Richardson Electronics Ltd (RELL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Richardson Electronics fourth-quarter and fiscal year 2012 conference call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen only mode. (Operator Instructions). We will be facilitating a question and answer session following the presentation. I would now like to turn the presentation over to your host for today's call, Mr. Ed Richardson, Chairman, CEO and President of Richardson Electronics. Please proceed, sir.

Good morning, and welcome to our fourth-quarter 2012 conference call. Joining me today are Kathy Dvorak, Chief Financial Officer, and Wendy Diddell, Executive Vice President, Corporate Development and General Manager of Canvys. As a reminder, this call is being recorded and will be available for audio playback on our website.

During the call we may make forward-looking statements and, based on certain risk factors, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of our risk factors.

Net sales for fiscal 2012 were down slightly to $157.8 million compared to $158.9 million in fiscal 2011 reflecting the cautious purchasing behavior we experienced from our customers throughout the year. Sales in North America were up slightly while sales and all other areas were down. Canvys sales were up slightly year over year while EDG revenues were slightly below the prior year.

Gross margin increased from 29% of sales in fiscal 2011 to 29.6% in fiscal 2012 as a result of our continued effort to shift sales from the OEM to the end user market and to focus on profitable segments of the business.

Operating expenses were well below prior year helping us deliver significantly higher operating income of $6.3 million this year compared to $2.8 million last year in spite of the impact of economic challenges on revenue growth.

We recognize that economic recovery remains uncertain, particularly in Europe and Asia, which represented nearly half of our revenue in FY'12. We continue to believe that there are market factors working in our favor.

Strong demand for automobiles, for example, increases the number of laser cutting machines that are in operation which drives demand for power grid tubes. Health Care Reform and the potential for 40 million new insureds will increase demand for medical equipment and services which in turn drives demand for glassware such as x-ray tubes, magnetrons, klystrons, and medical displays.

In our FY'13 planning process we were careful to maintain a relatively flat cost structure with spending increases primarily tied to initiatives which support these niche markets and opportunities. We will continue to invest in our service capabilities which enable us to sell to a broader base of customers who today cannot install replacement tubes without technical support.

We continue to look for acquisitions that allow us to leverage our existing customer base and global infrastructure which will drive down our fixed expense as a percent of sales. Now let me turn the call over to Kathy to present the details of our fourth-quarter performance.

Thank you, Ed, and good morning, everyone. While sales were below our expectations, we continued to execute extremely well. The fragile state of the global economy continues to create tremendous uncertainty. Despite the challenging environment which impacted our top-line growth, we achieved operating income for fiscal 2012 of $6.3 million, or 4% of sales, and income from continuing operations of $8 million, or 5.1% of sales.

Focusing on the fourth quarter, sales were $38.9 million, down 4.6% from the prior year's fourth quarter. Gross margin improved to 28.5% from 27.9% in last year's fourth quarter. This increase primarily reflects an improved gross margin rate for EDG offset by a decline in Canvys' gross margin rate.

Gross margin for Canvys was impacted by a warranty claim. Adjusting for this we would have seen an improvement in gross margin for Canvys as well. Overall, we believe that gross margin will continue its upward trend as we progress through fiscal 2013.

We continue to tightly manage our expenses. Operating expense dollars in this year's fourth quarter were $10.4 million, down by $400,000 from the prior year. This included $900,000 of additional expense noted in our press release.

Operating income for the fourth quarter of fiscal 2012 was $0.7 million or 1.8% of sales compared to $0.6 million or 1.4% of sales in the fourth quarter of last year. Interest income for the quarter was $384,000 and FX represented a gain of $281,000.

Income from continuing operations was $1.4 million before tax. Our tax provision from continuing operations reflects a benefit of $2.4 million related to a change in our position for permanently reinvested foreign earnings. So income from continuing operations after tax was $3.7 million or $0.22 per share.

For fiscal 2012 sales were $157.8 million, down slightly from $158.9 million of sales in the prior year. Gross margin was $46.8 million or 29.6% compared to $46.1 million or 29% in fiscal 2011.

