Richardson Electronics Ltd (RELL) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth quarter and year-end Richardson Electronics earnings conference call. My name is Candace and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-answer session after the prepared remarks. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Chairman, President, and Chief Executive Officer, Mr. Ed Richardson. Sir, you may proceed.

Good morning, and thank you for joining the Richardson Electronics conference call to discuss our fiscal 2008 results. With me today is Kathy Dvorak, Chief Financial Officer, and Greg Peloquin, Executive Vice President and General Manager of the RF Wireless and Power Conversion Division. RFPD is the largest business unit within Richardson Electronics and represents about 66% of our sales volume.

During this call, we will provide our view of what the future holds for Richardson Electronics. This means we'll be sharing forward-looking information with you. These statements are projections which are affected by the risks and uncertainties in the business. We assume no obligation to update our projection. Actual results may be materially different. Please refer to the cautionary language in our press release and SEC filings for additional discussion on forward-looking information.

This call is being webcast and will be available, as noted, in our press release.

I'd like to review the highlights of the fourth quarter and FY08 results, discuss the progress we're making in a number of areas and then spend a few minutes discussing the positive momentum within the Display Systems Group.

Kathy will present further details on the company's financial performance and then Greg will discuss the results for RFPD. Finally, I'll provide some comments on the Electron Device Group, as well as provide an update on our long-term outlook. Then Greg, Kathy, and I will be happy to answer questions for you.

Before we discuss our performance, I would like to highlight the fact that it is our unique capability as a provider of engineered solutions that truly sets us apart from other electronic component distributors. Engineered solutions range from a single component to a complete integrated system designed to meet our customers' requirements. Richardson Electronics has always placed our customers as a number one priority. As a result, we are continuously evaluating our infrastructure with a goal of optimizing our customer service. We are in the process of refining our stocking strategy to further improve service to our customers.

While we remain focused on our customers, we're working hard to improve the efficiency of our internal operation. In late December, we began attacking areas such as freight, inventory management, supplier and service agreements, staffing levels, and began general cost-cutting initiatives. We're working to realign the company's support structure to create visibility into cost that drive accountability and to reduce overall fixed costs.

The Richardson team is focused and committed to producing solid financial results for 2009. We have improved visibility and awareness into our financial metrics, both from a P&L and balance sheet perspective. On a daily basis, we review sales margin and inventory levels. To better align the team with our financial objectives, we have changed the incentive plans to include a working capital component in addition to earnings.

We're very encouraged by the current results we've achieved in the Display Systems Group and believe that we're making significant progress and repositioning DSG to become a more profitable business with a sustainable and focused business model.

DSG sales in the fourth quarter were up 28% over the prior year. Gross profit improved 300 basis points reaching 25%. The cost structure to support these sales is more than $3 million less today than it was a year ago. I'm very pleased with the progress that DSG team has made to date. The outlook is encouraging and we look forward to a positive year for DSG in 2009.

Our annual goodwill analysis indicated that the calculated fair value of DSG was less than the carrying value resulting in a goodwill impairment charge. Unfortunately, the impairment charge overshadows the positive results we've achieved in our fourth quarter on a consolidated basis.

Highlights of the fourth quarter include sales growth at 6%, operating income, excluding the impairment charge of $5.8 million, net income of $4 million, excluding the goodwill impairment charge and related tax benefit, and cash generated from operating activities of $19.7 million.

Now I'd like to turn the call over to Kathy to discuss the financial results in further detail.

Thank you, Ed, and good morning, everyone. I am pleased to report that we are making progress in many key areas of our business. We are rapidly identifying areas that provide opportunities to increase growth and improve out profitability. In addition, we are slowly gaining momentum with our employees worldwide to embrace change and to make processed improvements a way of life.

Before I get into the details of our financial results, I want to answer the question as to why we recorded a goodwill impairment charge at this time. As many of you are aware, the accounting rules to determine goodwill impairment require an evaluation of the carrying value versus the fair value as of our measurement date, which was March 1st, 2008. As Ed mentioned, while our recent results for DSG are positive and very encouraging the valuation model assigns a risk premium due to DSG's turnaround situation. As a result, we recorded an impairment charge. The non-cash write-off was $11.5 million. We also recorded a $2.3 million tax benefit as a result of the charge.

