Richardson Electronics Ltd (RELL) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Richardson Electronics year-end earnings conference call. (Operator Instructions.)

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

Thank you, Candace, and good morning, everyone. With me today are Kathy Dvorak, Chief Financial Officer, and Greg Peloquin, Executive Vice President and General Manager of the RF Wireless and Power Division.

Included in this conference are forward-looking statements, and therefore actual results may differ materially from expectations. We assume no obligation to update our projections. Please refer to the cautionary language in our press release and SEC filings for additional discussion on our forward-looking information.

I'll begin by providing a few brief comments regarding our view of the market and our fourth 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'll provide some comments on EDG and Canvys, and then wrap up with a few comments related to our outlook for the future. Then, we'll be happy to open the call up for your questions.

Without a doubt, the global economic crisis continues to impact each of our three businesses to varying degrees. Our overall sales numbers have steadily declined from positive sales growth in Q1 of 7.3% to being down in Q2 and again in Q3 and, most recently, down 26% in Q4 when compared to the prior year's quarters.

We certainly are not alone in experiencing these types of sales declines, as many of our competitors, customers, and suppliers are all seeing similar trends. The number one question, of course, is -- are we at the bottom? While we continue to describe it as bouncing along the bottom, we are holding our own and seeing initial signs of stabilization.

Sales for the month of June were somewhat more encouraging. Backlog seems to be stabilizing, customers are becoming a little more optimistic, and we're seeing some good news in terms of projects that are getting back online. Even with a little optimism on the horizon, we continue to proactively reduce expenses.

As you saw in our press release, we incurred approximately $2.2 million in severance expense in the fourth quarter. We consolidated several senior management positions, and our employment base is now about 775 compared to 926 at this time last year.

Nothing is sacred. We're pursuing efficiencies in every corner of our business. We're making permanent fundamental changes to the way we operate, which includes significant headcount reductions, exiting product lines, and walking away from unprofitable customers.

Now, let's turn to the broader market environment as it relates to each of our business units. I'll begin by discussing the markets for the Electron Device Group or EDG.

I assumed the General Manager role for the daily operations of EDG to focus on the tube business. The global recession has by far impacted this business more severely than anything I have personally experienced during the last 40 years.

Just as a reminder, EDG supports the aftermarket for power tubes used in steel, automotive, textile, plastics, semiconductor, medical, and the broadcast industries.

In a normal business downturn, production capacity is reduced while new equipment purchases decline and replacement tubes are purchased to support the maintenance of older equipment. In our current economic turmoil, production is being sidelined and equipment is being taken out of service, allowing our customers time to convert to solid-state equipment or cannibalize tubes from sidelined equipment to support equipment that's in service.

The end result is that the demand for our inventory of tubes has declined dramatically. Because of this, we were required to take a significant write-down on our existing inventory.

That being said, the market for tubes is not going away. It's shrinking, and a shrinking market will accelerate the consolidation of tube manufacturers. We believe we are the largest channel to market in the tube industry, and I'm very confident that we'll be able to grow by gaining market share in the future.

Many of you may not be aware but we have a manufacturing facility within our headquarters location that has supported both EDG and RFPD for more than 40 years. Given the decline in demand, we're scaling back our manufacturing activity.

During the quarter, a significant part of our inventory write-down related to our manufacturing operation and the fact that we'll no longer be supporting certain product categories. This also included reevaluating our inventory levels due to the significant decline in the projected future sales for certain products lines, based on the more uncertain economic future.

Now, let's turn to the Display Systems Group. Our Canvys business, which manufactures and delivers turnkey display and touchscreen solutions, has been hit the hardest by the economic crisis. This division provides customized display solutions for OEM equipment manufacturers, healthcare facilities, hotels and casinos, and many other end user markets.

Canvys products include solutions designed for use as electronic information displays, touchscreen interfaces, equipment control panels, and any other application that requires a display to communicate with the end user or operator.

The project cycle is relatively long, and commitments for these purchases typically require capital budget approval. As such, many companies have delayed replacements, upgrades, and deferred spending for new projects until market conditions improve and the economic outlook becomes more positive.

On a positive note, our OEM customers have indicated their intent to increase production late summer and early fall. Canvys is also seeing an increase in the number of digital signage opportunities that we're being asked to participate in, as well as some opportunities stemming from the government and military markets.

Moving to the RF and Wireless market, the trends are similar although not as severe. The build-out of infrastructure in Asia is expected to continue and should lead to a stronger second half of our fiscal 2010.

