Richardson Electronics Ltd (RELL) 2018 Q1 法說會逐字稿

Welcome to the FY '18 first quarter earnings call for Richardson Electronics. I would now like to hand the call over to Edward Richardson, CEO. Please proceed, sir.

Good morning, and welcome to Richardson Electronics' conference call for the first quarter of fiscal year 2018. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & Microwave Technologies Group; Pat Fitzgerald, General Manager of Richardson Healthcare; and Jens Ruppert, General Manager of Canvys. As a reminder, we're recording this call, and it will be available for audio playback.

I would also like to remind you that we'll be making forward-looking statements, and they're based on current expectations and involve risks and uncertainties. Therefore, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of our risk factors.

The first quarter was a nice start to our fiscal year. Historically, Q1 is a lower revenue quarter, given summer holidays, particularly in Europe. But sales were strong over the past several months with $37 million in revenue at 32.8% margin. All 3 of our business segments performed better than prior year. Greg Peloquin and his team realized growth in both EDG and PMT.

We've been investing in new supplier relationships for PMT, and we're now expanding our customer base and realizing sales from design wins generated in FY '17.

Canvys, under Jens Ruppert's leadership, had an excellent quarter with significant year-over-year sales increases coming from both existing and new custom display customers. Pat Fitzgerald and the healthcare team also generated year-over-year increases in CT replacement parts and equipment sales.

The sale of our PACS business late in the fourth quarter reduced healthcare sales in the first quarter.

Our executive management team remains focused on returning the business to profitability in FY '18. We realized a small operating profit in Q4 FY '17 and now, again, in Q1. We're certainly not satisfied, but these small victories create a sense of pride and help lay the groundwork for better performance each quarter.

I'll now turn the call over to Bob Ben to discuss our first quarter financial performance in detail.

Thank you, Ed, and good morning. I will review our financial results for our first quarter of fiscal year 2018, followed by a review of our cash position.

Net sales for the first quarter of fiscal year 2018 were $37 million compared to the prior year's first quarter of $33.4 million. There were 14 weeks in the first quarter of fiscal 2018 compared to 13 weeks in the first quarter of fiscal 2017.

Net sales increased $3.7 million for PMT and $1.1 million for Canvys, partially offset by a decrease of $1.2 million for Richardson Healthcare due to the sale of the PACS Displays business at the end of fiscal 2017.

Gross margin increased to 32.8% of net sales from 30.7% of net sales in last year's first quarter, primarily due to a favorable product mix in both PMT and Richardson Healthcare. These increases were partially offset by a lower Canvys gross margin that resulted from an unfavorable product mix.

Operating expenses were $12.3 million for the quarter, the same as last year's first quarter. This quarter did include an additional week of salary and benefit expenses as compared to the first quarter of fiscal 2017.

In addition, there was a $0.2 million gain on the sale of building in Florence, Italy. As a result, the company reported a $15,000 operating income for the first quarter of fiscal 2018 compared to a $2.1 million operating loss in the first quarter of fiscal 2017.

Other expense for the first quarter of fiscal 2018, including foreign exchange loss in investment income, was $0.1 million compared to $0.3 million for the first quarter of fiscal 2017. There was an income tax provision for the quarter of $0.1 million, which reflected a provision for foreign income taxes and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. The tax provision of $0.5 million in the first quarter of fiscal 2017 included a provision for foreign income taxes, additional tax due from an audit in France, adjustments from various tax returns filed in foreign tax jurisdictions and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss.

Overall, we had a net loss of $0.1 million for the first quarter of fiscal 2018 as compared to a net loss of $2.9 million in the first quarter of fiscal 2017.

Turning to a review of our cash position. Cash and investments as of September 2, 2017 were $61.4 million, which was a decrease of $2.8 million from the end of fiscal 2017. Cash and investments were $66.3 million at August 27, 2016. We had capital expenditures of $1.0 million in the first quarter of fiscal 2018 compared to $2.1 million in the first quarter of fiscal year 2017. Approximately $0.5 million relates to our investments in our healthcare growth strategy, $0.4 million to our IT system and another $0.1 million for other projects in the first quarter of fiscal 2018.

