Richardson Electronics Ltd (RELL) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Richardson Electronics second quarter earnings conference call.

I would now like to turn the presentation over to your host for today, Mr. Ed Richardson. Please proceed.

Good morning and thank you for joining our conference call to review the Company's financial performance for the second quarter of fiscal 2009. With me are Kathy Dvorak, Chief Financial Officer, and Greg Peloquin, Executive Vice President, and General Manager of the RF Wireless & Power Division, which is our largest strategic business unit.

The call today will include forward-looking statements related to the outlook for Richardson Electronics. These statements include projections which are affected by numerous risks and uncertainties. We assume no obligation to update our projections, as actual results may be materially different. Please refer to the cautionary language in our press release and SEC filings for additional discussion on our forward-looking information.

I will begin by providing a few brief comments regarding our view of the market, followed by some highlights on the second quarter financial performance. Following my comments Kathy will discuss in greater detail our financial results, and then Greg will discuss the results specific to RFPD.

After that I will provide comments on EDG and Canvys, which is our new name for the Display Systems Group, as well as the limited view of the Company's future performance. Finally, we will open the call up for questions. Before we discuss our financial results, I would like to briefly talk about what we are seeing in the marketplaces in which we participate.

During our second quarter our business was impacted by weakening economy, as customers had become cautious, and began to take more of a wait-and-see approach. The state of the economy is affecting both our OEM and MRO markets, particularly in the United States.

In addition to our overall economic conditions, EDG continues to be impacted by the overall decline in the semiconductor wafer fabrication industry, which is expected to be at it's lowest level in the past five years in 2009. The digital signage portion of the Canvys business is being impacted, as customers delayed discretionary capital spending on new projects. We anticipate RFPD customers will push out some of their orders. However, we continue to see strong demand for RFPD products, particularly in China.

While visibility for sales in the future is diminished, we are taking aggressive actions to reduce our controllable costs during this economic downturn. Our financial position remains strong, with a healthy cash balance enabling us to be well-positioned to react to changing market conditions.

Now let's turn to our second quarter performance. Considering the environment of uncertainty that we are operating in, I am pleased with the financial performance delivered by our management team during the second quarter. We generated operating income of $5 million, net income of $5.9 million, and diluted earnings per common share of $0.31, despite a sales decline of 8.6% from the prior year. We are preparing for the challenges that we will face in the coming months. The Richardson team has certainly risen to the challenge, and I am confident that we will continue to make progress and achieve our financial goals for the remainder of the fiscal year.

Now let me turn the call over to Kathy to provide some additional commentary on our second quarter. Kathy.

Thank you, Ed. Good morning, everyone. I am pleased to report financial results that exceeded our expectations for the quarter, particularly in light of the current state of the economy. Our goal is to run our business more efficiently, to sustain consistent and improved bottom line performance.

While our near term sales outlook is somewhat uncertain at the moment, we are making progress, in improving our margins and taking controllable costs out of our business. As Ed mentioned earlier, sales for the second quarter declined 8.6%. The decline was across all three of our business units, reflecting the impact a deteriorating economy has had on our industry segments.

Despite the sales decline, gross margins during the quarter improved 170 basis points to 25%, compared to 23.3% in the prior year's quarter. Our SG&A expenses also decreased to $28.2 million, or 21.3% of net sales, from $31.3 million, or 21.6% of sales in last year's second quarter. We expect future SG&A to decline further as we continue to bring down our head count and streamline our operations.

Our head count is currently close to 900 employees. This number will continue to decline as we move to a more cost efficient business model. Additionally, we are pursuing every opportunity to drive sales, improve margins, and continue to strategically invest in our business.

Specifically, we are upgrading our web presence to become a stronger marketing partner for our suppliers. Improved margins combined with tractions with our cost control initiatives produced operating income for the second quarter of $5 million, or 3.7% of net sales, compared to $2.5 million, or 1.7% of net sales in the prior year. During the quarter we had the opportunity to retire $3.3 million of our 8% bonds at 71% of face value using cash generated from operations.