So to provide you with a better picture of the true operating results for our business, the numbers I will be discussing from this point forward exclude the non-cash goodwill impairment charge. Sales for the quarter were up 6%, driven by strong sales growth of about 28% in DSG and 4% in RFPD. Gross margins in the fourth quarter improved by 190 basis points compared to the prior year's quarter.

We are beginning to see positive margin results from a favorable product mix and from our key initiative. While we are seeing positive results from our freight initiative, we are also facing the challenge of rising fuel costs.

Our SG&A expenses were approximately $32 million, or 20.7% of net sales. Overall, cost containment actions are gaining traction and we are starting to see our SG&A expense measured as a percent-to-sales decline. Included in SG&A expense is about $1.3 million of depreciation and amortization expense.

Our cost reduction efforts include trimming general and administrative expenses by tackling our external spend as well as pursuing opportunities for long-term structural change. This includes streamlining our infrastructure to create a truly scalable cost structure.

We expect future SG&A to decline further as we continue to bring down our headcount and benefit from our other cost-cutting initiative. Currently our headcount is 925 employees. This number will continue to decline as we increase the efficiency of our operation.

At the same time, we are balancing our cost reduction efforts with our need to make some well-defined strategic investments that will continue to drive long-term growth. For example, we are making the investments necessary to capitalize on growth opportunities in emerging markets such as India.

Our margin improvement, combined with expense control efforts led to operating income for the fourth quarter of $5.8 million, compared to a loss of $2 million in the prior year.

For the fourth quarter of 2008, net income from continuing operations was $4 million, compared to a net loss from continuing operation of $500,000 during the fourth quarter of last year.

Earnings per share for the fourth quarter of fiscal 2008 were $0.23, excluding the non-cash impairment charge.

Sales for fiscal 2008 were $568 million, up 2%, compared with $557 million during fiscal 2007. Earlier in 2008, we recorded inventory write-downs of $2.8 million and incurred $3.3 million of charges related to employee termination.

Gross margin as a percentage of sales adjusted for the inventory write-down was 24.4% for fiscal 2008. And adjusted operating income for the year was $16.3 million, or 2.9% of net sales compared to $8.1 million during fiscal 2007.

Net income for fiscal 2008, excluding only the impairment charge, was about $800,000.

Taxes for fiscal 2008, excluding the favorable impact from the goodwill impairment charge, were approximately $2.1 million of tax expense.

Now let me turn to the balance sheet. As I mentioned on the last call, the volatility of foreign currency relative to the dollar significantly impacted our balance sheet position. As an example, the translation of the U.S. dollar versus the euro declined by approximately 15% during fiscal 2008. Our accounts receivable balance as of May 31st was $110 million versus $106 million in the prior year. Excluding the impact of foreign exchange, our receivables actually declined by about $3.5 million versus a $3.8 million increase shown on our balance sheet.

Our inventory level was approximately $94 million, down about $16 million from 2007. However, if we exclude the impact of foreign exchange, our inventory declined by $23.4 million, due primarily to the implementation of tighter purchasing controls.

We are making great process in inventory management and expect to see further improvements in the upcoming quarters. So far we have developed daily inventory metrics that provide visibility into inventory levels by product line and have established goals for inventory turn by both product line and business unit.

We have implemented a new demand planning tool that currently captures approximately 45% of our total sales volume. We have rolled out an enhanced forecasting tool that increases accountability for our regional sales managers, and we have developed programs that are targeted at selling aged and reserved inventory.

Cash provided by the increased accounts payable balance since fiscal 2007 was approximately $2.3 million net of foreign currency translation. We are continuing our efforts to negotiate better terms with our suppliers and we are now able to take advantage of cash discounts offered by our suppliers.