Lastly, during the first quarter, we paid $0.8 million in dividends.

A couple final comments. Similar to last year, Ed has asked me to lead key company initiatives focused on improving profitability and increasing our cash flow worldwide. Some of these key initiatives for this year will include improving customer product margins, reducing IT expenses, reducing inventory and reviewing options for a repatriation of foreign cash.

Now I'd like to turn the call over to Greg Peloquin, who will discuss the results and plans for our Power & Microwave Technologies Group.

Thank you, Bob, and good morning, everyone. In the first quarter of FY '18, PMT sales were $29.1 million versus $25.4 million in Q1 FY '17. Based on strong bookings throughout FY '17, our business grew 14.7% over prior year, and we ended the first quarter with a very healthy 1.26 book-to-bill. Factoring in the extra week in Q1, sales per day increased 7% compared to prior year. In addition, our margin improved to 32.9% compared to 29.4% in Q1 of last year. Our improvement in performance is driven by sales growth within our core electronic device businesses as well as growth from our technology partners we've added over the past couple of years. We are taking advantage of our long-term customer relationships as well as forming new ones as we expand the product range.

Favorable marketing additions and internal actions to improve margins, efficiency and inventory turns are also contributing to our year-over-year growth. We are experiencing market share gains in revenue growth for products in both our business units, driven by demand in the industrial and radar defense market, with key suppliers like CPI, Qorvo, Thales, MACOM and Milky Way. More specifically, in the industrial market, applications include lasers, welding and industrial heating are contributing to our growth.

5G is still in development. However, we are seeing some prototype orders for test equipment in a tenant development to support this infrastructure rollout. The CTV market has also picked up with a number of new design wins. The semiconductor wafer fab equipment market continues to grow at nearly 20%. This growth is driven by demand for engineered solutions and components.

We're also excited about continued strong overall booking trends with our new technology partners. And looking at our growth and design wins we track on a global basis, it is clear our team has done a good job identifying key suppliers, niche markets and applications and top engineering resources in the field to support this growth. We are adding many new customers each quarter. When combined with our backlog, it makes us very confident our growth in revenue and backlog will continue.

In addition to focusing on profitable growth through targeted sales and marketing programs, we continue to maximize the use of our existing infrastructure and improve our inventory turns by concentrating our sales efforts on a limited number of supplier partnerships with disruptive technology. We know them and their technology well and are finding new opportunities for them every day. There's no question that we have an unparalleled capability and a global go-to-market strategy that is unique to the RF and power industries. We can support this fact by our growing list of customers and technology partners who choose Richardson Electronics. Our world-leading position in the manufacturing and distribution of electronic devices supports legacy equipment as well as new equipment, where solid-state cannot replace tubes. The markets we address need Richardson's capabilities for electronic devices, but also solid-state technology and our design in manufacturing solutions. We have key suppliers in place as well as a global field engineering group and the infrastructure to support our customers' needs throughout the world.

And with that, I'll turn it over to Pat Fitzgerald in Richardson Healthcare.

Thank you, Greg, and good morning, everyone. Healthcare sales in the first quarter of fiscal 2018 were $2.1 million, down 37.5% from prior-year sales of $3.4 million, due to the sale of our PACS Display business, offset partly by increased sales of Richardson-certified and refurbished CT tubes and equipment. Gross margin as a percentage of net sales increased to 48.8% in the first quarter of fiscal 2018 as opposed to 42.6% in the same period last year, primarily due to the sale of the PACS Display business, which generated lower margins.

Healthcare providers globally are under intense pressure to reduce costs. In this environment, hospitals continue to seek ways to reduce equipment maintenance costs, exploring alternatives to OEM service. As a result, there's a growing demand for an alternative source to the OEMs for replacement parts and service. We estimate the global market for diagnostic imaging replacement parts and service to be between USD 7 billion and USD 8 billion annually. Our strategy in healthcare is to play a significant role in the development and sale of diagnostic imaging replacement parts around the world.