In the other geographic regions, we are confident that we're maintaining an increasing market share but just experiencing lower volumes due to the decline in overall demand for the products that use our technology resulting from the very difficult economic times. Greg will address these issues in detail.

Given the current market dynamics, we anticipate that our first quarter sales will be down about 20% from the prior year. Even at these lower sales levels, the actions we have taken and will continue to take will enable us to show positive performance at the bottom line.

In addition, we're comfortable that we have ample liquidity and credit availability to run our business.

With that, I'd like to turn the call over to Kathy to discuss our financials.

Thank you, Ed, and good morning. Let me begin by reviewing our financial results for the Company, and then I will discuss the progress we have made with our Companywide cost-cutting initiatives.

Market conditions continue to deteriorate, as our fourth quarter declined at a faster rate than the first nine months of our fiscal year. This unprecedented sales decline has pushed us to continue to find sustainable ways to reduce costs. This has also forced us to reevaluate our inventory levels based upon a more uncertain economic future.

The good news is that as we evaluate our cost structure, we continue to find many opportunities for cost savings and productivity. To improve comparability of our financial results, I will use non-GAAP financial measures as disclosed in our press release issued last night. This will help you understand the current trends of our recurring operations.

Sales for the quarter were down 26.1% compared to the prior year's fourth quarter. Sales for all three business units were impacted by the deteriorating economy.

During the fourth quarter, we continued to focus our attention on our most profitable product lines and customer segments. This meant we had to exit certain markets.

Gross margin declined to 17.5% during the fourth quarter, primarily reflecting the fact that we wrote off approximately $7.5 million of inventory. Adjusted for the inventory write-down on a non-GAAP basis, gross margin was 24% during the fourth quarter compared to 24.4% last year.

The decline in margin is attributable to the fact that our higher margin businesses, namely EDG and Canvys, represented a smaller percentage of the margin mix in the fourth quarter.

SG&A was $26.4 million, or 23% of net sales, compared to $32 million, or 20.6%, of net sales in last year's fourth quarter. Included in the fourth quarter's SG&A expense is $2.2 million related to severance. Excluding severance, SG&A would have been $24.2 million, or 21.1%, of sales.

Based on our expense run rate, we believe our annualized operating expenses for fiscal 2010 will be approximately $97 million. This compares to SG&A of $110 million for fiscal 2009 and $125 million for fiscal 2008.

Headcount is down to 775 employees compared to 930 employees we had at the start of our fiscal year. As we improve processes and streamline our operations, we are finding additional opportunities to further reduce our headcount.

Operating loss for the fourth quarter was $7.8 million. Excluding one-time items, operating income for the fourth quarter of fiscal 2009 would have been approximately $3.4 million.

During the fourth quarter of 2009, net loss was $10.4 million compared to a net loss of $5.2 million during the fourth quarter of last year. The net loss of $10.4 million includes $10.6 million of significant charges. On a non-GAAP basis, excluding the $10.6 million of charges, our net income for the fourth quarter would have been a positive $200,000.

Once again, the foreign currency impact on our financials is significant. Unfortunately, this is becoming a recurring theme, given the volatility of foreign currencies relative to the US dollar.

In the fourth quarter, we recorded a loss of $1.3 million related to foreign currency translations as compared to the full year foreign exchange gain of $1.3 million. We transact business in many currencies and therefore our intercompany activity fluctuates as the relationship between the local currencies and the US dollar changes.

For the 12 months ended May 30th, 2009, our sales were down 12.7%. Our gross margin on a non-GAAP basis, excluding significant items, was 24% compared to 24.4% during fiscal 2008.

Operating income for 2009, excluding significant items, was $14.1 million compared to operating income of $16.1 million during fiscal 2008.

We are maintaining our focus on our balance sheet, which includes reducing our debt levels. To this end, we did not have any money drawn on our revolver at the end of the fourth quarter, and our long-term debt was approximately $52 million. Our cash position at year-end was about $44 million compared to $40 million at the start of our fiscal year.

Our accounts receivable balance as of May 30th was $92.4 million versus $109.5 million at the beginning of our fiscal year. Excluding the impact of foreign exchange, our receivables decreased by about $12.2 million versus the approximately $17 million decrease shown on our balance sheet.

Given the current economic climate, our allowance for doubtful accounts increased to 2.6% of accounts receivable in 2009, compared to 1.5% of accounts receivable in 2008.

