Richardson Electronics Ltd (RELL) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2013 Richardson Electronics conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Ed Richardson, Chairman and CEO. Please proceed, sir.

Good morning and welcome to our first quarter 2013 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 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 the first quarter of fiscal 2013 were $35.7 million, down 14.1% from net sales of $41.5 million during the first quarter of last year. The first quarter of FY 2012 was a 14-week quarter versus 13 weeks in FY-13. Taking into consideration this adjustment, sales are down 7.5% over prior year.

On a consolidated basis all geographic areas were down to prior year as financial concerns throughout Europe, decreasing demand from China and slower than anticipated US economic recovery continue to keep our customers on edge. Demand for Canvys' custom and healthcare displays in North America as well as consumables for CO2 laser equipment are several areas of our business that showed an increase over the prior year.

Gross profit for the first quarter of fiscal 2013 was $10.6 million or 29.9% of net sales compared to $12.7 million or 30.6% of net sales during the first quarter of fiscal 2012.

Operating expenses were well below prior year, as we committed to you last quarter. As a result, our operating income was $500,000, or 1.4% of net sales. While this falls short of where we hoped to be at this point of year, the teams worked hard to maintain market share while carefully controlling expenses.

Economic recovery in the markets we serve continues to be uncertain and our businesses remain challenged. However, we are hearing from our customers and suppliers that they expect demand to increase during the first or second quarter of calendar year 2013. Our plan is to continue focusing on key areas of strength and capture market share as the economy improves.

We're also meeting with our key vendor partners to discuss new ways to mutually improve the profitability of our businesses. We are looking for new products we can distribute and asking our customers what additional products and services we can provide. At the beginning of the fiscal year, we made significant changes to our organization and our incentive structure to encourage, identify and reward new business growth.

Kathy Dvorak will share the details of our first-quarter performance with you.

Thank you, Ed, and good morning, everyone. The global economic environment has proven to be far more challenging than we anticipated. Sales in our first quarter were $35.7 million, down 14.1%, falling short of our expectations. In spite of the sales shortfall, we continue to control our expenses and reduced our fixed costs by over $600,000. We achieved operating income in the quarter of $0.5 million, or 1.4% of sales, and income from continuing operations, $734,000 or $0.05 per share.

Gross margin decreased to 29.9% from 30.6% in last year's first quarter. This decrease resulted from a decline in EDG's margin rate, reflecting a shift in sales mix between original equipment manufacturers, or OEMs, and aftermarket customers, as well as our mix by geographic region. Canvys' decline in margin reflects a shift in customer mix as well as the significant volatility related to the euro and US dollar. While many components of gross margin have become less predictable, we believe that we will be able to maintain our gross margin percentage at these levels for the balance of fiscal 2013.

We are managing our expenses as carefully as we can during this sales decline. As you all know, it is difficult to leverage a relatively fixed expense base when struggling with the top line. On the other hand, our expense discipline pays off when sales begin to pick up again. Operating expenses were $10.1 million, down from $10.8 million in the prior year. Operating income for the first quarter of fiscal 2013 was $500,000 or 1.4% of sales compared to $2 million or 4.8% of sales in the first quarter of last year. Interest income for the quarter was $383,000, and FX was a small gain.

Income from continuing operations was $944,000 before tax. Our tax provision from continuing operations was $210,000, so income from continuing operations was $734,000, or $0.05 per share. Our tax rate from continuing operations during the first quarter was 22.2%, reflecting our geographical distribution of taxable income as well as our forecasted cash available to distribute in each of our foreign jurisdictions. We expect our tax rate for fiscal 2013 to be approximately 25%.

Cash and investments at the end of the first quarter were $150.9 million. During the first quarter, we spent approximately $5.6 million on share repurchases and working capital was a use of cash of $2.6 million. This increase in working capital investments reflects an increase for both inventory and receivables of $600,000 each and a decrease in payables of $1.4 million. Unfortunately, as sales slow down, it takes time to adjust inventory levels, particularly in light of the longer lead times in this industry.

While we are currently facing market and continued economic challenges, we remain excited about opportunities for growth. We will continue to pursue our growth strategies, and in the meantime we will not lose focus on keeping our cost structure under control and managing our working capital investment. We believe the market environment will improve as we move into the calendar year. Our outlook for the second quarter is for sales of approximately $36 million to $38 million, which, of course, makes our goal of reaching an operating margin target of 5% more challenging.