Operating expenses were $40.6 million versus $43.3 million. Operating income for fiscal 2012 was $6.3 million, or 4%, compared to $2.8 million in fiscal 2011, or 1.8%. Income from continuing operations net of tax was $8 million, or $0.47 per share.

Our cash and investments at the end of our fiscal year was $159.6 million. During the quarter we spent approximately $10.9 million on share repurchases. At year end accounts receivable was $19.7 million versus $22.4 million at the start of our fiscal year. On a positive note, DSO improved by four days and our inventory balance declined by $3.7 million from the third quarter.

We are committed to executing on our growth strategies while keeping our cost structure under control. This will allow us to achieve our operating margin target of 5% in fiscal 2013.

We will continue to return value to our shareholders. We have repurchased about 1.9 million shares during fiscal 2012 using approximately $24 million of cash and we have repurchased 2.9 million shares since the inception of our repurchase program. As of today there are 15.7 million shares outstanding. Our total share repurchase authorization remaining is 38.5 million which includes the incremental 25 million just authorized by our Board.

Our outlook for sales for the first quarter of fiscal 2013 is approximately $36 million to $38 million and, accordingly, we expect sales for our fiscal year to be in the range of $170 million to $175 million. Capital spending for fiscal 2013 will be about $1 million.

We believe our GAAP tax rate will be about 37%, although we currently have a $6.6 million income tax receivable which will mean that we will most likely not have a cash outflow for tax payments during this fiscal year.

In conclusion, we are confident in our ability to reduce our costs and achieve our operating margin target. Our long-term objective is to grow the business which will allow us to leverage our support function costs and achieve an operating margin above 5%. Now I would like to turn the call over to Wendy who will discuss Canvys.

Thank you, Kathy, and good morning, everyone. We were very pleased with Canvys performance in FY'12. Fourth-quarter sales were $11.9 million, a 6.5% improvement over prior year. For the full year Canvys sales were $45.3 million or just slightly higher than FY'11.

The North America custom OEM segment led the way finishing the year with significant year over year growth in sales and margin improvement through its focus on OEM project selection and pricing.

Healthcare also finished the year strong. Although healthcare sales were slightly below prior year on a full-year basis, higher margin and expense control resulted in significant bottom-line improvements.

Our European segment continued to struggle during the fourth quarter and revenue for the year ended well below prior year. In spite of lingering economic concerns we remain optimistic that with renewed attention to and accountability for prospecting, specifically the identification and targeting of OEM customers in markets that have already shown a propensity to use custom displays, that we will see growth beginning later in FY'13.

Canvys gross margins for the fourth quarter were 23.3% versus 24.7% earned in last year's fourth quarter. The gross margin includes a significant charge of $300,000 for a warranty claim. On an adjusted basis the gross margin would have been 25.8% for the quarter. On a full-year basis gross margin was 26.9% versus 24.6% last fiscal year or 27.6% of sales on an adjusted basis.

The Canvys team did an excellent job in sourcing and pricing programs, managing manufacturing and engineering resources and controlling other inventory-related costs such as inbound freight and obsolescence.

Moving into FY'13, we expect that Health Care Reform will have a positive impact across all of the Canvys segments as demand for digital imaging services will increase the demand for medical equipment and displays. Additional capital is also being deployed by the hospitals to upgrade and replace imaging equipment and infrastructure.

The past few years have been difficult on hospital budgets and the technicians have been forced to repair or use equipment that is performing below peak levels. Equipment eventually reaches a point where prepares are no longer practical or even viable.

Several of the large display manufacturing companies have indicated an interest in entering the medical display business to help offset losses in the highly competitive consumer market. But we feel our custom approach to the market addresses niche demand. The economics of doing small production runs do not make sense for these larger manufacturers.

Canvys is also considering expansion in other countries where EDG currently has sales and support resources. We are looking for countries where demand for medical service and equipment is growing in line with population increases and rising median incomes and where governments are changing laws to improve the level of medical services provided. This includes countries such as China, India, Brazil and Mexico, just to name a few.