We entered the parts space in 2015 with our acquisition of IMES and has since been able to leverage the company's infrastructure, including the use of our global supply chain, our manufacturing capabilities and worldwide local sales offices. The investments we are making in the production of new CT tubes and other high-value components, including the addition of experienced engineers and specialized manufacturing equipment, are the key to the long-term success of this strategy.

Sales of Richardson-certified and refurbished CT tubes were up compared to prior year. More importantly, we made good progress in bringing the new CT replacement tube into production. Creating a sustainable supply of CT tubes will ultimately lead to more rapid sales growth in both replacement parts and tubes, as alternative service providers are able to take system maintenance away from the OEM. Replacement part sales were down in the first quarter compared to prior year, but up compared to the previous quarter. Part sales are cyclical, and there can be significant variation from one quarter to another.

Service training revenue was up in the quarter, and we trained twice the number of engineers on how to maintain CT scanners, as we did last year. The fast pace of service training has continued into Q2. We believe this uptick in training is an early indicator that more hospitals and service companies are interested in servicing CT equipment as we near production of our new CT tube.

Sales in Europe were also up in the quarter. We recently completed our third training class for engineers at our parts and training center in Amsterdam. We expect strong growth in Europe to continue, as our European service partners are taking on additional CT scanners.

Finally, equipment sales were up again in the quarter. While equipment sales traditionally bring lower margins than replacement part sales, these sales represent additional socket that we can sell replacement parts and tubes into in the future. We believe that selling prices and margins for preowned equipment may rise as alternatives to OEM service, including parts and tubes, emerge for these systems.

Our P3 parts contracts, which we launched in the fourth quarter of fiscal year '17, have been well received so far. The P3 advantage is an exclusive supply agreement, and the P3 Protect is designed for customers who want replacement parts and tubes coverage in exchange for a fixed monthly fee. We have contracts for both types pending with customers now. P3 customers will gain preferred access to what will initially be a limited supply of CT tubes. We expect P3 Protect contracts to create a recurring revenue source for our parts business, while allowing our customers to budget and have predictable replacement part and tube costs. With replacement parts, CT and X-ray tubes, service training, wireless VR upgrade solutions as well as power grid tubes, coil repairs and cryogenic solutions for MRI systems, Richardson Healthcare has established excellent relationships with hospitals and independent service organizations on a global basis.

Over the past several years, we have significantly strengthened our value proposition for healthcare providers looking to provide lower cost and increased efficiency. We remain open to additional acquisitions in this market and are focusing on companies with models that can be expanded internationally. We are also evaluating additional partnerships and organic investment in product line expansion in segments that we feel are underserved.

I'll now turn the call over to Jens Ruppert to discuss Canvys first quarter results.

Thanks, Pat, and good morning, everyone. Canvys, which includes the engineering, manufacture and sale of custom displays to region equipment manufacturers in industrial and medical markets, had sales of $5.8 million during the first quarter of fiscal 2018, an increase of 25% to the same period last year. We also increased our backlog substantially this quarter. Gross margin decreased as a percentage of sales to 26.8% from 29.2% the same period last year. The year-over-year gross margin decrease was related to product mix, high input rate costs and increased lower-margin engineering builds. The division did a good job controlling expenses, and we continue to work closely with our Asian partners to deliver the highest-quality solutions at competitive prices for our customers.

The first quarter of fiscal year '18 was a very successful quarter for us. We were successful closing deals that were in development for an extended period of time.

During the quarter, we won 7 new programs from existing as well as new customers in the medical space. Publications such as optical biometry, measuring anatomical characteristics of the eye, Quad HD displays used on surgical application system that enables you to precisely track the location of such instruments throughout a procedure; intra-fraction motion review monitors used in radiotherapy and radiosurgery; control displays used in fully integrated operating rooms to control medical devices; and displays for the endo treatment chairs.