Cash flow provided by operations for the 12 months ending May 31st, 2008, was nearly $28 million, as compared to cash used in operating activities of $9 million for the prior year. The $37 million swing relates to substantial improvements in management of our working capital.

Capital spending for fiscal 2008 was $4.5 million versus $6.4 million in the prior year. We are very proud of the fact that our total debt less cash, or net debt, at the end of our fourth quarter was approximately $16 million, compared to $42 million at the start of our fiscal year.

We are aggressively working against detailed action plans on our key initiatives for 2009. These initiatives are focused on financial performance improvement, streamlining our operations and processes globally, and in better leveraging our existing technology capability. We are initially directing our resources to those that represent the highest payback. For example, we are reviewing our global support structure to align our administrative cost with the needs of our business. In support of this effort, we have identified many opportunities that we will pursue over the next couple of quarters. This will lead to a reduction in our overall general administrative cost.

We are realizing cost savings as we begin to better understand the drivers of our inbound and outbound freight expense. In addition to the many freight team process and system enhancements underway, we are renegotiating carrier contracts and optimizing our stocking strategy to reduce freight costs. We are also renegotiating our service agreements and non-inventory contracts. To date, we have achieved annualized cost savings of over $2 million.

Over the last several months, we have improved our DSO by one day on a consolidated basis. This equates to approximately $2 million that is not tied up in working capital.

As many of you may know, the first quarter typically represents our lowest quarter in terms of sales dollars. That being said, we still anticipate a sales growth rate in the range of 3 to 4%. On an adjusted basis, we ended 2008 with a 24.4% gross margin. We believe we will be able to improve our margin rate as we progress through 2009.

Expense reduction will become a way of life, and, therefore, we should see a continuous reduction in operating expenses in 2009. Our expense ratio should be in the range of 20.5% to 21%. Of course, our cost savings will be somewhat offset by severance and other charges as we work to reduce our fixed cost base.

Capital spending for 2009 will remain low and is anticipated to be about $3 million.

Our tax rate for this fiscal year is a bit more difficult to forecast. As I've said consistently, it is easier to discuss tax expense rather than a rate. We believe our tax expense will be approximately $2.5 to $3 million in 2009.

In summary, while 2008 was a challenging year, we ended the year with many positive signs of progress. We are now well positioned to achieve solid financial and operational performance in 2009.

Now I would like to turn the call over to Greg to discuss our RFPD business.

Thanks, Kathy. Good morning, everyone. As Kathy mentioned, we continued to improve in all aspects of our business. With a strong Q4 in our profitability and top-line growth, we have great momentum going into FY09.

Let's start with our improved profitability. In the second quarter of FY08, RFPD implemented an internally designed new sales and operations planning module. This change gave us improved visibility in all aspects of managing our inventory from customer forecasts, purchasing, open-order window, and backlog. The benefits and results achieved in FY08 were outstanding.

This new process decreased total inventory from Q3 by $8 million and enabled RFPD to operate at a lower and more consistent inventory level for the past six months. Most importantly, it improved our turns from 5.7 in FY07 to 6.9 in FY08. We are excited to begin FY09 with this system in place and expect to see continued improvement to manage our inventory levels appropriately for our business.

We also were successful in negotiating improved terms with 22 of our key suppliers. These suppliers made up an annual COS, cost of sales, of over $130 million. Improved inventory management and improved terms, along with reduction in headcount, all combined to show increased profitability and contributed to a positive cash flow in FY08.

On the revenue side, as I mentioned, we saw nice momentum in both bookings and billings in Q4, and this momentum continued into Q1. Sales were up 4% in Q4 and we hit the century mark for the quarter for the first time in company history at $102.9 million.

Gross margins were slightly above last year and we again showed positive DOC growth.

For the year, sales were up 2%, or $7 million. Annual sales exceeded prior year for the seventh straight year, as each of our three major product groups exceeded prior year's numbers. Attributing to increase sales growth was the additional opportunities in the military, market instrumentation, scientific and medical, better known as ISM, and avionics market. Also, our power conversion strategy focusing on alternative energy applications led the RFPD businesses in percentage growth.