As a result, we have recorded a net gain of $849,000 related to the retirement of this stock. As I have discussed in the past, since the volatility of foreign currency relative to the dollar impacts our financial statements. During the second quarter we recorded an FX gain of $1.5 million, this is primarily the result of cash balances held overseas in Europe and Asia where the US dollar strengthened against most local currencies.

We continue to monitor foreign exchange rates, and incorporate them in the decision making process of buying and selling, in all of the various countries we transact business. As we enter the third quarter, we are experiencing continued volatility in foreign exchange rates, and the US dollar is now beginning to weaken relative to certain local foreign currencies. Tax expense for the second quarter of fiscal 2009 was approximately $500,000, and we anticipate that tax expense for the year will be under $3 million.

Net income for the second quarter of fiscal 2009 was $5.9 million, or $0.31 per diluted common share, compared to a net loss of $700,000 during the second quarter of last year. Our diluted share count for the quarter was approximately 21 million shares, and is expected to remain between 18 and 21 million diluted shares going forward, depending on our earnings performance. Both our 7.75% and 8% convertible bonds were dilutive to our earnings per share during the second quarter, due to our positive financial performance. The dilutive impact to our earnings per share of our bonds was approximately $0.02.

For the first half of this fiscal year, our sales were down about 1.1%. However, our margins improved by 10 basis points and SG&A expenses declined by 150 basis points. Operating income was $9.4 million compared with $5.1 million, an 83% improvement. Net income was $9.6 million, versus a loss of $1 million during the first half of last year. Dilutive EPS was $0.52 for the first half of fiscal 2009.

We continue to focus on our balance sheet position, which includes conservative debt levels and improved working capital management. Our long-term debt is now $52.4 million, and our cash position at quarter end was $35.5 million. Our Accounts Receivable balance as of November 30th was $100 million, versus $109.5 million at year end. Excluding the impact of foreign exchange, our receivables decreased by about $2.1 million, versus the $9.4 million decrease shown on our balance sheet.

Our inventory level was approximately $100 million, up $5.8 million from year end. Excluding the impact of foreign exchange our inventory levels increased by about $10 million from year end. This inventory build reflects the seasonality of our business, as we support projected sales volume in the back half of our fiscal year. Unfortunately we have relatively long lead times from our suppliers, and therefore it is difficult to quickly adjust inventory levels to reflect the slowdown in sales that we experienced beginning in October.

Cash provided by the increased accounts payable balance since year end was approximately $5.4 million net of foreign currency translation. We continue to aggressively negotiate more favorable terms with our suppliers. Cash provided by operations for the second quarter was $4.5 million, as compared to $2.7 million for the prior year. Our cash used to support our working capital investment during the second quarter was approximately $300,000, and $2.9 million for the first half of fiscal 2009.

Capital spending for Q2 was $400,000, versus $2.3 million in the prior year. If you recall, last year we had significant capital spending due to IT related projects. Capital spending for this year is expected to be less than $2 million. While we are pleased with our second quarter financial performance, there is no doubt that market conditions will become more challenging for the foreseeable future. At this point, we have limited visibility to future sales. However, we remain committed to reducing costs to achieve our profit goals for this fiscal year.

In terms of sales, our third quarter is typically less than our fourth quarter sales volume. As a result, it will be more difficult to leverage our fixed costs in Q3 compared to Q4. We have worked hard as a management team to bring our cost structure in-line with our business requirements, and will continue to make appropriate decisions to reduce costs, thereby ensuring our continued success and long-term viability.

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

Thank you Kathy, and good morning, everyone. Although revenue was down slightly to $93.4 million during the second quarter as compared to $95.5 million last year, we generated operating income of $10.8 million, which is the 5.6% improvement versus last year. This improvement in operating income was driven by our cost controls, which reduced our SG&A expenses and other RFPD costs. However, we are very happy to report the first half of fiscal year '09 revenue improved by approximately 6% to $190.3 million, compared to the first half of last year primarily due to our strong sales growth in Asia Pacific.

