior year quarter with interest at 2.6 million which is also flat. That all leads us to an EPS of 7 cents for the quarter compared to a penny lost in the year ago quarter and 25 cents for the first nine months compared to 8 cents before the cumulative effect of accounting change a year ago. So turning to the balance sheet. Our performance here continues to be solid. Cash at 19.7 million, that's up almost $3 million for May. And that does indeed represent an opportunity for some improved cash management which we are working on. Accounts receivable at 96.3, that represents approximately 59 days which is flat from Q1 and Q2. Inventory at 93.2 million, that's down 2.7 and that represents 88.5 days which is down from Q4's 97 days. Net property at 30.7, that's down slightly from year-end with year-to-date capex at 3.9 million, pretty much washed out with depreciation of 3.9 million. I mentioned last quarter on the call our ERP implementation continues to be on schedule and that should drive that capex number up to at least $2 million next quarter. Accounts payable at 30.7, that represents about 27 days of payables and debt at 131.3, that's down about 7 million from May. So bottom line year-to-date we've got 8.4% sales growth with net borrowing down approximately 7 million. Our return on invested capital is running at about 8.4% annualized which is up 200 basis points from the prior year. And with that l'll pass it over to Bruce for more highlights.

Thanks Dario. Billings were obviously very strong and I'm happy to say that bookings were actually stronger. For the company overall sequentially we were up 3.3% from the second quarter and came in over the previous year by 26.7%. RF wireless had an excellent quarter, sequentially up 9.9%, 34.8% over the prior year. And a number of highlights there. First of all, Motorola named Richardson as their 2003 power distributor of the year, FCC qualification testing was successfully completed for our telematics wireless compensator amplifier and as we speak 25 prototypes are being built this week for distribution to selected customers. Samples of our cell phone jammer have been built. We are initially focusing on the Mexican market. We are now awaiting Mexican government approval prior to sales and distribution. Ed had mentioned the strength in North America overall. I'm happy to say that RWC North America, which has been one of our biggest challenge, achieved their strongest booking and billing month in February since 2001 and also their backlog has now climbed at the highest level they've had in the past three years. IPG, as Ed mentioned, very strong sequentially up 0.9% in bookings but ahead of the prior year by 44.4%. Their power semi conductor group successfully negotiated a new franchise agreement with FW Bill to distribute their line of current and voltage sensors that are used in a wide variety of industrial and commercial industries for safety and control applications. These sensors will represent an integral part of our engineered solutions power conversion assemblies. IPG also negotiated a European distribution agreement with Mitsubishi's European semi conductor division to distribute their full line of IGBT modules to the motor drive welding and power supply markets. And an exclusive distribution agreement with DINEX to promote and sell their new line of IGBT modules throughout Europe, Asia and Latin America was also consummated in the quarter. In securities systems, sequentially they were down by 7.9% but ahead of the prior year by 13.9%. Display Systems Group, as mentioned, is a project based SBU and sequentially we are off about 2.6% in bookings and below the prior year by 2.4%. Highlights: our new engineered solutions design integration facility, which we strategically established in Italy to supply and support customized touch screen displays to our European customers, became operational in the quarter and business is now starting to be booked through there. Turning to the area geographies, in bookings sequentially North America was up 3.6% but way ahead of the prior year by 24.4%. Europe was down slightly by 5.2% sequentially but very positively 18.6% ahead of the prior year. Asia-Pac, as Ed has mentioned, was our growth star, sequentially ahead of the second quarter by 22.1% and ahead of the last year by 72.6%. And Latin America, we are down 41.6% sequentially and down 50% from the prior year but primarily due to the fact that last year was a very, very strong quarter. As Ed has also mentioned, China led the way, actually, with over $11 million in bookings in the quarter with $7 million in February alone. I will turn this back to Ed.

