Richardson Electronics Ltd (RELL) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal year 2008 first quarter earnings release conference call for Richardson Electronics. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to your host, Mr. Ed Richardson. Sir, you may begin.

Good morning. I have Dan Fujii with me, who is Interim CFO, who will give you sort of the highlights on the profit and loss and the balance sheet. Greg Peloquin unfortunately is not with us this morning. He is in route to China. But I have a list of some of the highlights for the RF and Power Division which we will go over as well.

So we released earnings last night as you know. If any of you missed the release, it is on our website which is www.rell.com. We were certainly disappointed with the revenue, first quarter sales of $129.5 million, down about 7.2% from the prior year.

This summer was really quiet. June was the poorest month. We saw a major decline in June. It improved from there all summer. July was better. August, there was a good pick up. It has continued in September. September was very good. So the second quarter is off to a pretty good start.

We were encouraged that gross margin was up as we have gotten more re-engineered solutions through the channel. Gross margin finished the quarter at 25.2% versus 24.6% last year. And the margin last year was good as well, so that is an excellent improvement.

First quarter operating income decreased to $2.7 million from $4.1 million last year. We did make good progress in reducing SG&A as the restructuring plan has gone in place. For the first time in years the SG&A was below $30 million in the quarter. And a year ago it was above $30 million. In the fourth quarter it was $36.4 million, so to have it below $30 million we thought was excellent. And within that there was about $600,000 worth of severance also included in the $30 million. So it would have been $29.4 million something of that area except for one time charges.

In addition, there was interest expense included of approximately $600,000 on debt extinguishment costs associated with our prior credit agreement. We entered into a new credit agreement and wrote off the costs from the prior credit agreement in the first quarter as well.

In total, we had about $1.2 million worth at one time or extraordinary expense in the quarter. Certainly we would have shown a profit rather than the $400,000 loss without the $1.2 million worth of one time expense.

By SBU for sales and gross margin, RFPD was down about 7.7% to $84.3 million. That is almost in line with our estimate of the market decline. We felt the market was down about 7%, particularly in the telecom infrastructure side which is about 80% of our business' infrastructure, something of that nature.

The good news was that the margin was actually up as far as RFPD was concerned, so we were seeing more of the engineered solutions through the channel. Major areas that were down were the network access business was down about 10.6%. The one bright spot within RFPD is the power conversion business. Even though the total business was down during the quarter, power conversion was up about 3.7%. This is a business that we moved from the Electron Device Group about two years ago into RFPD as the -- it is a solid-state business and the engineering required is quite similar to the RF business, and that has really been a successful move.

Last year the business increased in the power conversion side about 32% to nearly $50 million, and that has continued this year. Actually year-to-date the power conversion business is up about 11%. The primary markets for these products are in power conversion, AC to DC, particularly in alternate energy. And so we're going into the second quarter with about a $32 million backlog for power conversion, and we really see that kind of increase continuing.

Geographically Asia was down about 4.3%. This was primarily in Korea and Japan. China continued to grow. Europe was up about 2.5%, with sales of $21.6 million.

EDG was relatively flat. It is interesting the world market for tubes is projected to be down about 6 to 8%, but our tube business continues to increase. The tube business is up about 4%, and is one of the most profitable areas of the Company. The gross margin there was up from 31.7 last year to 33.5 this year. The area that we saw down in the Electron Device Group was the semiconductor wafer fab business. That was down about 5.3%, which is why the business was flat overall.

But we ended the quarter with a book to bill in the Electron Device Group of 1.04, which was good news. The display business continues to be a problem for us. Display was down about 11.2% to $19.4 million. We are working on a global restructuring plan, which will be implemented in the balance of the calendar year for DSG. And basically trying to give the Engineering Group and our areas a special focus, so that we have each one of the engineering groups working in a particular technology rather than all of them working in parallel.

As you know, we have a group in Germany. We have another group near Boston called Pixelink, Image Systems located in Minneapolis. And all of these groups have been working on their own various areas of engineering, and sometimes in parallel. So we're really working hard to give that a global focus and getting everybody to work together and eliminate costs going forward.

Geographically North America was down about 12.5%. Again, that is primarily display. A lot of our display business is in North America. Our margin was actually up in North America. Margin was 26.8% versus 25.8% from the prior year. In Asia, again, the total business was down about 3.5%, although the margin was up, total margin was 24.9 versus 24 2, as again we got more re-engineered solutions through the channel.

China continued to increase. China was up 31.8%. Japan was an area that was really down. They were 37. -- down 37.1%. And Korea was also down at 28.7%. Europe was up 1.8% in total. Their margin was also up. Margin in Europe was 27.1. The major areas of increase in Europe, Scandinavia was up 17.7% and Spain was up 12.8%. So overall Europe is doing well. A lot of that has due to with the euro/dollar relationship, as I am sure you can imagine.