Looking at our key markets, infrastructure, wireless networks, defense, alternative energy, on the infrastructure side the business in Q2 was again a growth market for us, as we had sales improvement of 8% compared to last year. We expect to see continued growth in China, as a result of the TD-SCDMA rollout. Our infrastructure business will continue to grow in Korea, as they have announced a program to enhance both WCDMA and WiBro, their version of Wi-Max, in early calendar year '09.

US carriers do not appear to be cutting back as much as we had perceived in the early part of our fiscal year. We expect our US carriers to make investment cuts, including wireline CapEx. One of the expected results of a deteriorating economy is more people actually drop their landlines, which actually will increase cell usage.

Wireless networks within that business are experiencing significant downsizing with customers as demand has softened, and we are experiencing (inaudible-audio break) but at a much slower pace. Wi-Fi OEMs are being cautious which is not surprising as this is a quasi-consumer market. Our sales from our defense customers remain strong during the second quarter, with their new administration being elected in November, we have yet to see how this business will be impacted in the second half of the fiscal year.

The renewable energy market continues to show strong growth as sales grew 11.4% to $15.5 million during the second quarter compared to last year. We expect this trend to continue as we move into the second half of the fiscal year. The new administration has promoted major investment opportunities with energy storage, energy storage will be focused on connecting solar, wind, and other renewable energy sources, into a grid that will be power to population centers, replacing traditional electricity demand.

In summary and looking at Q3, with the extraordinary level of volatility in many of our markets, we have limited visibility to our sales growth as customers are being very conservative with their forecast demand. We are taking a very cautious approach as we forecast our revenue for the balance of the fiscal year. As Kathy and Ed mentioned earlier, we feel very good about our projects made with our cost cutting initiatives, which will position us to achieve our profit goals for the fiscal year on softer sales.

There are plenty of opportunities for us to grow our business within the global footprint, which we can address and redeploy resources in growth areas of the world. With that strategy, we have booked large orders with [Tallos] in France, RIM with BlackBerry in Canada, our backlog in India doubled in Q2, and the infrastructure and alternative energy markets are still strong for us.

However, we will continue to cut costs and improve our working capital management to maximize our financial performance for all of our shareholders. After six months into our fiscal year, our sales are up 6%, our inventory is down $4.3 million versus prior year second quarter inventory level, and operating income is up nearly 5%, with the environment we all operate in again not too bad for a global distributor.

With that, back to you, Ed.

Thanks, Greg. Now let's discuss our other two business units, starting with the Electron Device Group, or EDG. EDG supports the aftermarket for power tubes used in steel, automotive, textile, plastics, semiconductor and broadcast industries. As I mentioned earlier, the downturn in the semiconductor wafer fabrication industry and the uncertainty of the economy, has certainly impacted our top line sales for EDG, which were down about $6.6 million during the second quarter of fiscal 2009, as compared to the prior year.

In addition, the analog to digital TV broadcast conversion change occurred even more quickly than we anticipated. On a positive note, gross margins for EDG for Q2 improved to 35.2% from 32.3% last year, as we continue to focus on higher margin products. We believe we will continue to improve our margins for the balance of this fiscal year.

In November our Display Systems Group, or DSG, officially changed it's name to Canvys, signifying it's evolution to a market driven solutions group. Canvys also experienced declining sales with improved margins during the second quarter. The decline in sales for Canvys was driven primarily by the overall decline in the health care sector. The improved margins represent our progress in repositioning Canvys with a more profitable and sustainable business model.

Gross margins for Canvys reached 24.7% during the second quarter, compared to 20% last year. We are walking away from unprofitable sales, and focusing on those customer relationships that truly provide longer term profitable opportunities. Canvys will continue to reduce it's costs, allowing it to adapt to future sales fluctuations. Canvys has numerous projects under way, and while short-term sales growth is falling behind our original expectations, I am very confident that we are taking the right actions to incur a bright future for Canvys.