Our inventory level was approximately $81 million compared to $94 million at the beginning of our fiscal year. This decrease primarily reflects the $9.8 million of inventory provisions recorded during fiscal 2009 and the effects of foreign exchange, as well as a modest decrease in our overall inventory.

Our accounts payable balance was $53 million at the end of our fiscal year, compared to $58.9 million at the end of fiscal 2008.

Cash flow provided by operating activities during fiscal 2009 was about $11 million, as compared to approximately $27 million during the prior year. We believe we will be able to maintain positive cash flow from operations during fiscal 2010.

Capital spending for the fourth quarter was $310,000, and $1.2 million for the full fiscal year.

While our fourth quarter was disappointing from a sales perspective, we are encouraged by the significant costs we have permanently taken out of the Company. Our goal for 2010 has been to lower our cost structure to enable us to achieve improved operating performance even without a market recovery.

Gross margins should improve, and our annualized operating expenses on a go-forward basis will be around $97 million.

If we are fortunate enough to enjoy a market recovery during the year, we should experience significant expense leverage across a growing sales base. We anticipate our income taxes during fiscal 2010 to be about $2 million. Capital spending should be around $2 million, with depreciation and amortization expense around $4 million.

From a balance sheet perspective, we are diligently working to improve our operating cash flow while keeping in mind the need to carry inventory so that we are positioned to capitalize on sales opportunities when the market recovers.

While we unfortunately had to deal with inventory write-downs, goodwill impairment, and severance expense, we did achieve our targeted level of expense reduction. We are not done on the cost side and continue to find new cost-saving opportunities.

We have reduced our cost structure by more than $25 million since fiscal 2008, positioning us for sustainable long-term improvements in both financial and operating performance.

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

Thank you, Kathy, and good morning, everyone. On the revenue side, RFPD finished the fiscal year at $355 million, down 5.6% over prior year. This follows eight consecutive years of top line growth.

Based on the market trends we have seen over the past 12 months, RFPD continues to outperform in a market that is down, on average, between 20% and 30%. During fiscal year 2009, RFPD contributed to the significant cost-cutting measures taken by Richardson Electronics in response to declining sales.

During the fourth quarter, sales were $84.3 million, an 18% decline compared to prior year's fourth quarter sales of $103 million. While the overall results of RFPD did not meet our internal targets, we are pleased with the progress we have made in terms of reducing SG&A.

It was necessary for us to take advantage of any cost-cutting opportunities, given the difficult economy and the fact that we have decreased visibility into our customers' demands. We will continue to pursue additional cost-cutting initiatives that will position RFPD to remain profitable during fiscal 2010, despite any economic environment.

Now, let me turn to our four key markets, which are infrastructure, networking, broadcast, and alternative energy.

As I have mentioned over the past several quarters, the infrastructure rollout in China continues to return the largest sales growth, not only for RFPD but for Richardson Electronics. We expect that our sales growth, as it relates to the infrastructure rollout in China, to slow down slightly during our Q1. However, we have already seen increasing demand for Q2 and Q3 as China Unicom WCDMA rollout is underway.

In addition, we are seeing some positive signs in Korea in light of the Korea Telecom and KTF's merger being complete. And the network optimization programs, which include WCDMA and WiBro, are expected to occur during the second half of our fiscal year 2010.

Networking continues to be the market where we're experiencing the largest declines. The soft demand for subscriber equipment is affected by the deteriorating market conditions. In addition, the housing market continues to be soft, and our OEMs are cautious and still providing very little visibility.

Within our European market, we are seeing a small growth in the next generation digital broadcast transmitter designs at our key OEMs. Our broadcast system product lines, which support national broadcast companies worldwide, continue to significantly decrease in sales, and the increase in component sales cannot offset the overall decline.

Investments in alternative energy markets continue to be slow in North America and throughout the world. However, there are pockets of growth overseas, as two of our large customers in Japan and India have placed multimillion dollar orders with us for solar energy power supplies.

However, with this, we feel we have properly aligned our resources to support these markets. These have all been growth markets in the past and will continue to be growth markets in the future. But, in the last 12 months, each of these core markets have been hit by the downturn in the economy.

However, we have been successful with cutting costs and identifying opportunities within each of these markets to keep us profitable.

In terms of 2010 outlook, in speaking with many of our customers and suppliers, we see a market decline of 6% to 9% in the first half of our fiscal 2010. However, there will be a slight growth in the back half of our year.

