Richardson Electronics [RELL] Conference call transcript for 2023 q1
2023-04-06 18:35:03
Fiscal: 2023 q3
Operator: Good morning, ladies and gentlemen, and welcome to Richardson Electronics’ Third Quarter of Fiscal Year 2023 Conference Call. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's call may be recorded. I would now like to turn the conference over to Mr. Edward Richardson, Chief Executive Officer. Please go ahead, sir.
Edward J. Richardson: Good morning, and welcome to Richardson Electronics’ conference call for the third quarter of fiscal year 2023. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power & Microwave Technologies Group and our newest business unit, Green Energy Solutions; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we'll be making forward-looking statements. They're based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. We're extremely pleased with the continued strong financial performance in the third quarter. This is the tenth consecutive quarter where we had year-over-year growth. I'm very proud of the entire organization this quarter for shipping more than $70 million in product. The backlog in our Green Energy Solutions increased over the last quarter and we're more confident than ever that this business unit will become a significant and growing percentage of our overall revenue. Certainly, the economy is not without its challenges, continued inflation, rising interest rates, ongoing supply chain issues and news legislation has the potential to impact our business. To-date this impact has been minimal, mainly because of our diversity in engineered solutions. Alternative energy continues to be a global focus driving demand for our wind energy solutions. Our partnerships with our electric locomotive customers and suppliers are solid. Acceptance of synthetic diamonds throughout the world is increasing demand for our magnetron. And our core businesses perform well with both EDG and Canvys having another strong quarter. Today, more than 60% of our revenue comes from products we manufacture or have many factored exclusively for us. Ultracapacitor and lithium-iron-phosphate battery modules, magnetrons and many other tubes and related products are manufactured by us in La Fox, Illinois. Displays are manufactured in our display hubs in Marlborough, Massachusetts and Donaueschingen, Germany. Our manufacturing employees are cross trained and can be moved to different areas to meet the needs of our business units and ongoing growth. We have many products in development that will further allow us to continue this growth and adapting the changing market conditions. Greg, Wendy and Jens will provide more details in the quarter and its key growth initiatives. First Bob Ben, our Chief Financial Officer, will review our third quarter financial performance in more detail.
Robert Ben: Thank you, Ed, and good morning. I will review our financial results for our third quarter and first nine months of fiscal year 2023, followed by a review of our cash position. Net sales for the third quarter of fiscal 2023 increased 27.2% to $70.4 million compared to net sales of $55.3 million in the prior year's third quarter. Due to higher net sales in our Power and Microwave Technologies, or PMT, Green Energy Solutions or GES and Canvys business units partially offset by lower sales in our Healthcare business unit. PMT sales increased by $8.5 million or 22% from last year's third quarter driven by growth from manufactured products for our semiconductor wafer fabrication equipment customers and distributed products for RF and microwave applications. Net sales for GES increased $5.8 million or 103% from last year's third quarter. GES combines our key technology partners and engineered solutions capabilities to design and manufacture products for the fast growing green energy market and power management applications. Canvys sales increased by $1.5 million and 19% due to strong customer demand in North America. Richardson Healthcare sales decreased $0.7 million or 23.9% due to a decrease in parts sales as well as CT tubes sold in China, partially offset by an increase in equipment sales. Total company backlog of a $175.1 million in the third quarter fiscal 2023 almost mirrored that of a $175.6 million at the end of the third quarter of last fiscal 2022. Gross margin for the third quarter was 31.8% of net sales, the same as in last year's third quarter. PMT’s margin increased to 32.9% from 31.8% primarily due to product mix. Healthcare gross margin was 39.8% in the third quarter of fiscal 2023 compared to 25.1% in the prior year’s third quarter due to improved manufacturing absorption and decreased component scrap expense. GES margin decreased in the third quarter of fiscal 2023 to 25.7% from 34.6% in the prior year’s third quarter primarily due to product mix. Canvys gross margin decreased slightly in the third quarter of fiscal 2023 to 32.0% from 32.2% in the prior year’s third quarter because of product mix and foreign exchange effects. Operating expenses were $14.8 million in the third quarter of fiscal 2023 compared to $13.9 million in the third quarter of fiscal 2022. The increase in operating expenses resulted from higher employee compensation, including incentive expense from significantly higher operating income and higher travel costs. However, operating expenses as a percentage of net sales decreased to 21.0% during the third quarter of fiscal 2023 compared to 25.2% during the third quarter of fiscal 2022. The Company reported operating income of $7.6 million or 10.8% of net sales for the third quarter of fiscal 2023 versus operating income of $3.6 million or 6.6% of net sales in the third quarter of last year. Other income for the third quarter of fiscal 2023, including interest income and foreign exchange, was $0.4 million compared to other expense of $0.1 million in the third quarter of fiscal 2022. Income tax expense was $1.7 million for the third quarter of fiscal 2023 or 20.7% effective tax rate versus $0.6 million in the prior year’s third quarter due to the use of federal NOLs in fiscal 2022. Net income was $6.3 million or 9.0% of net sales for the third quarter of fiscal 2023 as compared to a net income of $2.9 million or 5.2% of net sales in the third quarter of fiscal 2022. Earnings per common share on a diluted basis in the third quarter of fiscal 2023 were $0.44 compared to $0.21 per common share on a diluted basis in the prior year’s third quarter. Turning to a review of the results for the first nine months of fiscal year 2023. Net sales for the first nine months of fiscal year 2023 were $203.8 million, an increase of 25.1% from $163.0 million in the first nine months of fiscal year 2022. Net sales increased by $17.1 million or 14.8% for PMT, $19.1 million or 145.7% for GES, $4.5 million or 17.3% for Canvys and $0.1 million or 1.6% for Richardson Healthcare. Gross margin increased to 33.0% from 31.6% primarily reflecting a favorable product mix in PMT and decreased component scrap expense and improved manufacturing absorption in Healthcare. These increases were partially offset by unfavorable product mix and foreign currency effects for Canvys and unfavorable product mix for GES. Operating expenses were $43.7 million for the first nine months of fiscal 2023, which represented an increase of $3.1 million from the first nine months of the last fiscal year. The increase was due to higher employee compensation and travel expenses. Operating income for the first nine months of fiscal year 2023 was $23.6 million or 11.6% of net sales as compared to an operating income of $11.0 million or 6.7% of net sales for the first nine months of fiscal year 2022. Other expense for the first nine months of fiscal 2023, including interest income and foreign exchange, was $0.1 million as compared to other expense of less than $0.1 million for the first nine months of fiscal 2022. The income tax provision was $5.3 million during the first nine months of fiscal 2023 or 22.5% effective tax rate versus $1.3 million in the prior year’s first nine months due to the use of federal NOLs in fiscal 2022. The Company reported net income of $18.2 million or 8.9% of net sales for the first nine months of fiscal 2023 versus $9.6 million or 5.9% for the first nine months of fiscal year 2022. Earnings per common share on a diluted basis in the first nine months of fiscal 2023 were $1.27 compared to $0.71 per common share on a diluted basis in the prior year's first nine months. Moving to a review of our cash position. Cash and investments at the end of the third quarter of fiscal 2023 were $24.6 million compared to $31.1 million at the end of the second quarter of fiscal 2023. The Company continued to invest in working capital to support the sales growth over the past ten quarters. Inventory grew to $101.4 million from $97.4 million at the end of the second quarter fiscal 2023. Accounts receivable increased to $42.2 million from $34.9 million at the end of the second quarter of fiscal 2023 primarily due to the timing of higher sales at the end of the third quarter of fiscal 2023. Capital expenditures were $2.2 million in the third quarter of fiscal 2023 versus $0.6 million in the third quarter of fiscal year 2022, approximately $0.9 million related to investments in manufacturing, $0.8 million for our facilities including manufacturing expansion, $0.3 million for our Healthcare business supporting Siemens Repaired Tube program and $0.2 million was for our IT system. We expect a higher level of capital expenditures in fiscal year 2023 as we make additional investments in our manufacturing capabilities and facility. We paid $0.8 million of cash dividends in the third quarter. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the fourth quarter of fiscal 2023. After the end of the third quarter of fiscal 2023, the Company entered into a three-year, $30 million revolving line of credit agreement with PNC Bank for additional liquidity as necessary. Now, I will turn the call over to Greg, who will discuss the results for our PMT and GES business groups.