In this environment nothing is more important than servicing our customers as effectively and as efficiently as possible. We understand the importance of providing our customers with first rate reliable service. As a result, we are working on several initiatives that will enable us to further improve our ability to partner with our customers. For example we are in the process of tailoring our stocking strategy to serve the specialized needs of our customers within each of our business units.

We are proud of results to date and we are committed to producing solid financial results in the second half of our 2009 fiscal year. Given the turbulent economy, forecasting sales is quite difficult. That being said, our goal is to continue to reduce our operating expenses, in order to achieve our profit goals.

As Kathy and Greg had indicated, we are tightly managing our expenses as well as focusing on cash flow. We continue to lower our head count and employee related expenses. We are confident that these changes will lay the ground work for future profitability. Again, I am pleased that we have been able to generate $9.4 million of operating income during the first half of fiscal 2009.

On a final note, I would like to mention that our Board of Directors authorized a $12.6 million repurchase of shares of Richardson Electronics stock, which represents an excellent opportunity for us to return value to our shareholders. On behalf of the Richardson team, I want to thank you for your support as we build a stronger company for the future.

And now I would like to open the call up for questions.

(Operator Instructions). Your first question comes from the line of Sam Bergman with Bayberry. Please proceed.

Congratulations on the good work you guys are doing in a tough economy.

Thanks, Sam.

Thanks, Sam.

A couple questions. One recounting inventory for the quarter where it did bump up a little bit. Had it not been for purchases made for the end of the year, where would the inventory have been at the end of this quarter?

Sam, this is Greg, in terms of RFPD we saw through the first four months a double digit growth, so based on year end, which is obviously the lowest inventory levels of the year at the end of May, we added inventory to support the growth. When we saw the slight bookings downturn in October and November, we adjusted our orders with our suppliers, et cetera, and got better forecasts from our customers, and if you look on a year-on-year level our inventory is actually down $5.8 million versus prior year, and sales being up single digits.

So it was just to support the growth coming out of last fiscal year. We had a lot of momentum, and if you look at the Q1 results, we were up double-digits, and that continued to about the middle of October, and then the bookings went down, so we have made the adjustments, and we feel we have a great control of it going forward in the third and fourth quarter, but we did see a spike happen in the second quarter.

What kind of markets are you in in renewable energy right now? Can you discuss that industry for us?

The majority of it today it is a growth market, it is a new market, as governments mandate energy providers to have a percent of their energy supplied by wind or solar, and our participation today is mainly in the inverter part of this system, converting the wind and solar into energy, that equipment is where we design in components, we do some engineered solutions.

And so as we continue to grow and that market continues to grow, and you keep hearing in the papers with the new administration, et cetera, that they are going to support and fund a lot of this growth, we think we are in great position to grow that business, similar to what we have done with the wireless infrastructure side of our business going forward, with the lines that we have and also our global capabilities, as Japan, China, and North America are our largest growth areas today.

You have a bookings number for that particular division in this quarter?

Not a number, but the book-to-bill was 1.3 in the second quarter for that group.

Okay. Is there any expansion going on with that group at all at this point, or because I know the rest of the Company you are trying to cut back on costs and employees?

It ends up being actually a cost reduction, but it is more of a redeployment, where we take and take head count and SG&A dollars, and redeploy them into growth areas, so the growth in China we redeploy head count.

However that head count is less expensive than it is in San Jose, or North America or Europe, so the end result is to actually increase the head count in opportunities where there is growth by redeploying SG&A. But no, that group has been from an SG&A point of view and a head count point of view growing, as we try to monitor had this thing is going to really take off, but that has been double-digit growth since we started making it separate three years ago.

It is mainly in field sales engineers to support the customer base which today is a large but small, size of the companies are small, so it is just very similar the same model we did with wireless over the years, and we think the numbers will be similar.

Last question, second half of this year, what is the CapEx expected in the third and fourth quarter for the Company? Maybe Kathy can do that.