Our key markets have pockets of growth throughout the world, and there are growth opportunities. And as the leading RF and wireless power conversion distributor in the world, we will find these areas and grab market share for our suppliers.

With the sales growth expected during the second half of our fiscal year, we will continue to manage our working capital through continued improvements in our inventory management processes throughout the world.

During FY 2010, we will continue to redeploy resources to support our growth areas and continue with our strategic cost reduction efforts. Our state-of-the-art Website featuring Engineer-Focused Navigation is scheduled to go live on August 10th. We are extremely excited about the potential for this new business growth and to better service our customers, markets, and suppliers.

There have been many challenges for RFPD over the last 18 to 24 months. However, with our global model of focused distribution, we have been able to gain market share and reduce costs in support of our suppliers and shareholders.

We still have a dominant global infrastructure of engineers, product management, and supply chain, and feel we will see signs of growth in the second half of the fiscal year. We also believe we will be able to capture additional market share throughout our fiscal 2010.

However, if this recession continues longer than our customers and suppliers are forecasting, then you can be assured that we are prepared to take the appropriate steps to rightsize the business so that we maintain profitability, based upon a lower sales base.

With that, back to you, Ed.

Thanks, Greg. Now, let's turn to our other two businesses, starting with the Electron Device Group or EDG. Sales for EDG in the fourth quarter were down 38.5%, showing further market deterioration from the 30.6% sales decline in the third quarter.

The industrial markets for tubes have been severely impacted by the economic crisis, particularly in markets like the automotive industry where business failures are taking tube-type equipment entirely out of service. The assets of these companies have been sold, and we're hopeful that the equipment will eventually return to service.

Unfortunately, our Visual Technology Division experienced a similar sales trend to EDG. Sales were down about 43.5% in the fourth quarter, which represented a sequential decline from 36.5% sales decline experienced in our third quarter.

As I mentioned earlier, this division experienced the greatest impact from the global recession as capital spending on new projects was delayed. Specifically, Canvys's healthcare business was down the most over the prior year with numerous projects being placed on hold or cancelled, due to the economic crisis.

On a more optimistic note, during the past two to three months, we have seen an increase in the number of healthcare projects being quoted, and several opportunities that were placed on hold are now being requoted or submitted again for budget approval.

Also positive is the fact that the digital signage projects that had been dormant for the past five to six months are beginning to show signs of life. While this does not mean Canvys will win all these projects, there are approximately 50 active digital signage projects in our pipeline.

We continue to be optimistic about Canvys's OEM business, which held up fairly well over the past year. A number of existing OEM partners have communicated that their order volume is expected to improve over the summer, and the disparity between forecasted releases and actual shipments seems to be less prevalent than it was during the third and fourth quarters of 2009.

I think it's important to note that we're not losing customers. We are just experiencing timeline delays as the customers deal with their own budget constraints. While sales have been soft, our focus has been on improving gross margin by pursuing profitable business and rightsizing the organization to enable it to be profitable at these levels.

We believe we've accomplished these objectives.

Gross margin for Canvys was about 29% in the fourth quarter, adjusted for the inventory write-down of $600,000. We believe we'll be able to maintain this margin rate as a result of the operational process improvements we've made in the Canvys business model.

We're training our sales team to identify those customers that will place value on the customized products and services that Canvys offers. We are continuously improving our controls to help us truly understand which customer relationships are profitable. Canvys has made great strides in reducing expenses across the entire organization, allowing for stronger performance to emerge once the markets improve.

In summary, although I'm not satisfied with our financial results for 2009, I'm convinced that we've taken all the necessary steps to manage our costs and strengthen our business. As Kathy indicated, our balance sheet is in good shape. We are tightly managing our expenses and we're focusing on cash flow.

The economic crisis is forcing us to look at our business differently. Our objective is to eliminate costs permanently by becoming more efficient in how we operate.

Thanks for your continued commitment to Richardson Electronics and for your support as we build a stronger company for the future. And now, we'll open the call up for your questions.

(Operator Instructions.) Our first question will come from the line of Christian Schwab of Craig-Hallum. You may proceed.

Great. Thanks. As far as seasonality for the remainder of the year, would we expect a typical seasonal pick up in Q2?

Yes.

Okay. Of similar strength as we've historically seen, or too early to tell?

I think it's too early to tell.