Greg Peloquin: Thank you, Bob, and good morning, everyone. Both of our strategic business units Power and Microwave Technologies or PMT and Green Energy Solutions or GES drove strong growth in our quarter. Our GES unit has experienced exceptional growth throughout its first three quarters as the demand for green energy applications such as wind energy, electric locomotives, energy storage and power management has greatly increased. We continue to apply and focus on resources to this extremely important strategic business unit and growth opportunity for Richardson Electronics. In Q3 FY '23, GES sales were up 103% to $11.5 million versus $5.7 million last fiscal year. Our backlog increased to $54.3 million versus $29 million in Q3 of FY '22. Green Energy Solutions includes revenues from several products such as the ULTRA3000, electric locomotive battery modules, the ULTRAGEN3000 and products used in synthetic diamond manufacturing. The growth of these customers and products in GES continues as several major OEMs, our active discussions with us and our engineering teams in the development of power management energy storage products and other green energy applications. We have numerous products and design, prototype and beta testing. We anticipate announcing several new products in the program in the next couple of months. This strategy of developing niche products and technologies often in concert with our key technology partners is crucial to our long-term success. Third quarter FY ‘23 sales for the Power and Microwave Technologies Group or PMT, which includes EDG and PMG, increased 22% reaching $46.8 million versus $38.4 million in Q3 last fiscal year. This growth was mainly due to continued success in our RF and wireless infrastructure business and a strong quarter for our semiconductor wafer fabrication equipment business. Our engineered solutions strategy is led by our global technology partners such as Qorvo, MACOM, Anokiwave, LS Materials, Amogreentech and Fuji Electric. Key tube manufacturers and partners include CPI, Thales, Nisshinbo Micro Devices, previously known as NJRC, and Photonis. Each of our global partners provide key technologies to support our customers' requirements. Our team has done an excellent job identifying and cultivating opportunities. We continue to add partners who fill technology gaps in our offering and support our growth. In Q3, we added two new key technology partners, Navitas Semiconductor and VINATech. Who fill technology gaps in our component and engineered solutions offering, giving us an expanded source of supply to support as well as create new opportunities. Often through these partnerships, we can identify opportunities for new products that we design and manufacture in-house increasing the value we provide to customers and allowing us to capture more revenue. To meet our growing business needs, we continue to invest in our infrastructure to support this growth. We are hiring talented design engineers, field engineers, and expanding capital investments to further enhance our manufacturing capabilities. Our growing in-house design engineering and manufacturing teams are doing a great job supporting the increased demand for current products and new product designs. I am pleased with the progress we are making. We will continue to identify, develop and introduce new products and technologies for green energy and other power management applications. Our growth strategy has proven to be highly successful over the years and we will continue to develop new products and technology partners as well as increase our customer base revenue and profits by capitalizing on our existing demand creation infrastructure. To support this growth, we are strategically investing in inventory that positions us to fill the pipeline and ensure we are able to meet our customer needs. We work closely and collaborate with our customers and suppliers to shorten the time between purchasing inventory and recognizing the sale. As the team drives new products, technology partners and programs, there are always some headwinds. However, Richardson’s unique global model and continued growth with our technology partners and engineering solutions, we are beyond excited about the future. We expect a slowing in the semiconductor wafer fab market. This cyclical market has occurred continually over the past 20 years. However, we are more than ready for it. We also acknowledge the difficulty in finding enough design and field engineering talent to support the growth strategy. However, we are confident that the PMT and GES strategy can offset most, if not all anticipated slowdown. We continue to improve the health of the business by gaining market share, introducing new products and technology partners expanding the value we provide customers. I cannot stress enough the value of Richardson Electronics model is to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power and microwave RF and green energy markets. We've developed a strong business model including legacy products and new technology partners that fit well with our engineered solutions capabilities. Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities when they arise. The execution of our strategy has never been better. There is no question our customers and technology partners need Richardson's products and support more than ever. And as I said in the past, we are just warming up. With that, I'll turn it over to Wendy Diddell, to discuss Richardson Healthcare.
Wendy Diddell: Thanks, Greg. Good morning, everyone. Third quarter sales for Healthcare were $2.4 million which was lower than the $3.1 million in Q3 of FY '22. While sales started off slowly in December and January, sales then recovered in February. Most of the decrease in revenue was because we did not ship any CT tubes to China in the quarter. This is purely a timing issue with orders historically coming in every other quarter. Part sales were below the prior year, but the product margin was higher, helping improve the margin in the quarter. CT system sales were higher in the quarter than the previous year. Gross margin in the third quarter improved significantly to 39.8% versus 25.1% in Q3 of last year, primarily reflecting better factory utilization and lower scrap costs. Inbound freight costs were also lower. We continue to make good progress on the Siemens Repaired Tube Program. This is a series of four tube types, including the Straton Z, MX, MXP and MXP46. The Siemens installed base is considerably larger than Canons and there are no third-party replacement options for these tube types. At the end of the quarter, we released the Straton Z to full production. We are repairing tubes now for stock and expect sales to rise gradually in the coming quarters. We anticipate the Siemens MX series will follow in the 2023 calendar year. We are working on development and validation of the critical component to finish this repair process. As noted in prior calls, the Siemens program is a critical element for our Healthcare business unit to reach its goal of providing a positive operating contribution to the Company by Q4 of FY ‘24. In addition to our Siemens program, we are working on several new programs that will further improve CT tube sales and factory utilization. These programs include reloading tubes in Brazil. We are working our way through the registration process with a local partner. We are also partnering with an international company to reload and sell several other tube types in the Americas. Our first samples are due later in the quarter. These programs may have a positive impact on our revenue in FY ‘24 depending on how quickly we can validate and achieve regulatory approvals. Our current tube product line the Siemens Repaired Tube program and several new parts programs with large third-party service organizations give us a path to breakeven or better by the fourth quarter of FY ‘24. We continue to monitor our progress and we will make the necessary adjustments to achieve this goal. I will now turn the call over to Jens Ruppert, to discuss the results for Canvys.
