Richardson Electronics Ltd (RELL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter conference call for Richardson Electronics. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Ed Richardson, Chairman, Chief Executive Officer, and President of Richardson Electronics. You may proceed, Sir.

Good morning and welcome to the Richardson Electronics' second quarter conference call for fiscal 2012. Thank you for joining us today. With me on the call are Kathy Dvorak, Chief Financial Officer, and Wendy Diddell, Executive Vice President, Corporate Development and General Manager of Canvys. This call is being recorded and will be posted for audio playback on our website.

Let me begin by reviewing our Safe Harbor statement. Some of the comments we'll be making on today's call include forward-looking statements which are subject to risks and uncertainties so actual results may differ materially from our expectations. A more complete description of our risk factors can be found in our press release and SEC filings.

Sales in our second quarter fell short of our expectations. Our customers are purchasing with caution, reflecting the growing concern over the state of the economy. We reported sales of $39.1 million, down slightly from the $41 million in the prior year. Gross margin improved to 29.9%. Operating expenses were $10 million, or 25.5% of sales, compared to $11.2 million, or 27.3% of sales in the prior year. Operating income for the second quarter of fiscal 2012 was $1.7 million, or 4.4% of sales, compared to operating income of $600,000 in the prior year's quarter. Income from continuing operations was $1.6 million compared to $200,000 in the second quarter of last year.

As I mentioned on the last call, we completed the acquisition of Powerlink in September. Powerlink is a successful UK-based technical service company with locations in London and Dubai. Powerlink services traveling wave 2 amplifiers and related equipment for the satellite communications market throughout Europe and the Middle East. Due to the high power requirements, traveling wave 2 amplifiers must be serviced and TWPs replaced by an authorized service center. Our plan is to expand the services Powerlink provides and create a hybrid service center to accommodate not only satellite communication customers but also industrial power grid tube users in the near term and military and medical customers in the longer term.

To help us build and broaden the business, we hired two additional microwave tube engineers with significant experience in the medical and industrial markets to join the Powerlink team. They have been meeting with industrial and medical equipment users to determine the types of service they require. The response from the industry has been very favorable. Typically, service capabilities have been very limited. The key area of opportunity, for example, is in the CO2 laser market. We discovered that in Asia many CO2 laser equipment users are not trained to replace the tubes and rely heavily on the original equipment manufacturers for service.

Once we understand what our customers require, we'll expand the services Powerlink provides in the UK and then duplicate the model in various geographies throughout the world. We will customize the service offering in each geography based upon the customer's needs with the objective of increasing sales of both power grid and microwave tubes. Before we discuss EDG and Canvys, I'll turn the call over to Kathy to present the details of our second quarter performance.

Thank you, Ed, and good morning. I am pleased to report that during the second quarter we achieved an operating margin of 4.4%, reflecting significant cost reductions from continuing operations when compared to the prior year's second quarter. Sales for our second quarter were $39.1 million, down slightly from the prior year second quarter. Gross margin improved to 29.9% from 28.8% during the prior year second quarter, primarily related to a significant improvement in Canvys' gross margin rate as we continue to focus on the more profitable OEM business. Conversely, EDG's gross margin rate was down due to customer and product mix. Ed will provide additional insight into the trends related to EDG's margins.

As we have demonstrated in the past, we have successfully reduced our operating expenses. Operating expenses in the quarter were $10 million, or 25.5% of sales, down from $11.2 million, or 27.3% of sales in the prior year second quarter. Operating income for the second quarter of fiscal quarter of 2012 was $1.7 million, or 4.4% of sales, up from $595,000, or 1.5% of sales during the second quarter of fiscal 2011.