A few minor comments -- capital spending for fiscal 2013 will be about $1 million. Our GAAP tax rate, as I mentioned, will be about 25%. And as we have noted in the past, we currently have a $6.4 million income tax receivable.

We have been active in our share repurchase plan. To date in fiscal 2013, we have repurchased about 600,000 shares, using approximately $7.1 million of cash. Our total share repurchase authorization remaining is about $35 million.

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, allowing us to leverage our support function costs and infrastructure 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. Canvys finished the first quarter of fiscal year 2013 with sales of $10 million versus $10.8 million in Q1 of FY 2012, a 7% decrease in sales. On an equivalent basis, sales were flat quarter over quarter. Both the North American customer OEM segment and the healthcare segment exceeded prior-year sales. Sales growth in the custom OEM segment came mainly from new projects and increased volumes with existing customers. The healthcare segment is highly project oriented. Sales come from different hospitals each quarter.

Our European custom OEM segment continued to struggle in the first quarter of FY 2013. While the economy in Germany remains strong, economic conditions in Europe failed to improve and exports in Germany remained constrained. Sales are also hurt by declining demand for products in China. Generally, we have not lost any key customers in Europe. Demand for monitors supporting specific programs is simply down year-over-year.

Gross margin for the division fell from 28.1% in the first quarter of FY 2012 to 26.4% in the first quarter of FY 2013. The decline was due to the impact of unfavorable fluctuations in the euro exchange rates on fixed price contracts in Europe and, to a lesser degree, by higher freight costs. Both the North American segments exceeded prior-year gross margin as a percent of sales.

Prospecting is the key to ensure long-term sales growth in our customer OEM segments. This is the number one priority for Canvys. While Canvys has many new customers and projects in the pipeline, the time from initial call to first deliveries is being stretched, with programs often taking longer than the originally projected 6 to 18 months. We continue to work on new base packages, such as our True Flat Monitor series, which can be easily modified to specific customer requirements to speed up the process. Ultimately, we are tied to the speed of the OEM itself. Our timetable is determined by the development schedule of the specific equipment in which the monitor will be used.

Market demand, shifting corporate priorities, delays in technology development and specific internal and external approvals can all delay or speed up the approval and purchase process.

While we remain optimistic that healthcare reform will create new display opportunities, some larger medical OEMs are reducing costs and delaying investments in new plants and equipment in advance of the new tax included in recent healthcare regulations levied on medical equipment sales. We're also seeing more community hospitals downsizing and looking for additional ways to reduce costs. Some hospitals are now replacing workstations as they fail rather than refreshing all displays. Hospitals are hesitant to finalize upgrade plans pending the release of new fiscal year budgets, election results and further understanding of government regulations.

One strategy we have deployed to help level out healthcare sales is more active pursuit of the healthcare replacement monitor market. We have conducted a thorough review of the monitors we are able to offer for various modalities and have identified some opportunities where we can satisfy additional demand. This initiative ties in nicely with the Company's plans to pursue the replacement parts market for diagnostic imaging. We will be targeting companies that sell to third-party service organizations or direct to hospitals.

As we mentioned in our last call, Canvys healthcare is also considering expansion in other geographies where EDG currently has sales and support resources. Based on our market research, we determined that the best place to start is in Latin America. We are currently meeting with potential customers. Many are hospitals and service dealers that purchased products from Richardson Electronics in the past. We are providing samples of our Image Systems products and will confirm our ability to offer cost-effective solutions to this market.

Canvys' book-to-bill ratio over the past month has strengthened and backlog has increased as a result. We will closely monitor new business in the pipeline and will continue to explore options to shorten lead times and look for new opportunities with more immediate demand. We will remain diligent about expenses and working capital requirements to support the display business.

We look forward to updating you on our progress at the end of the second quarter. Thank you again for your time and interest in Canvys. I will now turn the call back over to Ed.

Thanks, Wendy. We are confident that if the European economy improves, so will the European segment of our display business. EDG sales were $25.6 million in the first quarter, down 16.6% from $30.7 million in the first quarter last year. Adjusting sales for the extra week in the first quarter of FY 2012, sales in the current quarter were down 10%. Gross margin was strong at 31.2%, but down slightly from 31.5% in the prior year. Sales in all geographic areas were below prior year with the largest decline in Asia.