And then, my last question. Greg, just the last comment that you said, I just want to make sure I understood it right. You said that you would take more actions in rightsizing the business if the recession lasts as long as your customers and suppliers think. Can you elaborate on that? Did I hear that correctly?

Yes. As you remember, Christian, in the first quarter of last year, we were up 14% and up about 6% in the first half of the year. So we took actions, even with this growth, in terms of making sure we had a SG&A model that would support the potential downturn.

And so, we removed over 40 people, over $4 million. And the market, when it does come back, we'll be able to leverage the SG&A. But, if it continues, and again, the customers we talked to, what they're forecasting, what our suppliers are seeing with the larger OEMs, and what we see on a daily basis, we feel that there's going to be an increase in 2010.

However, if that does not happen, we'll continue to do like we did in 2009 and to right-size the business to the revenue dollars that we're producing, sales made.

All right. Perfect. I did misunderstand that. Great. Thank you.

Thanks, Christian.

Our next question will come from the line of Mark Zinski of 21st Century Equities.

Good morning, everyone.

Hi, Mark.

Hi. Kathy, just two quick questions. Is the near-term gross margin goal still about 24.5%?

I think that's a fair assumption, yes.

Okay. And are you seeing any pricing pressure at all?

Oh, I think if we're seeing pricing pressure, it's probably in RFPD more than anywhere else. Would you like to comment on that, Greg?

Yes, throughout the year, obviously with the market downturn higher on some of our competitors in terms of their microprocessor and DSP business in the consumer items, we've seen cost pressure. But, over the last number of years, we've demanded from our suppliers, and they've been very supportive, to put in design registration programs to protect our margin.

Where we're seeing the pressure is in terms of logistic support and offering better terms. We've seen everywhere from 90 days to 120 day terms offered to our customers to buy through a different channel.

So, our suppliers have supported us on the margin dollars in terms of the price. However, we're seeing pressure in terms of terms and supply chain issues.

Okay. Great. Oh, and Greg, two quick questions on the international business for RFPD. The first one is, can you give any color as to how the expansion in India is going, particularly with the cellular build out there? Are you making positive inroads?

Yes. We've seen growth there in India in that initiative, better resources throughout the year, but we haven't seen it on the wireless side. We've seen it mainly in the power conversion side with companies building solar inverters and (technical difficulties) the radar business that we're participating in. But, it just hasn't increased.

Now, we are selling to customers outside of India that are putting in wireless infrastructure, not --.

Right.

A lot of folks in terms of infrastructure suppliers in India being developed. What we're looking for and waiting for is the next Huawei or ZTE of India.

Okay. And then, in terms of China, I understand that there has been an aggressive buildout in the rural areas of China for wireless communications. Are you seeing direct benefits to the business from that expansion?

Absolutely. We shipped into that market last year about $43 million of product that was specifically to the CDMA rollout and also the CBMA rollout.

We expected a slowdown in Q1. There has been a slight slowdown. We expected the rollout to dilute in the second half of 2010. The good news, it should be flat to up, based on exactly what you said. They're expanding into the rural areas after they've done all the major cities (technical difficulties) in 2009. And we do participate directly in that.

So, what we're excited about is the fact that China will be flat to up slightly this year, which in essence gives our shareholders, you and I, 12 to 18 months more time for the market to come back in Europe and North America where we're experiencing the most decline.

Okay, great. And then, final question. Kathy, is there an estimated share count for fiscal '10?

At this point, I would use the 18 million shares.

18 million. Great. Okay. Thank you very much.

Thanks, Mark.

(Operator Instructions.) Our next question will come from the line of Sam Bergman of Bayberry Management. You may proceed.

Morning, Sam.

We lost him.

Hello, Sam.

Hello, Sam. Your line is open.

I think we lost Sam.

Yes. (Operator Instructions.) At this time, I have no further questions.

All right, Candace. Thank you very much. While our fiscal 2009 results are disappointing, we are entering fiscal 2010 with renewed optimism. Richardson Electronics has undergone a very necessary downsizing to reduce our cost structure and become a leaner and more efficient organization. As a result of the actions we have taken, I'm confident that we'll produce significantly improved operating results in fiscal 2010.

I would like to thank the Richardson team for stepping up during this extremely trying time, and thank our shareholders for your patience as we structure the Company to achieve significantly improved financial performance. We look forward to reporting our progress to you in October.

Thank you for your time today and for your continued support of Richardson Electronics.

Thank you, sir, and thank you for your participation. You may now disconnect. Have a great day.