Interest income for the quarter was $281,000, reflecting our conservative investment strategy. FX was income of $486,000, reflecting the strengthening of the US dollar versus the many foreign currencies we hold overseas. We are monitoring our cash position on a daily basis and continue to mitigate our foreign exchange risk whenever possible. Income from continuing operations was $2.5 million before tax. Our tax provision from continuing operations was $836,000, or a 34% tax rate. So, income from continuing operations after tax was $1.6 million, or $0.09 per diluted share. For the first half of fiscal 2012, sales were $80.6 million, up 2.8% compared to $78.5 million of sales in the first half of fiscal 2011. Gross margin was $24.4 million, or 30.2% compared to $23.2 million, or 29.5% in the prior year. On a year-to-date basis, operating expenses were $20.7 million versus $21.7 million for the first six months of fiscal 2011. Operating income was $3.7 million compared to $1.4 million in fiscal 2011.

For the first half of fiscal 2012, income from continuing operations, net of tax, was $2.7 million, or $0.15 per diluted share, compared to income from continuing operations of $600,000, or $0.03 per diluted share in the prior year's six months. Our cash and investments at the end of our second quarter was $176.7 million. During the quarter, we spent approximately $4.2 million on share repurchases, another $2.3 million on the Powerlink acquisition, and invested a little over $2 million in working capital. Our accounts receivable balance remains relatively flat when compared to the start of our fiscal year.

As of quarter end, AR was $22.4 million versus $22.3 million at the start of our fiscal year. Our DSO held steady, reflecting our ongoing cash collection efforts. Inventory was $35.3 million compared to approximately $30.9 million at the beginning of the fiscal year. This $4.4 million increase reflects the strategic inventory investment to support sales into the CO2 laser market. I would like to assure you that working capital management continues to be a high focus throughout all levels of our organization, and we believe that our working capital will be a source of cash during the third and fourth quarters.

We are committed to executing on our sales strategies to increase our sales while keeping our cost structure under control. This will allow us to achieve our operating margin target of 5%. We are committed to returning value to our shareholders. Through this very choppy economic environment, we are being opportunistic with our share repurchases. We had repurchased about 1.5 million shares to date using approximately $20 million of cash. As of today, there are 16.9 million shares outstanding. Our total share repurchase authorization remaining is $29.4 million.

While we are carefully evaluating acquisition opportunities, we remain committed to returning value to our shareholders through a combination of cash dividends, share repurchases, and investments in our growth initiatives. Our outlook for sales for the third quarter of fiscal 2012 is approximately $40 million to $42 million. We expect sales for our fiscal year to be in the range of $165 million to $170 million, or a 4% to 7% increase over the prior year. Capital spending and depreciation expense for fiscal 2012 will be about $1 million. Our tax rate for fiscal 2012 will be approximately 35% for cash tax and 37% for GAAP.

In summary, we continue to make progress on reducing our cost structure and believe that with our expected sales volumes we are on track to achieve our operating margin target of 5%. Our long-term objective is to grow the business, allowing us to leverage our support function costs and ultimately further improve our operating margin beyond 5%. Now, I would like to turn the call over to Wendy to provide an update on our Canvys business.

Thank you, Kathy. I'm pleased to report that Canvys had a good second quarter. Sales were $11.1 million, which was below prior year second quarter sales of $12.3 million but slightly ahead of the $10.8 million in sales realized during our first quarter of FY 2012. Gross margin was 28.3%, which was significantly better than the 23.1% gross margin earned in the second quarter last year, and up slightly over first quarter. The Canvys team continues to do an excellent job focusing on profitable OEM and healthcare opportunities by controlling expedited freight requirements which have historically hurt our gross margin. Year-to-date, Canvys has generated nearly $1 million more than prior year in gross margin, or a 19% improvement. This increase in gross margin is attributable to improvements across all three of Canvys' business segments. The most notable change is in the North American customer OEM business segment, which was ahead of prior year in both sales and margin. With the tightened managed focus on finding and selling to OEM customers, we are seeing a steady increase in new projects, primarily from existing customers, and our backlog is steadily increasing. We are continuing to identify display opportunities within the base of our OEM customers who purchase products from Richardson Electronics' other divisions, and expect our efforts to drive incremental revenue greater in Q4 and into FY 2013.