In anticipation of lower demand, expenses were carefully managed. Broadcast and aviation sales were flat and laser consumables, a line we launched last year, showed a significant gain over the prior year. These gains are offset by declines in the marine market and a continued downturn in the semiconductor wafer fabrication industry. Business with end users and original equipment manufacturers indicate production is down 40% to 50% this year. Investment dollars are being tightly controlled and plants are not operating multiple shifts, resulting in lower demand for our products.

We do not feel we are losing customers to competitors or to different technologies. Our customers are optimistic that the economy will show improvement beginning early in 2013, at which time we anticipate our sales will follow suit. Offering installation service and support as well as consumable items for laser equipment are key elements of our strategy to increase sales of power grid tubes to end-users in CO2 laser markets.

During the quarter, we were successful shifting sales of CO2 laser tubes from OEMs to end users. As a result, our margin increased by 2% in this product line. Our Powerlink team made significant progress expanding our CO2 laser equipment service capabilities throughout Europe and parts of Asia. Using a combination of third-party service organizations and direct employees, we are now able to provide service to those end users that do not have the technical expertise to replace power grid tubes and other accessories in their equipment.

Our initial service focus is on CO2 laser equipment. We will soon expand our coverage to other industrial markets and equipment using our existing resources. For longer-term growth, we continue to focus on engineered solutions opportunities such as high-power industrial microwave systems which use magnetron tubes and klystrons as their RF source. We booked prototype orders in China this quarter for $1 million for 915-megahertz generators used to process organic material. We recently had a dedicated OEM sales personnel to focus exclusively on these types of customers and business opportunities.

For many years, we have supplied a range of tubes and related products to medical OEMs, service providers and hospitals. The global market for parts and service is in excess of $10 billion, and this number is growing as many countries such as China dramatically improve their health care systems to support growing populations. The more we learn about this market, the more we realize there is a significant opportunity for an independent parts company to help reduce reliance on the OEMs and facilitate reducing healthcare costs.

This is particularly true with respect to replacement parts for diagnostic imaging, including CT, PET CT and MRI equipment. Our challenge now is to identify the right acquisition targets in what is currently a highly fragmented market. Our plan is to carefully select several companies in key geographical areas that give us a global footprint, relationships and the knowledge necessary to successfully expand Richardson Electronics' role as a key player in the replacement parts market. We will leverage our existing global infrastructure to facilitate this strategy.

This will not be a fast process, but we are confident that such a strategy will position the Company well for growth and provide an excellent return to our shareholders.

While the first quarter was weaker than we expected, we are starting to see increased backlog and improved coding activity. Given the seasonality and the current market outlook, we anticipate second-quarter sales for Canvys and EDG will be up slightly over Q1, in the range of $36 million to $38 million. We will closely monitor expenses and explore opportunities to take cost out of the organization if we can do so without negatively impacting growth. We will also continue to pursue our goal of doubling the revenues of the Company within 3 to 5 years while returning value to our shareholders through dividends and stock repurchases.

We will accomplish this by making acquisitions which take advantage of our current global infrastructure and customer base while contributing positively to earnings.

At this point, Kathy, Wendy and I will be happy to take your questions.

(Operator instructions) Mark Zinski, 21st Century Equities.

Ed, can I put it down to give your kind of personal opinion on the demand you are seeing out there in the market? Is it more of a hesitancy about what's going to happen on the political front and what's going to happen with some of the countries in Europe? Or, do you detect more of a kind of systemic weakness in your end markets?

Sure. Well, particularly in the Electron Device Group, about 80% of what we sell goes for replacement in existing equipment. And the whole economy is what I would call nervous. And in that type of environment, instead of buying spares, these companies tend to wait until either the equipment goes down or to cannibalize parts from equipment that's not in service, particularly when it's not in production 24 hours a day.

So we think we are seeing, particularly in the summertime, a temporary blip while people catch their breath and don't buy spares, don't spend money on that type of product and wait to see what's going to happen. I will say that we have seen the business pick up nicely in October, and so we are cautiously optimistic that this is going to correct itself, particularly in the first quarter of the calendar year.

Okay, that's helpful. And then in terms of the CO2 laser market, are you able to give out any year-over-year sales numbers on that market for this quarter?