We are looking at somewhere just around 2 to 3 million for the total year, so it will just be maybe 1 million to 1.5 million.

Okay. Thank you very much. Great work. Thank you.

Thanks, Sam.

Your next question comes from the line of Mark Zinski with 21st Century Equities. Please proceed.

Good morning. Congratulations on a nice quarter.

Thanks, Mark.

Kathy, I guess I had two quick questions for you. Number one, the gross margin improvement, is that primarily from demand shaping, or was there some cost efficiency improvements as well that went into that?

Both of those items. Some of it is some work we have done on the freight side. Some of it comes from a switch towards more of the engineered solutions are a higher margin product mix.

Okay. And then secondly, do you expect any one-time restructuring or one-time charges, related to the head count reduction?

We have ongoing severance expense embedded in our SG&A, and on a go-forward basis we are going to continue to reduce costs, and so there will be some one-time expense.

Okay. Great. And then, Greg, I was wondering if you have any update on the 3G licenses in China? Is there any news on the timeframe for when those licenses will be issued?

Yes. In fact, with October and November bookings not being what they were the first half of the year, we were very happy to see that yesterday and some on Monday. China has announced that they are unleashing and approving a $41 billion two-year program to upgrade the country's mobile communications infrastructure.

Now we have done very well with the TD-SCDMA version. They are going to have actually a three version protocol, but today with our global design administration program, we are designed into the amplifier manufacturers that are supporting this upgrade, through TD-SCDMA, and now with WCDMA and CDMA 2000, so I will forward you the press release that came out I believe on Monday.

I got it Monday night, but the China has officially unleashed the dollars, $41 billion to the program to upgrade the country's mobile communications, and as you know through every conference call we have had probably for the past 1.5 years, our investment in China and our growth in China ends up being a smart decision on the part of the Company, and that is where we are going to see our revenue growth probably for the next six to eight months, so yes, it is announced, and had we are very excited about it. Huawei, one of their largest service providers is predicting 30% growth in 2009. I haven't seen a lot of press releases like that going around in the past few months.

Okay. And then in terms of alternative energy, the alternative energy market in Europe in particular I know had been pretty strong. Are you seeing any kind of slowdown specifically in the European alternative energy market?

With alternative energy the growth was so strong, pretty much every market alternative energy and on the wireless side, WiMax, it is growing, but it has slowed down. It is just everyone seems to be taking a stop-and-see attitude to see what is going to happen in 2009, so they are holding their forecasts and their growth to the chest, and we will know a lot more to see what happens in the next three months, but it has slowed down, but it is growing, single digits from what I can see, in terms of bookings.

Okay. And then final question, I guess just for all of you. There has been some acquisition activity in Japan, and I am just wondering if you see that as a potential market down the road? I understand it is a little tougher market to break into, but any color there would be helpful.

We have been in Japan for, Ed, I think you can start with the ten years. We have a large organization.

It is more than that. We actually started our organization in Japan in the late '80s, so we have been there for a long time. What was the question?

The question was there has just been some acquisition activity in Japan, and I am just wondering if that is a reflection of any new movement in the industry there, in terms of consolidation, et cetera?

Not as far as we are aware.

Okay. Great. Thank you.

Your next question comes from the line of Russ Silvestri with SKIRITAI Capital, please proceed sir.

Hi.

Good morning, Russ.

How are you doing?

Good.

Good. I wants to say, it was probably about a year ago when I was ranting at you guys, and you guys have really done a good job, and meeting the cost cuts, and delivering on maintaining the revenue, so you have a lot to be proud of, and nice job, just keep it up now.

Thanks.

Congratulations. I was just curious in terms of the last quarter, how did it break down on a monthly basis in terms of bookings and billings? And just also on the receivables side, if you can talk a little about what the end customers are, if there is the kind of risk you might associate with any of the ability to pay from those customers?

In terms of the quarter and how the month broke down, we really started to see the real slowdown come the second week in October or so. It all pretty dramatically changed, so October and then November continued to see that kind of decline.