While we are optimistic about the future of Canvys, we will remain diligent about expenses and working capital requirements and adjust both if and when needed. We do not have a lot of incremental expense planned for the year. We will add key positions to support modest growth, but these will be tied to segment performance and outlook. We look forward to updating you on our progress again at the end of the first quarter. Thanks for your time and interest this morning. Ed?

Thanks, Wendy. We are definitely pleased that Canvys has begun contributing to the overall profitability of the Company in a meaningful way. EGD had a more challenging year, although still highly profitable, due to its dependence on markets which are more susceptible to economic conditions such as semiconductor wafer fabrication.

Sales for FY'12 finished at $112.6 million, down 1% compared to the prior year. All geographic areas except Europe were below prior year. Performance during FY'12 represents an 11.4% increase in industrial power grid tube sales primarily due to our exclusive distribution agreements and rising demand for CO2 laser tubes. This was offset by a decline in our broadcast business relating primarily to the conversion of analog to digital broadcasting and the replacement of tube type equipment with solid-state equipment.

We also experienced a $3.5 million decline in continuous wave magnetrons and related assemblies sold primarily into the semiconductor wafer fabrication market. Gross margin remained flat year over year at 30.8%. Throughout FY'12 we focused our efforts on the CO2 laser market. Early in the year we determined that the majority of users outside of the United States did not have the ability to replace tubes in their own equipment.

Under Powerlink supervision we have now contracted with independent service companies in China, Korea and Taiwan and we're able to offer installation services with our sales tubes which should give us access to a much larger portion of the market.

We will continue to add a combination of independent service companies and field technicians in the major countries of Europe and Asia to service CO2 laser equipment as well as install tubes and consumable parts for our customers. This initiative will help drive improved margins as well as sales in FY'13.

Overall we remain cautious about an economic recovery in Europe and the longer-term impact of the downturn in the economy in China. We will continue to act conservatively in the new fiscal year. This will not, however, prevent us from pursuing initiatives and acquisitions which will take advantage of our resources and infrastructure to sell new products and access additional markets.

During the fourth quarter we worked with a consulting firm to evaluate several different market opportunities. Of particular interest are markets currently dominated by OEMs where there is a large aftermarket in which the OEMs sell parts and service the customers at extremely high prices and where market dynamics create a need for independent parts and service providers.

Providing users with a cost-effective alternative to OEMs who dominate the aftermarket for parts and supports has traditionally been Richardson Electronics' formula for business success. Of particular interest to us is the healthcare market.

For many years we've supplied a range of products to medical OEMs, service providers and hospitals. We spent considerable time over the past six months meeting with and listening to biomedical technicians, independent service organizations and medical replacement parts providers.

We understand there is a significant opportunity for an independent parts company to help reduce reliance on the OEMs and subsequently cut healthcare costs. While the US is fairly well served, Europe and other developing countries such as China, India and Brazil present a unique opportunity to provide cost effective medical replacement parts and services.

We look forward and sharing more of this strategy with you in coming quarters. We anticipate that the sales for Canvys and EGD for the first quarter of fiscal 2013 will be in the range of $36 million to $38 million while sales for the full year of fiscal 2012 should ramp up and be in the range of $170 million to $175 million excluding the impact of acquisitions.

We remain confident that we'll be able to achieve our operating margin target on a full-year basis in excess of 5%. We remain committed to growth and will continue to focus on further market penetration, additional acquisitions and building on the strength of our financial performance.

We will continue to invest in our key initiatives while opportunistically returning cash to shareholders through share repurchase and dividends. We have repurchased 2.5 million shares of stock totaling $32.7 million to date. We announced yesterday we have increased our quarterly dividend by 20% and the Board authorized an additional $25 million for share repurchases. At this point Kathy, Wendy and I will be happy to take your questions.

(Operator Instructions). Mark Zinski.