We also won projects in non-medical areas, publications including human machine interfaces for high-speed and high-precision billing machines; packaging inspection systems; ticketing machines; CT scanners used at airport security checkpoints; and teleprompter, talent monitors and clocks that are used in the broadcast industry. This last win required us to focus our engineering effort on features unique to professional television station applications, including custom monitors and incorporating a clock that displays time code information. The special electronics we develop extracts the timing information from a video or audio signal or direct from an IP network.

With our recently launched all-in-one products, we received a significant follow-on order for storage and expensive solutions that are installed across OE stores. And we also secured a critical new frame contract with one of our major customers in the word processing field.

From the variety of customers and applications and the value of orders from existing as well as new customers, it is certainly clear we offer our customers outstanding product and service.

While our sales organization stays focused on new opportunities, I will continue to review and adjust our business strategy with the goal of improving the operating performance of television. Maximizing cash flow is an ongoing priority. We will continue to work with our partners to help us reduce inventory by being able to meet the demands of our customers.

I will now turn the call back over to Ed.

Thanks, gentlemen. I believe you covered it all. FY '18 will be an exciting year for Richardson Electronics, our employees and our shareholders. The healthcare team is on target to launch new CT tubes later this fiscal year. Having a sustainable supply of CT tubes will generate new revenue stream as well as increase our sales of replacement parts and systems.

Our backlog exiting the first quarter is good, and our momentum is strong. We're realizing perpetual growth in backlog from our new technologies as well as large orders received from our custom OEM display customers.

Our backlog in engineered solutions, including products we manufacture in LaFox, continues to grow as well due to the high rate of growth and the demand for semiconductor wafer fabrication equipment.

We'll continue to operate conservatively and make full use of our existing infrastructure to support our profitable power grid tube business, our expansion in Power & Microwave Technologies and our healthcare businesses. We'll use cash to pay dividends and make additional strategic investments in our key initiatives, which we believe will offer our shareholders the best return on their investment. We're not currently considering any acquisition targets, although we remain open to doing so on an opportunistic basis.

At this point, we'll be happy to answer a few questions. Nancy, may we open up the line for questions?

(Operator Instructions) You have a question from the line of Mark Zinski.

Congratulations on the sales growth. First question is for Greg. In terms of PMT, can you potentially break down the percentage of sales related to the semiconductor wafer fab business and the percentage related to industrial lasers?

Yes. On the semiconductor wafer fab market, we have half a dozen customers. And in the quarter, in terms of the total revenue, is about 10% of the total number is in PMT. However, of the increase over Q1 of last year, it's about 25 to -- 20% to 25% of the increase.

Okay. And what about the industrial lasers like CO2 lasers?

On the industrial laser side, that's less than 5% of the total business. And then in terms of the quarter, they had a nice growth. And I would say it's 5% to 7% of the incremental revenue and bookings that we received.

Okay. And then for the semiconductor wafer fab and the laser business, is there any noticeable strength in geography?

I mean, the main geography that's doing really well is North America. That's where the ones that we're engaged with heavily are located. But because of our global footprint, we are supporting those companies that are buying and assembling in other parts of the world, just another attribute of Richardson Electronics. So it's just North America mainly right now.

Okay. When you guys -- obviously, the investments you made in PMT obviously now are seeming to pay off with the sales growth. Do you have any kind of internal ROI metric that you can reference in terms of what you invested in those new products and what kind of sales you're achieving?

Yes. The investment was a documented strategy, and we have bookings numbers. It was a peer startup. As you know, we started from 0. So we looked at what we thought we could book over the next 3 years when we started 2 years ago. We looked at what the billings would be, and then we matched it up with -- the investment is really in people. And we've put together probably the best field engineering team that was available, and that continues to evolve. And then in addition to that, we signed, as you know, Mark, the key technology partners to support that model. And that included some inventory. And so at the growth rate right now, we're very close to achieving each of those metrics year-over-year. At some point, we'll probably come up with exact numbers and break it out like we used to, but we're not doing that at this time.