Revenue in our European segment has been hurt by the economic challenges in Europe; however, Europe's gross margin is the highest across all three segments and continues to show improvement over prior year. As 90% of Canvys' business in Europe is generated within Germany, the weak demand for German exports has caused many of our customers to delay or suspend anticipated orders. Under the leadership of a new general manager for Canvys Europe, we are evaluating OEM markets and applications which have not been hurt by the economy. We also continue our efforts to identify a line of certified marine displays to sell to Richardson Electronics customer base and marine radar manufacturers, and we are making good progress towards finding a viable solution.

Healthcare sales were much stronger in the second quarter, as anticipated, due to receipt of several purchase orders for large refresh projects. Year to date, healthcare revenue was flat to prior year but backlog is increasing as we carefully control inventory purchases and time our deliveries to receipt of purchase orders. During the second quarter, purchase orders were received late and we missed the opportunity to ship complete in the quarter. Our margin in the second quarter has also improved over prior year.

We anticipate the third quarter will be very much like second quarter for Canvys and we continue to manage our expenses in inventory in line with our revenue and margin forecast. Our objective is to stay focused on identifying and cultivating profitable OEM relationships and opportunities, and be ready to meet demand in all segments as the economy strengthens. Ed?

Thanks, Wendy. Let's review our second quarter performance and outlook for the Electron Device Group, or EDG. Sales began to soften as we progressed through the quarter. We ended the quarter at $28 million compared with $28.7 million in sales the prior year. Europe showed the largest decline, reflecting the high degree of turmoil and uncertainty in the region. Gross margin decreased to 30.5% in the second quarter of fiscal 2012 compared to 31.2% in the second quarter of the prior year. The decline in margin is the result of a shift in sales mix between product lines and geographic regions. To offset the decline in margin, we're carefully controlling our expenses. The power of the EDP sales team is found in the strength of its relationships with our customers and our vendors. We're capitalizing on these relationships in a number of ways.

As I mentioned earlier on the call, we've recently concluded the acquisition of Powerlink, which allows us to provide technical assistance to our power grid tube customers that do not have the capability to service their own equipment. This will help us in increase power grid tube and related electronic component sales as well as sales of microwave tubes. We are also in the process of expanding our product offering to include other industrial components that are required by our global customer base. These industrial components are primarily consumables, or products that are replaced by our tube customers on a regular basis. We've recently launched a new website, www.rellaser.com, which makes it very easy for our customers to find the consumables they need by the type of equipment they own. The products are the highest quality and priced competitively which is important to our customers who are using very expensive equipment and can't afford to risk damaging a machine or experiencing down time due to part failures. We believe this one-stop shop concept will be attractive to our customers and drive incremental sales in the near future.

In spite of the economic challenges being amplified by the media, we believe there are markets and applications that are doing well. Our job is to focus our highly skilled sales force on these markets and increase sales. Finally, as Wendy discussed, the EGD sales team continues to help Canvys reach more OEMs.

In summary, we're focused on those markets which present new opportunities for growth. We're confident that as a small player in a large market we can overcome some of the challenges presented by the uncertain economy. Tubes provide the power for equipment in many diverse industries, although industries like textile, broadcast and semiconductor wafer fab industry are experiencing declines, there are other industries that use laser equipment that are enduring strong growth. EDG has the highest quality product offering for this application and, therefore, we need to seize the opportunity. Our success has been based on listening and responding to the needs of our customers and finding ways to deliver solutions for our customer's unique requirements. We efficiently serve the after market with immediate shipment from stock, vast technical knowledge and strong service capabilities. We continue to look for companies and opportunities that enable us to take these capabilities and diversify into new geographies and new markets.

Sales for Canvys and EDG for the third quarter of fiscal 2012 will be in the range of $40 million to $42 million, and we anticipate sales for the full year of fiscal 2012 to be in the range of $165 million to $170 million. As Kathy discussed, we're confident that we'll be able to achieve our operating margin target of 5% by the end of the year. We will continue to invest in our growth initiatives, such as our technical service centers, while opportunistically returning cash to shareholders through a share repurchase program and cash dividends. Now, Kathy, Wendy and I will be happy to take your questions.