First question has to do with Europe. I've noticed some distribution companies have adopted kind of a formal strategy within Europe in that they are targeting the healthier countries in Europe say versus like the Southern countries in Europe. Have you adopted any kind of strategy similar to that to deal with Europe?

I'm sorry, Mark, I really didn't get it?

Just wondering if you have any specific strategy for Europe? I've noticed some distribution companies are focusing more on the northern countries, the healthier economies and allocating less resources to, for instance, the Southern countries in Europe.

Okay. Well, the majority of our business in Europe at least for EGD is for replacement tubes and existing equipment. But we go to the market where that equipment is installed and a much larger portion of that type of equipment is in Germany and some of the economies that are much healthier at the moment so that is where our focus is. But we do do a substantial amount of business in Spain, for example.

So it is really -- we have identified, for instance, in the CO2 laser market over 9,000 sockets for tubes and we know by country where they are, so we spend our time in those countries where the business is. And it is not looking at either Northern Europe or Southern Europe, it's where the sockets are.

Okay. And then can you provide a little more color on the CO2 laser market just in terms of the percentage of sales that you are deriving from the CO2 laser market or any kind of year over year growth figure for that segment?

Well, the growth has been substantial. First, a look at the overall market. It is dominated by two or three very large OEMs and they in the past have serviced the majority of their aftermarket business. So we have tried to, as usual, which has always been our strategy, is to address the users directly, not only for tubes but also consumable parts that go into that equipment.

And as I mentioned earlier, we have identified about 9,000 sockets around the world that use power grid tubes in CO2 laser applications and we think that there is probably another 3,000 to 5,000 sockets that we haven't identified.

We have also, as I mentioned in the -- earlier, determined that in Asia particularly where the equipment is fairly new that the users don't have the ability to replace the tubes in the equipment. So we have developed alliances with third-party service organizations and actually employed some of our own technicians where we can actually install the tubes for the customers to be able to access that market.

The business during the year in the CO2 laser area was up about $6 million, so it's a substantial increase and a major portion of the increase in power grid tubes which we talked about earlier. But there is a long way to go, there's a very substantial market out there, we are probably halfway there.

Okay. Given the recovery in the auto industry and given that there is generally a two year replacement cycle on the CO tubes, would you say that that replacement cycle is now kind of in full swing or is there still room for that -- room for that to grow?

Well, again, this equipment, by the way, has been sold for over 20 years. So the equipment has been out there for a long period of time and the replacement cycle has to do with whether the equipment is used 12 hours a day or 24 hours a day or eight hours a day. And the tubes actually last about two and a half years to three years depending upon how many hours a day they are used.

So the replacement cycle is directly dependent upon the production cycles, for instance, in the automotive industry. We have been told in the US they've even been working six days a week and that obviously produces more requirements for replacement tubes. So I think the answer to your question is that the total demand is pretty constant year over year and is very much dependent upon how many hours a week that equipment is being used.

Okay.

We think, for example, at the OEM level that the total purchases of tubes and CO2 laser equipment is probably $25 million, somewhere in that area. So there is a ways for us to go.

Okay. And then just last question in terms of your acquisition strategy. I think you mentioned on the last call that you were entertaining the possibility of doing a larger acquisition or you are open to the idea of larger acquisitions than maybe you had been in the past. Any update on your thinking in terms of potential acquisitions, what you are seeing out there in the market and if you are still entertaining a potentially larger acquisition?

Well, we are probably considering half a dozen different companies as we speak in various stages. Some of them are fairly substantial as far as size is concerned. It all comes down to economics. I am not used to paying a high multiple for companies and what we are seeing out there right now are multiples that don't have anything to do with EBIT, they have something more to do with revenue and we are not willing to get into that practice at all. So it is always a willing seller and a willing buyer and we keep working the program.

Okay, great. That is it for me. Thank you.

Roman Kuznetsov.

Just one question. With revenues slated to grow 9% to 10% in 2013 based on your guidance, what kind of increase in working capital will that require or do you think you will be able to maintain some of the improvements you guys achieved this year?