Latin America continued to decline, although we expected this. Last year we closed warehouses both in Mexico and Colombia, so Latin America was down 17.7%. Although the margin was quite good. The gross margin in Latin America was 30.9%.

So we have put in a contingency plan. Although we have seen revenue increase in September, and we think Q2 is going to -- quarter two -- is going to improve dramatically. We put a plan in place in the first quarter, as we saw June revenue be down substantially, to reduce SG&A as a percentage of sales in line with revenue.

But we have done is we have ranked all the resources in terms of their criticality to the business. And if further expense reductions are necessary, cuts will begin with the least critical positions and programs. At the same, time as we have begun making cuts we closely evaluate the business at risk and determine the cause. And if the market -- if it is market related, we will consider alternative strategies to address current market conditions. So we have really gone after areas like advertising, travel, additional sales expense, consulting fees. All of the areas of SG&A we are evaluating closely, and the charter is to keep SG&A as a percentage of sales in line with whatever the revenues may be going forward.

I think the action, at least from a SG&A point of view that we took in the first quarter was good, and we are continuing that program, monitoring the revenue end of the business closely going forward.

The restructuring plan that we put in place about a year ago will be completed. And at the end of the calendar year we're a little bit behind. The only area of the hub structure to be completed now is Asia. Europe has been in place since last November. And the U.S. and Latin America was completed thereafter. Originally we intended to have our own warehouse in Singapore to act as the hub for Asia. And we anticipated spending about $500,000 in capital to structure the hub in Singapore.

As we went through the process late in the program we found that we could use a third-party logistics firm similar to what we're doing in Amsterdam, and that firm would hire our logistics people to work with within the third-party warehouse, which would give us our own expertise and at the same time keep us from spending the $0.5 million in capital.

So we have made that decision now to go to a third-party logistics firm in Singapore. That is being put in place presently. And with our own people handling the shipping, we think we have the best of both worlds. But that has delayed the process to move inventory from Korea and Japan and Australia and other areas of Asia into the hub about one quarter.

So we think now that will be completed by the end of the calendar year. And once it is completed, it allows us to fully implement our limited risk distributor structure. What that does for us -- basically in the past when we had 25 warehouses all over the world, we had to leave 10 to 15% of the profits in country to support the internal in country infrastructure. And under the LRD structure utilizing the three hubs on a global basis we can reduce the tax to where about 2% is left in country, and the balance of the income will be returned to the U.S. where the majority of it will be tax sheltered.

We have about $38 million worth of tax loss carryforwards in the U.S. And we have an additional $20 million worth of reserved inventory that could be tax loss carryforward if we could use it. So once this LRD structure is completed the overall tax structure will be reduced dramatically going forward.

At the same time, as you know, we completed the sale of the Security Systems Division the last day of the fiscal year. And we have gone forward to pay down bank debt. And at the end of the quarter the bank debt declined to $4.2 million. And in addition to that we had a cash balance of $21.78 million. So this is probably the finest condition that our balance sheet has been in in years, and we're really pleased with that process.

With that I will turn in over to Dan Fujii and let him tell you a little bit about the P&L on our balance sheet.

As Ed was alluding to on the balance sheet, it is the strongest it has been maybe ever, but definitely in recent years. Looking at the end of last year versus Q1 restricted cash decreased $61.9 million during Q1. Restricted cash represented the proceeds from the SSD Division on May 31, which was used to pay off our credit facility during Q1. As such, the current portion of long-term debt also decreased during Q1. This resulted in a debt to equity ratio of 44% at the end of Q1 versus 89% at the end of last year.

A couple of other changes. Accrued liabilities decreased from $31.3 million at the end of the year to $20.6 million at the end of Q1, mainly due to a reclassification of tax liabilities of $7.0 million to not current.

Turning to the cash-flow statement, cash increased $4.3 million during Q1. We realized positive cash flow from operations of $5.9 million, primarily due to the decrease in our receivables. Cash used in investing activities was $1.5 million, which related primarily to our IT projects. And the net cash from financing activities was not significant. Back to you Ed.

A couple of highlights with the RF and Power division. After the close of the quarter we had substantial bookings for Korea for a WiBro infrastructure upgrade. So we see the Korean business coming back strong in the balance of the fiscal year.

We had several large bookings for Talus and a company called True Positions that we have worked with over the years. True Positions, we have done about $10 million worth of business with them, and we saw strong bookings from them going forward. We also booked an order in Southeast Asia for a broadcast system of about $8 million, and that shipping should start in Q2 and be completed in the balance of the year.

A large OEM in Israel has also placed an order that should be substantial shipment in the balance of the fiscal year. And we also see the TD-SCDMA rollout in China for the completion of their infrastructure prior to the Olympics, which also should be a major pick up for us in the balance of the year. So we -- at the end of the quarter we ended with a backlog for RFPD of $127 million and a book to bill of $1.05 million. At the end of September the book to bill for RFPD was $1.17 million, so we have seen nice momentum in the second quarter. And we think that the revenues will pick up.