Okay. Are you -- given this success, are you considering more sort of internal investment in new product designs? Or is that sort of on hold now?

Well, it's never on hold. I mean, the company has been around 70 years because it's a very opportunistic-driven company. And when opportunities come up, that makes sense from an ROI point of view and a profitable point of view and is the best thing for the company as investors, we'll take advantage of those. I will say that, right now, we think our line card is strong enough to get us to the numbers that we have discussed. There might be a couple more, and we call technology gap and look at our line card, and we look at our capabilities and look at our suppliers. And after talking to customers that we find there might be a technology gap in terms of products that we're seeing the customer, everybody's need, we'll go find that. We have one of the best CTOs in the industry that find these people. So we'll probably have a couple over the next 12 months that fill technology gaps. And inventory turns are improving every year, so there's not going to be a large investment. We're getting a lot of traction. We're getting a lot of bookings. We're adding hundreds of customers a quarter, so we're just going to make sure we maximize this, and then look at opportunities as they come up.

Okay. And then, Pat, on healthcare. Exclusive of the PACS sales, if you strip that out, what was year-over-year, apples-to-apples growth?

It's a great question. It was roughly 8%, 9%.

8% or 9%? Okay. And then last question is for Bob. In terms of the operation -- operating cash flow. I think previously you had -- in Q4, you speculated that it'll probably be about the same in FY '18. Is that still your thinking at this point? Or might there -- is there a chance for some improvement with the improving inventory turns?

Well, I believe, in the fourth quarter, we generated cash flow from operations. I think that's what you're referring to, correct? Cash flow from operations or total cash?

Yes, operating cash flow. I thought you had speculated that in FY '18, operating cash flow would be similar to FY '17.

Yes, full year. The full year last year, we generated a total of $1.8 million in operating cash flow. The first quarter, we used about $2.4 million, but that was largely due to the fact that the inventory increased. Even though turns improved in areas, the inventory did increase largely because of the sales growth, which was about 11% for the quarter. So I do expect some improvement in operating cash flow during the rest of the year, and it might not be quite a $1.8 million generation of operating cash flow, but it should be close to 0 or around a small negative amount.

And you have a question from the line of Eric Landry.

So Pat, you mentioned that the growth x of the PACS would have been 8% to 9%. So if I back that out, tax was a little bit less than $1.5 million last year of sales?

That's correct.

Okay. And so, Bob, on the overall sales line, is there any estimate you can make as to how much the extra week gave you? I mean, if I just divide in a linear fashion, it's a little bit over $2.5 million. Is that an accurate assessment?

Yes. Actually, that's -- when you look at that, what I did is I took the extra week, and then I also factored in the PACS Displays sales that didn't happen this quarter that, of course, happened in the first quarter of last year because we still owned it. And when you make those adjustments for the extra week, and also for the fact that we didn't have the PACS Display business this quarter, the sales growth is still 7.2% instead of the 10.8% that we recorded.

Right, okay. Yes, that's what I get. So a mid-7s type of adjusted number?

Yes, they're about the same.

Great, okay. Greg, you may have answered this, but I'm not sure I understood. Is there any way you could sort of just comment the degree of growth that you get from cyclical factors like the semiconductor market versus your growth initiatives? Is there any way you could sort of simply break that down?

Yes. The really the only cyclical market that gives us any forecasting concerns and opportunity is the semiconductor wafer fab market. And that historically has been very cyclical. But what we have found with the addition of new technologies is our ability to sell more products into these markets. So the markets will still -- could potentially still grow, even though the -- our business can still grow even though the market might be declining. And that's the kind of the goal. But the most cyclical one is the wafer fabrication market. And the rest of them, 80% of our business today is still MRO, and that's just based on the use of the product and when they need to do the repair. When you see certain markets pick up, the housing market, you'll see our CT business pick up. When you see refurbishing of traffic control centers and stuff like that, we have the products and we take advantage of those. I wouldn't call them cyclical though, Eric.

Okay. How about if I attack it from this angle? The 1.26 book-to-bill is up, what, 11 points from the end of last quarter. How much of that growth do you think is due to the semiconductor wafer fab market?