In terms of receivables risk, we have seen some of the customers obviously in this environment try to push out payment, but at this point we have seen bad debt hold relatively constant as a percent of sales, so we are watching it closely.

Okay. And actually, Greg, are you available after the call? I had one question I wanted to ask offline?

Sure.

Thanks. That is all for me.

Thanks, Russ.

Thank you.

(Operator Instructions). Your next question comes from the line of [Simon Lee with Aster Whites] Capital Management. Please proceed.

Good morning.

Good morning.

I think you answered most of my questions. I have one question left. It is good to hear that you want to buy back stock, but my question is since the credit market is so tight, and most of your convertible bonds are trading at a big discount, will that be better for you to buy back convertible bonds right now?

Well, as we told you in the last quarter we bought back 3.3 million of our convertible bonds at 71.

Right, but you still have $40 million there.

Right. And so we certainly would be interested in buying the bonds back at that kind of number again and we will just opportunistically look at whether we buy bonds or equity, but we are interested in buying either.

Okay. All right. Thank you.

Your last question comes from the line of Gary Siperstein with Eliot Rose Asset Management.

Good morning and congratulations on a solid quarter.

Thank you.

Thanks for working so hard for all of us. First of all, you mentioned a few times during your opening remarks about despite the slowdown and the lack of visibility out there, you still are hoping to achieve your profit goals for the year. Can you just refresh me on what those profit goals were?

We actually didn't state profit goals. Some of the analysts have estimates out there that are in the range of $0.75 to $0.80, $0.75 to $0.85 for the total year.

Thank you, Kathy. In terms of severance, you mentioned, Kathy, ongoing each quarter. You didn't mention the figure in the last quarter. Can you just tell me what the severance has been in Q1, Q2, and what you expect it to be going forward?

Q2 was about $0.5 million, and we are going to keep taking actions, so I would expect it to be somewhere around that number, depending on what happens in the economy and what we are seeing, in terms of the sales line.

Okay. So the for the year then you are saying roughly $2 million?

It could be in that ballpark, yes.

Okay. You are not taking that out as a separate line below operating income that is going right into SG&A?

Correct.

Okay. So everything else being equal, if you still hit the $0.75, the analyst numbers, one could add back $2 million for those one-time severance charges?

Theoretically, yes.

Okay. And in terms of the last gentleman's call on the buyback debt versus equity, I presume you will do whatever is available, so the bond straight by appointment, so if you see anything during the quarter and you can respond to it, in the absence of that, you will be as able following the rules buying common stock back?

That is absolutely correct.

And with $12 million authorized, if you bought over the next year 2 to 3 million shares at the $4 level, have you run the numbers, Kathy? Book is, what, 7.80? How accretive is that for us?

Well, again, depending on stock price, I mean, it could be anywhere from $0.10 to $0.20.

Thank you. And lastly, I know the economy is tough, and I know you want to focus on what you have been doing so well these past six months, and achieving all of those goals you mentioned, but because there is such a significant turnaround in the Company, and a cleaning up of the Company, does it make sense to put a little effort in at some point on the IR front, the stock still trading kind of quietly, and not a lot of analysts reports out on you guys, and you are trading almost $4 below book, with an improving bottom line situation?

Well, we will certainly be increasing our activity in that area going forward for sure.

All right. Thanks very much. Congratulations.

Thank you.

At this time we have no further questions. I would like to turn the call over back to Mr. Ed Richardson. Please proceed, sir.

Thank you, Leeza. As you have heard, we are certainly committed to implementing strategies that will improve the profits, by reducing expenses, enhancing customer service, gaining market share and ensuring the long-term success of our Company.

I am confident that our management team will deliver improved performance in 2009, and will position us for even stronger performance in the years ahead. And with that, Kathy, Greg, and I want to thank you for participating on the call today, and for your continued investment in Richardson Electronics, and we are all available to answer further calls during the day. Thank you very much.

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect. Have a great day.