A preliminary outlook for FY09. We will continue to see strong profitability with top-line growth. Our power conversion strategy will continue to focus on alternative energy applications throughout the world. The global RF semiconductor market is showing around 2 to 3% growth rate. However, we will put more focus on the military, ISM, and broadcast segment of this market, while greatly improving our web-based marketing strategy. The ISM and military market for RF semiconductors is predicting a 9.5% growth, which is where we'll focus our attention.

In summary, we continue to invest in key emerging markets such as India and China, in addition to redeployment of our sales force and marketing dollars to support PODs, or point of design opportunities. As the momentum continues into Q4 -- into Q1, our global reach for our suppliers and engineer solution strategy continues to be proven as world class. With our global view, we continue to separate ourselves from the competition. In fact, already in Q1, we booked a multimillion dollar engineered solutions product which we'll design and manufacture at a design center here in Lafox. The product is supporting our alternative energy strategy. The system we are developing is the inverter for converting power from wind energy to the power grid unit. It is currently rated at 7.5 kilowatts and with our key suppliers' product support it also can be scaled up to 20 kilowatts. Our first order is for 1,200 units. Again, not too bad for a distributor.

Back to you, Ed.

Thanks, Greg. Let me briefly provide highlights for the quarter for the Electron Device Group and then close with some comments on our outlook for the first quarter in fiscal year 2009.

Sales for EDG were relatively flat in the fourth quarter and up about 2% for the year. The increase was driven by growth and the sale of tubes, partially offset by a decline in products we manufacture for the semiconductor wafer fabrication industry.

Gross margin for FY08 declined to 31.9% from 32.6%, reflecting competitive pressure in the mix of product sales.

Our focus for the upcoming year is to more effectively manage our margin. As Kathy and Greg have indicated, we're building momentum for both sales and profit improvement. The Richardson team fully understands the need to change. While we continue to work to take customer service to the next level, we are also working to enhance gross margins, reduce our cost base, and manage working capital investment. We're confident that these changes will lay the groundwork for future growth and profitability.

As Kathy mentioned, first quarter net sales should be in the range of $133 million to $136 million. And we're looking for overall sales growth for FY09 to be about 3 or 4%. The first quarter is typically our lowest quarter in terms of absolute sales dollars, so it is more difficult to leverage our expenses. Our 2009 goal is to keep operating expenses as a percentage of net sales below 21%.

The past two years have been challenging for Richardson Electronics, and I'd like to thank our dedicated employees for their efforts and commitment that have enabled us to make remarkable progress towards building a more profitable company. We're committed to delivering a year of solid financial performance in 2009.

Now I would like to open the call for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question will come from the line of Rob Damron of 21st Century Equity. Sir, you may proceed.

Good morning, everyone, and just an outstanding quarter. Congratulations.

Good morning, Rob.

Hi, Rob.

Thank you.

Let's see. I wanted to start with the DSG, Ed. It looks like there was a real nice rebound both in sales and profitability. And maybe you could just give us a little bit more insight into what has gone on there, how have you changed that business to improve both sales and profitability.

Okay. Well, as you know, we brought on Doug Albregts from NEC in November. And Wendy Diddell was very successful in helping us sell the Security Systems Division, took over the management of DSG with Doug's help at that time. And they've really spent a great deal of time refocusing the business, actually eliminating customers that were low margin. They've taken about $3 million worth of cost out of the business, focused it around custom digital signage and healthcare. Probably they -- the difficulty we had with DSG was we were trying to address every possible opportunity without focus and not really doing a good job in any one area. So the -- the refined business strategy and focusing on the three key elements of the business has really come a long way. It's now started to turn into some positive business and the results are obvious with the sales being up 28% in the fourth quarter.

Were there any one-time large sales during the quarter?

Well, nothing like we have seen in the past. We had an order for Canadian Lotto that was several million dollars. But it just -- the broad base of the business and we're moving a little more towards a standard product range and some of the project-based business is starting to level out a little bit. That's been part of their strategy.