Jens Ruppert: Thanks, Wendy, and good morning, everyone. Canvys engineers, manufacturers and sales custom displays to original equipment manufacturers in industrial and medical markets throughout the world. Canvys delivered excellent performance with sales of $9.7 million for the third quarter of fiscal 2023. Strong customer demand, primarily in North America, drove the 19.0% increase in sales over the same period last year. Gross margin as a percentage of net sales was 32.0% during the third quarter of fiscal 2023, compared to 32.2% for the third quarter of fiscal 2022. The slight decrease in gross margin was primarily related to the product mix and foreign currency effects, but showed an improvement over prior quarters in the fiscal year reflecting lower freight rates. Our backlog remains healthy, which we expect to support strong sales throughout fiscal 2023 and into fiscal 2024. Given the number of projects currently in the engineering stage, we are well-positioned for continued growth. Our expectations assume no impact from current supply chain obstacles and demand is not negatively impacted by recessionary pressures. During the quarter, we received several new orders from both existing and first time medical OEM customers. Some of these applications include; pulsed field ablation of timeology laser, robotic-assisted surgery, monitors for dental treatment chairs, human-machine interfaces, HMI to control medical devices such as video documentation systems and other operating room equipment, microwave ablation and surgical navigation. In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes air traffic control, tailor prompting and talent monitors, human-machine interfaces for process automation, 3D printing and all-in-one computers to control the milling machines and product dispensers for retail applications. I am proud of our teams around the world and I'm extremely pleased with the excellent operating performance. Our strong and growing customer relationships and stable backlog position us well for future growth. From the variety of customers and applications as well as the value of orders from existing and new customers, it is clear we offer our global customers outstanding products and localized service. While our sales organization stays focused on new opportunities, I stay focused on improving the operating performance of the division, maximizing cash flow and improving Canvys profitability is an ongoing priority and we continue to work closely with our partners to meet the demands of our customers. I will now turn the call back over to Ed.
Edward J. Richardson: Congratulations, Jens, on another great quarter. Canvys continues to deliver thanks to you and your talented team. As you’ve heard from the business unit leaders, there are many programs fueling our growth. As market conditions continue to change, we remain committed to growth through our engineered solutions. While we carefully control our expenses and protect our cash flow, we’ll continue to add engineers to expedite new product development. At this time, we'll be happy to answer your questions.
Operator: Thank you. [Operator Instructions]. And our first question is coming from the line of Anja Soderstrom from Sidoti. Your line is open.
Operator: Thank you. And our next question coming from the line of [Brett Davidson] (ph). Your line is open.
Operator: Thank you. And our next question coming from the line of P Ross Taylor from ARS Investment Partners. Your line is now open.
Operator: Thank you. And our next question coming from the line of [DeForest Hinman] (ph). Your line is open.
Operator: Thank you. And as a reminder, please limit yourself to one question and one follow-up. And our next question coming from the line of David Snyder, Private Investor. Your line is open.
Operator: Thank you. And we have a follow-up question from Anja Soderstrom of Sidoti. Your line is open.
Operator: Thank you. And our next question coming from the line of Daniel Berner of Berner Family Fund. Your line is open.
Operator: Thank you. One moment for next question. Our next question coming from the line of P Ross Taylor from ARS Investment Partners. Your line is open.
Operator: Thank you. I will now turn the call back over to Mr. Richardson for any closing remarks.
Edward J. Richardson: No, Olivia. We thank you very much and thanks to all of you again for your investment and support and interest, and please give us a call or plan to visit us when you can. It's a lot easier to show you what we do than to talk about it. And we look forward to our ongoing discussions and sharing our fiscal 2023 fourth quarter and full-year performance with you in July. Thank you very much.
Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