We haven't issued the year-over-year sales numbers by product line. I can tell you we are still seeing nice growth, and we also think that as we do offer more service capability, particularly in Asia, that that growth will accelerate. It's a huge market and we have a very small piece of it. A lot of it has to do with the auto industry. A lot of the CO2 laser cutting equipment is used for cutting steel parts for the auto industry, and when the auto industry is strong, that industry is strong as well.

But we probably have currently 20% -- 15% to 20% market share in the replacement tubes that go into that market, so it leaves us a lot of room for growth. And that's a major strategy for the future.

Okay. And then on the acquisition front, are you still being pretty active in evaluating acquisitions? And are the valuations becoming a little more tolerable, in your opinion?

Yes, we are very active in that field. We're looking at probably four or five companies in parallel. I can't tell you that I'm pleased with evaluations that we've seen. As we mentioned earlier, we are particularly interested in the medical aftermarket business. We see a major opportunity in the healthcare field as all the pressure on reducing costs on a global basis. And we've looked at a lot of small companies in that space. And I think, over the next 12 months or so, you'll see us move into the healthcare business on a much broader scale.

Okay, and then, Kathy, were there any one-time type expenses this quarter?

There were some expenses related to year end, and typically the first quarter and the first half of the year has some what you might call one-time, but nothing of major significance that I would carve out for you.

Okay. And then last question, Ed, why do you think Asia is down more so than Europe year-over-year? Is it just the kind of soft landing in China, primarily? Or is there something else unique going on in Asia?

Well, I think it's the first time in years that the Chinese haven't seen double-digit growth. And I think the nervousness that we are seeing elsewhere in the world is probably even greater in China at the moment. We just returned from China, actually, last week, spent several days with some service companies and industrial companies. And I think they are all sort of in shock that the Chinese economy can be down to single-digit growth. So I think we've seen more of a reaction, and particularly in the summertime there.

And you also have this political situation that's going on between China and Japan, which isn't helping things all.

Okay, great, that's it for me, thank you.

Mike Cikos, Sidoti & Company.

Just a question for you -- I think you had said that you were starting to see a pickup in business in October, cautiously optimistic that it continues into the first half of calendar 2013. I guess, can you delve a little deeper as to why you saw -- or your thoughts on why we did see that improvement in October?

Oh, it's difficult. We did have some onetime orders, one that we mentioned that we were successful after a long period of time in taking a prototype order on some microwave generators. And that prototype order is in China, as a matter of fact. It's about a $1 million order in the front, but it could be much larger going forward. So we're pleased about that.

We've actually seen some pickup in EDG on backlog. So I think what's happening is, in the summertime, with so many plants that take a vacation, particularly in southern Europe in August, that the replacement parts business just dried up. And now they are having to replace some of those parts as equipment gets back into production. And that's giving us more backlog.

Okay. And that backlog is, then, the main driver for why we would expect the first half of next year to improve?

I think so. And, basically, we have to see the economy improve as well. And we are being told, at least by our customers, that they expect it to improve in the first couple of quarters of calendar 2013.

Okay. Kathy, one question for you. I think you had said in your prepared remarks that there's been approximately a $0.6 million reduction in your fixed cost base. Is that correct?

I said $600,000 decline from Q4 to Q1.

Okay, okay. And can you just explain, I guess, how you were able to reduce those costs, then?

We continue to work on every aspect of the business to see if we can find cost savings. I don't think it's any particular area; it's pretty much across the board. And then sales decline, incentives are also impacted.

Okay. And then my last question is for Wendy, just going around the horn right now. You had said that the book-to-bill ratio strengthened towards the end of the order. Can you give us an idea as far as the rate that you were looking at for either the month or the quarter?

Are you asking about for the end of Q1? Like in the August time frame, for us, it dropped fairly low; it dropped to a little bit below 1. Obviously, for EDG, they are always talking a book-to-bill of just about 1 because they are shipping on immediate demand for their customers. For Canvys, again, we are taking orders for custom displays, so typically, we like to see that backlog well above 1 each month. Beginning really in September-October, we've got in a lot of full-year orders from our customers which bought that book-to-bill way back up to an acceptable level for us.

Okay. An acceptable level -- we are talking maybe 1.3?

Yes, I would like to see it there or better.

Okay. Okay, great, guys. Thank you very much.

(Operator instructions) Jeff Gates, Gates Capital Management.