At the moment we are looking at forecast for Q2 of about $145 million. That would be about 5.3% higher than last year's second quarter. Gross margin continues to look good, so we think the gross profit side will be about 25%. And we are working hard to keep SG&A in line with revenues, so somewhere between $30 million and $31 million. Hopefully we can keep it at Q1 levels, and we are implementing this contingency plan to try to make that happen as well.

With that we will open it for questions.

(OPERATOR INSTRUCTIONS). Christian Schwab, Craig-Hallum.

Ed, when we look at the $145 million uptick in revenue, I assume the majority of that increase is all from the RF business. Am I thinking about that right? Somewhere back into the mid 90s then?

Yes, that is true. Some will be from DSG. We have seen some of these projects start to rollout. It looks like the Reuters project is going to rollout earlier than we anticipated, and that total contract is about $6 million. The question is how soon it will rollout. But it looks like we have pulled in part of that. So we see a pickup in DSG, but the majority of the increase is the RFPD, you're right.

How should we be thinking about the tax rate? What is our tax rate on a go forward basis looking like? Is it going to be somewhere in the mid-30s or could it be better than that? Can you help us? And how soon does that tax rate stabilize at some level?

The first thing we have to do is complete the LRD structure before we get full benefit. And to do that we have to pull the inventory in out of Japan and Korea and Australia into the Singapore hub. And we're in the process of doing that, but I think it will be the first of the year before we get the full impact of it. So I would look at Q2 maybe sort of normalized, I think, again, 35%.

Yes.

It is possible once this total LRD structure is in place that the tax structure could run down in the low 20s or even possibly below. It depends how successful we are in utilizing the hubs on a global basis. And I don't think we can actually tell you at this point.

Can you give us an update on the new CFO search?

I was hoping by now we would be able to announce that we had a new CFO in place. We have identified two candidates that we are very high on. We had, as you know, a Board meeting this week, as well as the strategic planning meeting. And both candidates met with the Board. So we are hopeful to announce one or the other of the candidates here within a week or two.

Jon Gruber, Gruber & McBaine.

A question on interest. It was up over $1 million, and you have less debt now than you did before, so what is it going to be going forward? It was $2.7 million versus $1.6 million.

What they have done, and I will let Dan try to technically explain it, is we reversed out all the interest last year based upon discontinued business. And so the comparisons are really not correct. But, Dan, you want to try to wade in on that one?

Yes. The interest of $2.7 million in this current quarter does include $643,000 of those debt extinguishment costs. So stripping that out, our true interest expense was about $2 million.

Now looking at last year, the face of the financials showed $1.6 million, but another $1.4 million was sitting down in the discontinued operations section. So really our true interest expense last year was in the neighborhood of $3 million. This quarter it was about $2 million. That is about a $1 million difference for the quarter. And we have been estimating all along it could be up to $5 million for a full twelve-month basis.

What will it be this quarter -- interest?

I would estimate it to be in the range of $1.7 million to $1.8 billion.

That will be a plus. When you say that your costs will be -- did you say your costs will be $31 million?

Yes. What we're trying to do -- I mean, our goal is to have the SG&A as 20% of sales. That is what we're trying to work against. Obviously, even at $145 million we're below planned sales. And we're trying to be conservative with that number. We want to make these numbers. But we're trying to pull it down as 20% of the revenue number. That is our contingency plan.

This past quarter it was $30 million, so it is going to go up $1 million when you're trying to reduce it?

What happens is that a large portion of our SG&A has to do with incentives. And because the sales were so low the incentives were negligible in the quarter. If we get to $145 million we probably have $1 million worth of incentives. So that is the issue.

Al Tobia, Sidus Investment Management.

Just to follow-on just on John's question on the SG&A. Can you tell us what sort of level of excess G&A you're carrying now? Just ballpark it in terms of excess finance, guys, or things that you won't need going forward. Maybe just take the quarterly focus out of it and just look at absolute levels. Because I kind of agree with John, it just looks high to me. And I could see how it could go up from incentives hitting a revenue number, but there should be a lot of fixed cost still to come out of there just in personnel and things. That is sort of a first question.

We certainly agree with you. The restructuring that we are completing in the hub structure really has more to do with logistics and sales. And I think that the next phase has to do with administrative costs. In all fairness to Dan, we're running without a CFO and have been for three or four months. And we're hopeful when we get a new CFO in place that that will be the first thing that we attack.

But at the moment for instance, for instance with finance what we really want to make sure is that we're reporting correctly and we have adequate staff and so forth. I think there is a lot that can come out of the administrative side of the business, but that is sort of Phase II.