Hopefully we will be able to maintain the improvements. I mean we will see inventory kind of go through cycles for us. We build in Q1, Q2, Q3 and it tends to come down in Q4. But we certainly are looking for working capital to be a source of cash next year.

How much? Any idea?

We will be happy if it is a small contribution.

Okay. All right, thanks.

Mike Cikos.

I had a question for you on the sales guidance we are seeing and I was hoping you would be able to walk me through. So in the first quarter we are looking at $36 million to $38 million, but for full year we are looking at about $170 million. So I just wanted to know what is your reason or logic why the revenue would ramp over the course of the upcoming year?

Well, normally the first quarter just on a calendar basis is our lowest quarter and the reason for it is Europe, especially Southern Europe, just about closes up for August. So it tends to be a two-month quarter for us. And we normally see that, the second quarter is the strongest and then it just ramps all year long.

Some of that has to do with some of the initiatives that we are working on as far as being able to actually service and install tubes in Asia. We just started that program actually June 1 to be able to offer installation services on tubes in China and in Korea and Japan. And we intend to open more agreements to install tubes on a global basis. And so as we do that that business will ramp up on a linear basis and impact the quarters as well.

And then that service and installation business that you have in Asia and you are focusing on also in Europe, is that the reason why you are expecting this let's say 8% to 10% increase year over year in sales?

As far as EGD is concerned that's true. Canvys is more OEM focused and it is projects that they are working on that are more long-term. You want to talk to that, Wendy?

Well, you pretty much covered it, Ed. I mean we have the entire team focused on prospecting and making sure that we have new projects that we are looking at. And as Ed mentioned, particularly as we look at Europe some of the growth in the recovery will come later in the year in the third and fourth quarter as we look toward economic recovery. We are quite optimistic again that our third and fourth quarters will continue to show improvement over the first and second.

Okay. And with the -- I guess you had said that Canvys is focused on longer-term projects. How long do those projects typically last for?

yes, that's the good news. So they typically take between six and 18 months in terms of from the time we start talking to the OEM until the time we start shipping product. But with the OEM market once you are in they don't like to redesign or recertify their equipment. So you are in typically for a minimum, and I do mean at minimum of three to five years. I lots of our customers are much longer-term than that.

I see. All right. And the one other thing that I wanted to ask was regarding the tax provision that you guys had in the fourth quarter this year. You said that was associated with relocating foreign investments?

No, it had to do with the fact that we have now said those investments -- cash overseas in certain countries is permanently reinvested for tax purposes.

Okay. All right, thank you very much.

[Steve Kertzman].

Could you tell us how much of your cash has held overseas and specifically where it is held?

Primarily right now I think there is about $40-million-some that is held overseas and it's in primarily Amsterdam and Asia.

And you mentioned in your prepared remarks that your SG&A was up about $900,000. Could you elaborate on what the increased costs were?

It had to do with bad debt expense, we had a single large customer that unfortunately didn't pay up that we had to take that expense. And then we had some severance expense that was somewhat unusual.

So, should we think about $9.5 million as a good SG&A run rate for you guys?

Probably close to $10 million.

And one last question. You guys have done a great job managing cost, could you talk to us about how much variability there is in your cost structure? Meaning if there is another hit in sales in the next year, how much further can you ratchet back the costs?

Well, that's an interesting question. We are doing everything we can to pull down costs. Obviously incentives fluctuate, but we have very much a fixed cost structure, so we will hold the line as best we can.

One thing that does happen is that our sales team, and throughout the organization, the employees are highly incentivized on performance. And if we don't hit the sales number our incentives are not anywhere near as high. So the compensation comes down.

Okay, thank you very much.

And we have no further questions at this time.

All right. Well, we thank you very much. I would like once again to thank all of our employees and partners for their contribution to our success in FY'12. And we look forward to discussing our fiscal 2013 first-quarter results with you in October. We wish all of you the best in the coming months and we will speak to you then.

Ladies and gentlemen, we thank you for your participation in today's conference, this concludes the presentation and you may now disconnect. Have a good day.