Okay. And then just another unrelated question with regard to, I guess the global restructuring that you started I think about 18 months ago. Is that basically complete? Are you no longer -- I think you were holding double inventory there for a while in two different warehouses. Is that all behind us now? Just kind of give us an update there.

No, we continue to refine the system. I think we've come a long way. We've gone from having 20-some-odd warehouses all over the world to having three main hubs and several satellite warehouses. But we've learned a lot out of the process and we think we can even make the system more efficient, take more cost out of it. Certainly, we think we have an opportunity to refine some of our administrative international services to go more towards the hub-based program in areas like finance. Maybe you want to touch on that, Kathy.

We're going to continue to look at opportunities to see how we can bring down our administrative cost over seas and continue to operate more efficiently. So if that means we can bring some of the functions into hubs, we're going to pursue looking at those opportunities as well.

So I would say that our restructuring is sort of phase one, and we're entering phase two and it's going to continue. We see the opportunity to take more cost out of the organization.

Okay. And then just, lastly, the cash, obviously, significant improvement of the balance sheet. Any plans with that cash? Are you able to pay down any of that long-term debt or stock buyback? I guess what are the thoughts on the cash, the cash on the balance sheet and the free cash flow going forward?

Well, I think the first area that we're looking at is possibly either buying bonds back or stocks back. We haven't convinced the board yet that that's the right thing to do, but possibly that will happen in the near future.

Okay. That's all I have. Congratulations.

Thanks.

Thanks, Rob.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Christian Schwab of Craig-Hallum Capital. Please proceed.

Good quarter, guys.

Hi, Christian.

Kathy, on the tax rate, what should we be assuming for tax rate in '09 and '010?

Again, don't focus on the tax rate. I build $3 million, $2 to $3 million into your model in terms of absolute dollars and that reflects the LRD model, which is the limited risk distributor model that we've been working on for a while, from a tax perspective.

Perfect. Perfect. And then when we look at the 4% year-over-year growth of the business, how are you getting there? Meaning, what type of growth rate are you guys assuming next year from the RF business and then from EDG and from Display?

Well, Christian, this is Greg. On the RFs and wireless side was the largest percent of the revenue. The growth rate for our main business, the RF semicon business is about 2 to 3%. And as you've known over the last seven years, we continue to out perform the market. So we're looking at mid-single digits this year. But as, again, every year, we have a couple of nice projects going on that could raise that even higher. But right now the forecast FY'9 looks like a mid-single digits.

And as far as the Electron Device Group is concerned, again, it's interesting, the two business on a world basis is declining about 6 to 8%, but our two business as part of EDG was about 5% last year. So we continue to gain market share. Unfortunately, the semiconductor wafer fabrication portion of that business was down, nowhere near as far down as the market, but we did see about a 20% decline in that portion of the business, which is about $20 million of the business in total.

So all-in-all we're forecasting 1 or 2% growth for EDG. The Display Systems Group, the focus there will be somewhere between 5 to 10%, depending upon how some of these projects come through.

Okay. Perfect. And then what are we going to do with -- now that we've kind of cleaned up a lot of all these operational messes, and great job being able to do that in a pretty rapid time frame, Kathy, when are we going to address the class B shares? Is that something that we're going to address or is that something that we should think is constant?

Well, we continue to look at it. Certainly at some point if we thought it was putting a lid on the stock price, we'd address the issue. I think right now probably the priority is looking at buying stock back or bonds back, and at some point we may readdress that area as well.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will turn the call back to management for any closing remarks.

Thank you, Candace. Well, as you've heard, we're moving the company forward on many fronts. We're managing our margins, reducing costs, improving cash flow, and increasing profitability.

I'd like to take this opportunity to thank the Richardson team for their contributions to date. And I'm confident that we'll deliver significantly improved performance in the upcoming year.

So with that, Kathy, Greg, and I want to thank you for participating on the call today and for your continued investment in Richardson Electronics.

Thank you for your participation. You may now disconnect. Have a great day.