After having said that, our short-term goal is to run the business at 20% SG&A. And that, based upon $145 million, would be $29 million, or something like that for the quarter. I would like to say we're going to get there, but it is probably linear. And we think ultimately -- we just did a three-year LRP, long-range plan, for the Board, and at the moment our plan is sub 20% going forward. But it is going to take us a while to get there.

Certainly as we get the hub structure in place and we go to the limited risk distributor structure, there's an opportunity to take people from all areas of administration out of the in-country locations, because the majority of that work will now be handled from the three hubs.

Just one other just another question from a standpoint of -- I mean if you just did a three-year LRD to the Board, and you have made some cost adjustments, and you're talking about working through tax situations, why not just promote someone from within to the position of CFO? Why bring an outside person in when you have already done all this work? It seems to me like you are bringing him in on top of a lot of things that have already been put in motion. Isn't there someone -- isn't it an easier solution and less costly to just promote someone from within?

It is my feeling we have a good staff from within, but I think we need someone who has a lot of experience working with the hard decisions on how to cut costs out of this organization. We need a fresh set of eyes from the outside that can come in and look at the business in a different way than we do. That is what we're looking for, is someone that can really come in and help us cut some of this administrative costs out, and have had a lot of experience in that area.

In terms of a hire we should be looking at someone who has had some level of operational experience. And my assumption is that they're going to be compensated by a combination of equity and then performance along SG&A reductions?

You are absolutely right.

(OPERATOR INSTRUCTIONS). Amy Norflus, Pilot.

The 20% estimate, how did you come up with that number?

We basically have gone through the organization presently and tried to look at exactly what it takes to run the Company with the structure from -- Amy, as you know, we have 468 engineers and salespeople involved in the sales and marketing for the Company. We have looked at all of that and tried to figure out what kind of revenue we can get per salesperson. What it takes in each one of the administrative functions. Day one that is what we have come up. Now we think we can improve on that, but at the moment that would be a nice goal if we can get it to 20%, we can increase the top line low double digits, get the margin to improve. As you saw, the margin here improved substantially in the quarter. If we can even get 50 basis points a year in margin improvement, hold that SG&A at 20%, and get 10, 11% worth of revenue increase. You can do the numbers on the back of a napkin. We go from 2 or 3% operating income to 7% in three years.

As part of the three-year plan to the Board what SG&A were you using?

This year we are using $20 million. Over the three-year plan it comes down to about $18 million.

And now is that to assume that if a new CFO comes in, it could go back to $10 million? Would you let this person have the power to take it down to $10 million, or how does that work? If there is already a plan in place and the Board is okay with $18 million, can somebody come in and say, okay, redo the plan?

Absolutely. If a CFO can come in and show us how to reduce it more, no one has more to lose or gain than I do. I am behind it 100%.

What about the savings that you were talking about, advertising, travel, all of that stuff. That is already in the 20% or that would be incremental?

At the moment it is -- what we have to do is if the revenue actually comes in at $145 million we have to reduce the existing base. We have figured the 20% against the plan. Quite honestly, the plan was over $145 million for the quarter. So we have to take expense out to make sure we stay within the 20% number.

All right. I wish you luck.

Russ Silvestri, SKIRITAI Capital.

A couple of questions. Just in understanding the gross profit margin, in particular on the RF and Wireless business, it looked like it was up a little bit this last quarter. And I'm just trying to get an understanding on what is driving that. And it sounds like your gross profits are going to be up a little bit more again in the quarter that we're in currently.

My second question was when you talked about the business picking up in September, what is your degree of continents on the $145 million?

Let's address the $145 million first. We think at the moment that is a pretty conservative number. That we have seen almost linear improvement in September and starting out in October. But after having said that we want to make the number. But we think it is conservative.

What is happening within RFPD, as you know the custom product, or what we called engineered solutions, has a much higher margin than the standard distribution of components for people like M/A-COM, and Freescale and others. So we're seeing more custom product go through the channel.

The other area which I touched on is the power conversion business is a much more profitable business than some of the network access products, for example. And so as the percentage of power conversion increases within RFPD that also helps the margins go up.

Last question was on the hub structure that you outlined. In the plan or the presentation to the Board when was that expected to be completed?

The hub structure is to be completed at the end of the calendar year.

I'm not showing any further questions at this time.

Thank you very much. We are available to take your calls anytime today. And we appreciate the investment in the Company. And right now we are really optimistic we can improve things going forward. Thank you very much grade.

Ladies and gentlemen, this conference will be available for replay after 12.30 PM today through January 9, 2008 ending at midnight. You may access the AT&T Teleconference Replay System at anytime by dialing 1-800-475-6701, and entering the access code 889789. International participants please dial 320-365-3844. (OPERATOR INSTRUCTIONS).

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive teleconference. You may now disconnect.