(Operator Instructions) And we have a question from the line of Mark Zinski. You may proceed.

Yes, good morning.

Hi, Mark.

Ed, just wondering if you could maybe add some color to what you're seeing in the EDG segment in terms of the various vertical markets.

Sure. Well, I guess from a macro perspective, we would say the customers are nervous. I think sometimes the media drives more uncertainty than reality. And certainly in Europe, if customers have the opportunity, instead of placing orders, they are delaying placing those orders and we saw a lot of push back during the quarter in that area. After having said that, about 80% of our business is replacement in existing equipment. As long as that equipment is running in a manufacturing cycle, ultimately it requires replacement tubes and related components. So you can delay for a period of time, but ultimately you may not carry spares, but you have to buy tubes to keep the equipment going and sometimes that actually plays into our strategy because these customers require their product immediately and we carry large inventories, as you can see, and it allows us to charge full price when they need them, rather than if they have a spare in stock they can go shopping. So there are a lot of the industries right now that have sort of pulled back on buying replacement tubes. On the other hand, as I mentioned, the CO2 laser business is predicted right now, or forecasted, to be up about 50%. So that's an area that we're very strong, it's a huge market, probably the largest market for power grid tubes and we're concentrating our sales force efforts in that area right now.

So would you say it's more of a European element?

Yes, our sales are down and our backlog is down the most in Europe to any of the continents.

Okay. In terms of the acquisition environment, are you still actively pursuing other potential microwave acquisitions?

Yes. Our strategy is really, as I mentioned many times, is to make what we call bolt-on acquisitions where we can sell more products to our existing customer base. We sell to 25,000 customers all over the world, and of course with the sale of RFPD we sold assets but we maintained a global infrastructure. We have offices in 35, 40 locations around the world and subsidiaries in 22 or 23 countries. So our objective is to leverage that infrastructure and to sell more products to the existing customers. And if we can, possibly, add other acquisitions in geographies where we're not strong, for instance, in India and eastern Europe where we could add geographic coverage.

Okay. In terms of the acquisition environment, I guess there's been some speculation that this expiration of the lower capital gains tax is kind of adding to the flurry of deal making. Are you seeing any kind of evidence of that in your acquisition pursuits?

Not really. I guess the acquisitions that we look at are usually under the radar. If you followed our history, we've probably done 30 or 35 small acquisitions in my history with the Company, and we're usually buying private companies where asset value with an earn out structure and I think that one of the companies that you're speaking about are probably more on the radar. They are public companies that have more exposure and more recognition.

Actually, we're probably looking at four or five companies as we speak and none of them are huge opportunities, probably range in size from $25 million, $30 million on down in revenue. But I would say the environment is conducive to doing acquisitions now as we've seen it in a long time. People are interested in trying to monetize their position and to partner with larger companies to expand what they do and so we're optimistic. It's a lot of fun, actually.

Okay. Last question just in terms of CapEx spending. With the Powerlink acquisition -- that gives you some service center facilities. Do you plan on spending more on additional technical facilities, or not so much in the near term?

Well, our strategy at the moment, Powerlink is specialized in microwave service for satellite communications equipment and they have been in that business for 16 years and they really cover the European market very well and now the Mideast, through their Dubai location. We want to expand that capability, but we see a greater opportunity going into the industrial service business, particularly in CO2 laser equipment service.

As we mentioned earlier, in studying the total market, there is quite a mix. About 90% of the users in Asia, where the CO2 laser equipment is fairly new, they don't seem to have the capability to service their own equipment. So to sell tubes there, we need to have technical service in Asia. And the engineers in Powerlink are convinced they can service industrial equipment. Microwave equipment is much more sophisticated than RF equipment in these industrial applications. And so our first objective is to try to expand their service capability into Asia and we may do that greenfield or we may acquire some companies; independent service companies that are already in that business.

We're actually traveling to Asia in February and we have appointments with several companies that specialize in CO2 laser service and so we'll either look to partner with these companies or acquire them and ultimately we want to get into the medical service business. It looks to be an excellent opportunity with all the hospitals pushing healthcare costs down, and then ultimately possibly into military service.