Thanks, Bruce. Certainly lots of excellent highlights in the quarter. Lots of good things happening. I know all of our investors are looking for guidance as they always do for the future. I would honestly say that visibility is getting better. Certainly bookings and design activity is at the highest level that we've seen in a long time. Normally the fourth quarter is up 9% sequentially over the third quarter and we really feel like from the bookings that we are seeing and the level of engineering activity that things are well back to normal. So I think to look for 8, 9% sequential growth, which is normal for us in the fourth quarter, we are comfortable with. And at the same time we think that gross margins that have improved in the third quarter will at least maintain their current percentage. We also think that we can do a little better on SG&A. We think SG&A will be somewhere around 20% in the fourth quarter which is our overall goal, as you know. So it looks pretty good. We are really encouraged by the level of bookings and certainly the solid quarter in sales and with that, Kathy, we will turn it over to you for questions.

Thank you. [Caller Instructions]. Our first question comes from Bill Benton with William Blair. Please go ahead.

Good morning, guys. Good to see the continued improvements there. Obviously, the margin was a nice surprise. Margins and a couple of the gross particularly in the wireless area. I am just curious where, ultimately, you see those going. I understand that there's been components shipped into Asia for some time. But as a segment where do you expect that to maybe go over the near term? Also the display systems group I know was up year-over-year but down a little bit over the last couple quarters and I'm curious where you might see that going as well?

Well, first let's start with the RF and wireless group and we will let Greg address that one for you, Bill.

Yes, Bill, the margin trends continues to grow even as we go into the fourth quarter and the backlog supports that. A lot of it has to do with two of the five major programs we've been talking about in terms of engineered solutions where we've been shipping over the last four months the GSM repeater product which is in production and shipping and also the digital broadcast product which meets all of our engineered solutions internal requirements in terms of gross margin. We've also seen a great increase in our component engineered solutions business in terms of customers needing special testing, matching selection for their application, specifically in the network access group and the backlog is continuing to grow for that. The third, Bill, we did a lot good work in terms of getting suppliers to support our model and giving us exclusivity in different areas of the world and that has helped protect us from the standard distributors trying to gain access to the market in terms of lowering the margins. We've been able to keep at least that margin flat in addition to the increase in engineered solutions sales.

Okay.

Bruce, you want to address the other SBUs?

I didn't hear the last question.

He was also asking what the margin looks like for IPG and for display. Display has been down a couple of quarters but they are over last year and he's looking what's going to happen.

I think in both areas it looks very, very good. We've done a major focus on the legacy business and IPG relative to the tubes which looks very good at this point in time. Our new integration display operation, which we are establishing in Europe, will represent 100% of engineered solutions activity over there which we have to date have not been able to take advantage of. So that will help, certainly, and capitalize, I think, also on the strong margin results out of Pixelink which does the engineered solutions for DSG.

It sounds like maybe your gross margin guidance flat is very achievable sequentially?

We think so but we like to be conservative.

Okay. I know Bruce touched a little bit upon a couple of the new products. Could you update us more generally on where things are? I know you had said you had 25 units ready to go and the Mexican situation. Is there anything else that you might be able to offer in terms of updates there?

Greg?

Sure. The three products you are talking about the cellular jammer. We have gotten confirmation that Monday we will receive the written notification that we can distribute this into the banking systems at which point we will start the process of building 1,000 units to support that initial prototype order.

That's in Mexico.

In Mexico.

Right.

However, due to lead times, Bill, the components coming into build that we don't think we will see much revenue in the fourth quarter but as I've said for the last three quarters we will see revenue from that in FY '05. On the other front, good news on the in home compensator. Everything is on schedule for the introduction six weeks from now for the universal compensator which is usable within all protocols which is what the customer base has been asking for and that will be available, as I mentioned, in six weeks and we have completed and has been FCC approval on the wireless compensator for the telematics automobile and we are building 25 units which will be finished next week which we will be distributing to numerous customers. The most recent one is the paging divisions of Motorola in Brazil in terms of after market sales. So we are very excited and everything is still on schedule to what I've been telling you and everyone for the last three quarters and we'll see revenue from this in FY '05.