Ed, just a question -- if I look at the level of SG&A spend, and I know you just have some fixed cost reductions this quarter, but I guess the question is how long would you maintain this infrastructure that you have if you weren't able to find an acceptable acquisition?

Well, (laughs) if we couldn't find an acquisition, obviously, we would cut into that substantially. We are quite used to running the business at about 20% SG&A when we are fully loaded, and that has been a while, certainly, since we sold RFPD. But I don't think we have any question in our minds that we are going to be able to include a couple of these acquisitions that we are looking at. Right now, we have one that's a little larger that's the priority, and we are going to spend a lot of time on that one. And then, if we are unsuccessful with that acquisition, then we will probably move on with some of these smaller ones. Sometimes, it takes just as much effort to do a smaller acquisition as it does a large one. And right now, we've got a priority we are working on.

So we are really not -- we would like to see things better quarter by quarter with the existing business, but the priority now is to utilize our global infrastructure and to integrate these acquisitions that we are looking at and get the business back up to $300 million, $400 million in revenue here in the next three to five years. That's our goal, and we are pretty confident we can do that.

And when you talk about a larger acquisition, just can you give us an idea of the scale of what you're talking about?

Oh, $50 million to $100 million in revenue.

Okay, so you are not looking to leverage the balance sheet? You're basically talking about using the cash that you have?

Absolutely. I don't intend to go back into debt.

And can you briefly talk about the Powerlink acquisition and if that is working out as you expected?

Sure. Our original intent when we acquired Powerlink was to expand further into the microwave tube business. Powerlink services high-power amplifiers for satellite communications primarily. And those amplifiers have traveling wave tubes in them, or klystrons. And it's a huge market. The microwave tube market is about $1 billion. And really, to be able to access aftermarket in that space, you have to be able to replace the tubes for the customers. They are very high voltage and it takes an engineer, a microwave engineer to be able to service that equipment. Most customers don't have that capability.

So our intent was to move into the microwave tube business using Powerlink, which we think is probably one of the finest satcom service companies in Europe, for sure, if not the world and expand that geographically. And we started that, but really we saw a greater opportunity immediately to actually service equipment in the CO2 laser space. That's something that we have a complete menu of products, and we have a customer base already. But in Asia, the customers are not able to replace the tubes.

So we sort of refocused that strategy and we have Powerlink working on either training engineers that are our own employees or that we have added to help us build service capability, particularly in China, Japan, Korea and the Asian market, and also to bring third parties up to speed as authorized service centers for us. And that's their basic priority; that's what they are working on right now.

So we're pleased with the acquisition. Certainly, it hasn't grown revenue as fast as we thought it would. But, at the same time, we have refocused their efforts around CO2 laser service.

And going back to SG&A for a second, my last question, if you are running at $40 million, I guess to get to 20%, you need $200 million in revenues. I'm just kind of wondering, can you get there on a cyclical basis? I'm looking back to like 2008, when you did like $192 million, pro forma. And I'm just wondering, can you get there on a cyclical basis -- just on a cyclical recovery without acquisitions?

I guess it would depend on how robust the recovery is. We haven't seen anything like that for a while.

Okay, thank you, good luck.

(Operator instructions) [Michael Coless].

Say, just a general question. Whenever I see Avnet or Arrow make a buyout or something like that, they always say they have stiff competition from Richardson Electronics. And I was just wondering, with the divestiture of your previous -- that big divestiture, how much overlap you still have with these major companies.

Well, the only overlap at all is with Canvys. Actually, we sold RFPD to Arrow, and so we don't compete within the RF space at all. Canvys -- both Arrow and Avnet have a custom display integration group. And so I guess conceptually, we compete with them off and on with our Canvys group, but frankly, we don't see them too often. We are very specialized in what we do in our customization of LCD displays, and really can't tell you that we compete with Arrow or Avnet at all.

Okay, thanks, that answers the question.

(Operator instructions). With no further questions in queue, I would now like to turn the call over back to Mr. Richardson for closing remarks. Please proceed.

Thanks, Stephanie. Well, thank you for joining us and for your continued support of Richardson Electronics. I would also like to thank our employees and partners for their hard work and commitment. We look forward to discussing our fiscal 2013 second-quarter results and our growth strategies with you in January. I wish you all the best in the coming months and look forward to speaking to you soon.

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