Okay, great. That's it for me. Thanks a lot.

Thank you.

(Operator Instructions) We have a question from the line of Gary Siperstein. You may proceed.

Hi, Gary.

Hi, Ed. Hi, Kathy. Hi, Wendy. Congratulations on continued improvement in the business. Ed, I know I sound like a broken record and I'm sure some other shareholders do too, but I want to talk about the cash. With the buyback, getting the share count under 17 million, you're probably get about $10.50 per share in cash. And, therefore, the valuation on $165 million profitable business is, what, about $20 million? I mean, it's ridiculous. And I think that part of it is the fear by your shareholder base that, despite your track record, et cetera, on M&A, that the company may do something stupid with the money. And in light of the prior gentleman's question about the 15% tax rate on dividends and capital gains that may or may not disappear at some future time, doesn't it make sense?

I mean you've done it your way so far with keeping all that cash, but it seems to me if you could pay out a $5 special dividend, you would still be left with over $100 million in cash for the business which is more than enough, and your shareholders would get a nice payback -- your long-term shareholders -- taxed very favorably. And since we're January 2012, we don't have to pay tax on it until April 2013, and the 15% tax, to boot, before something changes. And I would suspect that if that -- if you did something along those lines, then the valuation for the business would probably be a little better than what The Street's valuing it now. Can you talk to that for us?

Sure, sure. As you know, we just had a Board meeting this week prior to the earnings release and that's a perpetual discussion. We've made it very clear. I think if you look at, first of all, the transaction on RFPD has been completed now for a little over 10 months, and we've made it very clear what our strategy is and how we'll go forward. And the first thing we did was to increase the dividend where it's up to $0.20, or it's about 1.5% return on investment, something like that, at the moment. We said we're going to do bolt-on acquisitions and we completed the first one in September and we're looking at four or five right now. We've purchased $20 million worth of stock and we continue to purchase stock on an opportunistic basis.

And I've been around -- I hate to admit it, I've been around for over 40 years and I really don't think I'm going to change my method of operation. If you look at the 35 acquisitions that I've done over the years, they are all very conservative in nature, normally bought around asset value with some premium or an earn out, and that's what I intend to do. Our goal is to grow this company up to $300 million or $400 million of revenue in the next three or four years around our engineered solutions concept, and we're going to be very, very conservative in what we do with the cash and just continue to run the business in the most opportunistic way that we can, and at my station in life I don't think you're going to see that change. And we're going to continue to follow the strategy that we laid out since the beginning.

All right. Clearly, I hear you but, at a minimum, I mean, don't you feel $0.20 dividend is [miserly] with the amount of cash we have? If you're so hell-bent on not giving back that $176 million to your shareholders, at least have a $0.40 or $0.50 dividend so we get a respectable return on our money while we see what you can do with the cash.

We consider that every quarter and it will be brought up again in the April timeframe.

Okay. I think if you do any above that, notwithstanding what you've just articulated about, you laid out the strategy but it's been 10 months and we've really gotten no valuation of appropriateness on the Business, so I think if you do one or the other, or a combination thereof, you would still have your cake and eat it too; still plenty of cash, but you get a more appropriate valuation of the business.

Well, we certainly appreciate your opinion, Gary, and we'll bring it up to the Board again. We talk about it every quarter.

Okay, thanks, folks. And congratulations on the progress.

Thanks.

(Operator Instructions) And at this time, there are no other questions in the queue. I would like to turn the call over to Ed Richardson for closing remarks.

Okay. Well, thanks, Frances. Thanks, all of you, for joining us on the call today and for continuing to support Richardson Electronics. I'll close by simply saying that I believe we're focusing on the right things and we're on track to reach our goals. We're closely watching industry data points and are shifting priorities and tightening our belts appropriately to respond to these conditions. By taking these actions, we're confident in our ability to execute on our strategy and deliver shareholder value. We look forward to reporting on our progress in April. Thanks very much.

And, ladies and gentlemen, this concludes your presentation. You may now disconnect, and have a great day.