I'm at the wireless show right now and they just got done with their little speech, all the Executive CEOs of these wireless companies and Sprint did mention the wireless, what they call a wireless repeater in the house. So there's your in home compensator, are talking about it so good news on this end.

Tell them to send us an order.

Will do.

One more thing to add. I forgot to mention in six weeks the in home we will have both the external antenna and internal antenna version. We found a partner who was able to work with us in terms of an alliance on the antenna. In six weeks we'll have both the one unit in terms of the internal antenna but also because there's other applications for that, for bullets, et cetera, an external antenna. We're very excited about that. Are you at CTIA?

Yes

We were there yesterday talking to numerous customers about all three products.

You didn't call me. I'm just kidding.

I was busy. I think I owe you money so I have to stay away from you.

Have a good one, guys, thanks.

Thanks, Bill.

Thank you. We now have a question from Walt Liptak with McDonald Investments. Please go ahead.

Good morning.

Morning, Walt.

If we could drill down a little bit into the Asia Pacific region for wireless. With the gross margin picking up, I'm not sure if I understand if it's a products mix that we are seeing (inaudible) cross margin products from the wireless LAN, the access products, or if it's more engineered solutions going into Asia, especially into China?

Greg, you want to comment on that one?

Yeah, today it's more on the component engineered solutions side and also exclusivity. We've increased our exclusivity with numerous suppliers and we're being protected better for our design work done, and Bruce mentioned in Europe and North America, and so that's helped the upward trend in terms of the gross margins. But it's on the component engineered solutions side as opposed to the TRLs of the world that you know.

Okay. Great. Then as we go out the next couple of quarters, it sounds like the bulk of the gross margin improvement is going to be coming out of the Asia-Pacific group. Is that correct?

Well, we certainly have the greatest opportunity to improve margins, no question about it. You're right. I mean, that's the newest geographic area for us although we've been there 5 or 6 years and it's the fastest growing. It takes awhile for us to develop relationships with these companies where they are comfortable to outsource their engineered solutions to us and that's where the higher margin is. Obviously the majority of the business right now is components and as we move from components to engineered solutions and assemblies the margin goes up.

Okay. Great. Congratulations on a nice gross margin during the quarter.

Thanks, Walt.

Thank you. Our next question is from Rob Damron with Century Research. Go ahead, please. Good morning, guys. Hi, Rob.

Just a question about, first of all, on the operating expense. The revenues were basically flat sequentially but we saw the SG&A line up $1.7 million sequentially and I am just trying to reconcile what drove the increase in SG&A expense?

Right. Well, one of the things, we commented on it, actually, at the last call, was that our budget, our incentives are based on how well we do compared to budget and our budget was actually to have our sales decline like our normal seasonal patterns. So as a result of coming closer to our plan incentives were up about 400 K. This happens to be a big quarter where a large piece of the population gets hit with merit and that was up about 400K. And then currency was up about 400K quarter over quarter. There was about 300K worth of one time items like severance but other than that it seems like a realistic rate that we are going to continue going forward with.

Okay. Then I guess just going down the income statement, the interest expense line was I guess up also slightly despite the fact that the debt level was down. So what was the incremental expense on that line?

It's actually down. You know, it's rounding. When I say flat at 2.6 it actually was 25.77 versus the prior year of 26.34. When you consider our bank debt is at about 4%, paying down 7 million is about 70K a quarter so it's right in line in actuality.

Okay. What should we expect for a tax rate going forward?

I don't think there's any reason to think anything other than 35 or 36.

Okay. I also wanted to ask Greg, Greg, you mentioned about the in home compensator that over the next six weeks it sounds like you're going to be moving into production. Could you just talk a little bit more about, have you actually signed an agreement with Sprint and/or Verizon or any of the other wireless carriers and I guess where are we in this process of actually moving this into full scale production?