Of the growth in the book-to-bill, about 30% to 35% were customers that are supporting the wafer fab market. And a lot of that large portion, that was our largest customer. But there were still other companies that were either building or supporting the people that are building it. So about $30%, 35% of the growth was the wafer fab market.

Okay. And more than half of that is your legacy EDG stuff is built there in LaFox, correct?

Yes. More than half of it was products that we build here in LaFox.

Okay. And I think last, we thought you mentioned that the people that you talked were indicating that this cycle was going to go well into calendar year '18. Is that still the case?

Well, yes. I mean, in the past, it's been wafer fab buildouts. Somebody's building a new wafer fab. But our customers, end customers are supporting memory chips, [field] programmable semiconductors that are going into the cloud and IoT applications, both mobile and fixed. That market is taking off, so we might see a little bit longer trend. The forecasts we're getting from our key suppliers for this does go into the second half of calendar year 2018. So we're thinking, our fiscal year, we should see strong growth throughout, both in bookings and billings.

Okay. And then you mentioned something about 5G. Is there any way to determine what type -- what, I don't know, maybe percent of content you have on these sites when they build out these 5G type of antennas?

Yes. Historically, on any rollout, 3G, 4G, 5G, we've always participated and focused on the infrastructure of that. The handheld business, the mobile part of it, we've not focused on that. And so within that, if you look at the amplifications, whether it's a picocell, a microcell, an old base station, any sort of transmission, the power transistor or the transmit side of that is about 60% of the cost. So in terms of percent of the market, obviously, we have very, very little now. But in the past, when we had this model, the power transistor market, we had 30% to 45% of that market. And right now, what you're seeing, Eric, is it's slow. Technology needs to catch up to what they need us to do. On the handset side, we're seeing some more advances than on the infrastructure side. But what we're seeing right now in terms of our activity, I mentioned 5G because that is a market we're monitoring and watching and we've always done very good in is mainly the antennas, these unique antennas that are needed, whether it's on a building or on a base station, all the test equipment products that test all these products, that's being developed and that's where we're seeing natural orders for. And so, right now, I mentioned it because, as an investor, and it's always been a big market for us, we are watching it every day. We're talking to these customers that we work with and some of them for 20, 25 years. So when China rolled out their 3G at TD-SCDMA market, our sales went to $140 million in China. So it's a big market. And we're just going to keep our eye on it, but it's not of any substance right now, Eric.

Okay. Great. Jen, you mentioned your backlog is up substantially. So should we -- I mean, this substantially mean 10% to 20%, 5% to 10%, 50% to 60%? Is there anything more you could say about what substantially indicates?

Sure. Yes, it's like 40%, 4-0. And you have to understand that backlog at Canvys, we are very much into the project business. So what we do is we get frame orders that are -- that have a lifetime of 12 months to 24 months. It really depends on whether what customer it is. So we will have peaks of backlog, and then customers basically consume the backlog over 12 months, 18 months. So backlog will go down. But if I even all this out, we have the strongest backlog for a long, long time at Canvys.

So is it reasonable to assume that this business has assumed a new trajectory that's not perpetually down?

Yes. So yes, we have seen -- we have won several new programs in Q1 that we never had before. And on top of that, we see an increased demand from customers throughout the world actually. Europe is very strong. And where we suffered last year, in North America, we could increase our backlog by 6%. So that's also up. It's very promising.

And is that driven mainly by the true flat? Or is that too simplistic?

It's driven by the -- mainly driven by the true flat, but also the all-in-one that I mentioned on my spreadsheet.

Okay, great. And last thing, Pat, any idea when you'll have a manufacturing tube on the bench for testing? Is that any time in the not-so-distant future?

I think so, Eric. I hope to be at our next call talking about just that.

And there are no further questions at this time.

Okay. Well, thank you again for joining us and for your ongoing support of Richardson Electronics. We look forward to discussing our fiscal 2018 second quarter results with you in January. Thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.