Yeah, we have NDAs with AT&T Wireless, Verizon and Sprint PCS and also (inaudible). We continue to work with them on adjusting or characterizing the product to meet their specific needs. However, the product that we will have available will be a universal unit which works for all protocols and has the two antenna approach and also the single antenna approach. Again, it's been an ongoing, we continue to work with them, when we will see the actual prototype orders I am still hoping, as I've said, Q2 of our FY. So they can have something potentially for the holidays. That's kind of where it's at with those four.

Okay. Last thing maybe for Dario, I know there's been a big push to improve return on invested capital and bringing down the investment in inventory and receivables with a new compensation program for many of the managers. I know it was based on inventory historically. Is there any change to that looking into fiscal '05 in terms of how some of the business unit managers will be compensated from return on invested capital standpoint?

You're right, it's been predicated on inventory. If we can get the appropriate amount of visibility on receivables and payables by business unit without getting into a significant amount of allocations we would like to indeed extend it to that. We are in budget process right now and well see how it shakes out for '05.

Okay. All right. Thank you.

Thank you. Our next question is from Matt Sheerin with Thomas Weisel Partners. Go ahead, please.

Thanks. Good morning. You spoke about the gross margin and seeing some improvement there primarily because of mix, more value-add. Could you talk about components in general, about the pricing environment, whether you are seeing pricing pressure or are you starting to see prices come up even from your suppliers or you are starting to see some pricing improvement from your customers and then also talk about inventories and do you see lead times stretching or any concerns about components constraints?

I will let Greg address that for you.

To start with your last question, yes, we've seen it in terms of increased in lead time across the board with all of our suppliers. We've done the best job we can because we, as I think many of you know, we track all of our design opportunities by application code by customer worldwide. We feel we do a very good job or at least better than our colleagues and competitors in forecasting what's needed to get that. Lead times were being pushed out across the board with all of our suppliers. In terms of the component gross margin increase we are seeing a lot of it, we are replacing, I'll give you an example in terms of WJs. Replacing a lot of their competitors business with higher margin products from the support from WJ to support that growth. We have exclusivity with people like Anadigics, Maycom in Europe and we are seeing more and more design wins on the component level because the base business is coming back. So when the base business is coming back in those sockets are these exclusive suppliers that protect us for our work and that's generating a higher gross margin than we've seen over the past two years because of the competition. In terms of costs, from suppliers with technology increases, we are seeing more cost product, however our margins on that product are growing. So even though we are able to produce more integrated products to save what the systems costs, if you will, we are still able to keep our gross margins at a minimum flat to support that business.

Okay, thank you.

Thank you. We will now move on to Stephen Lewis with Lewis Capital Management. Please go ahead.

Hello. Could you please go over the operating cash flow for the quarter and for the nine months and the capital expenditures for the whole year? You said it would increase notably in the third quarter.

Yeah. The bottom line of the cash flow statement for the year-to-date is like I mentioned before, capex was 3.9 million year-to-date which was pretty equal in the first three quarters at 1.3 million, depreciation was at 3.9 year-to-date, as I mentioned. Bottom line nine months worth of cash flow we've generated about $10.5 million, of which as I mentioned before, we paid down about $7 million worth of debt resulting in the incremental $3 million worth of cash.

Okay. And what will be the sweetener, do you think, to get people to exchange their convertibles?

Actually we are in registration right now so we really can't talk about the proposed deal on this call.

Thank you.

[Caller Instructions]. We have no further questions, Mr. Richardson. Please go ahead with your closing remarks.

Okay, Kathy. Well, thank you very much. If any of you have any questions after the call you're welcome to call us. We'll be in all day. We appreciate your investment. We look forward to talking about the fourth quarter and year-end three months from now. Thank you very much.

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