Richardson Electronics, Ltd. (NASDAQ:RELL) Q2 2023 Earnings Call Transcript

Richardson Electronics, Ltd. (NASDAQ:RELL) Q2 2023 Earnings Call Transcript January 5, 2023

Richardson Electronics, Ltd. beats earnings expectations. Reported EPS is $0.39, expectations were $0.29.

Operator: Good day, and thank you for standing by. Welcome to the Richardson Electronics Earnings Call for the Second Quarter Fiscal Year 2023 Conference Call. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Ed Richardson, CEO. Please go ahead.

Ed Richardson : Good morning, and happy new year. Welcome to Richardson Electronics conference call for the second 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 Canvas. 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 our strong financial performance in the second quarter. Despite global economic challenges, rising interest rates, supply chain delays, and recession fears, sales in the second quarter of fiscal 2023 exceeded our expectations and were up 22.1% over Q2 of last year. There were times we had teams working 6 and sometimes 7 days a week to ensure we met customer demands. Sales growth was particularly strong in Green Energy Solutions. Sales of our patented ULTRA3000 capacitor modules increased as the microwave tubes for a synthetic diamond manufacturing and power management solutions for electric cars and locomotives. Sales were also strong for the semiconductor wafer fab market in Canvys displays.

There are many programs in the works to adapt to changing market conditions and continue this growth. Bob Ben, Chief Financial Officer, will first review our second quarter financial performance in more detail. Then Greg, Wendy and Jens will provide more detail on the quarter and key growth initiatives.

Robert Ben : Thank you, Ed, and good morning. I will review our financial results for our second quarter and first 6 months of fiscal year 2023, followed by a review of our cash position. Net sales for the second quarter of fiscal 2023 increased 22.1% to $65.9 million compared to net sales of $54.0 million in the prior year second quarter due to higher net sales and our Power and Microwave Technologies, or PMT, Green Energy Solutions, or GES, and Canvys business units, partially offset by slightly lower sales in our Healthcare business unit. PMT sales increased by $3.8 million or 10.2% from last year’s second quarter, driven by growth from our manufactured products for our semiconductor wafer fabrication equipment customers and distributed products for RF and microwave applications.

Net sales for GES increased $7.4 million or 150.3% from last year’s second quarter, GES combines our key technology partners and engineered solutions capabilities to design and manufacture products for fast-growing green energy market and power management applications. Canvys sales increased by $0.9 million or 10.2% due to strong customer demand in North America. Richardson Healthcare sales decreased $0.2 million or 4.7% due to a decrease in parts sales, partially offset by increased equipment and CT tube sales. Total company backlog was $192.6 million in the second quarter of fiscal 2023, up from $146.9 million at the end of the second quarter of fiscal 2022. Gross margin for the second quarter was 33.2% of net sales compared to 32.7% of net sales in last year’s second quarter.

PMT’s margin increased to 34.5% from 33.7%, and GES margin increased to 33.9% from 32.3% primarily due to product mix. Canvys’ gross margin decreased to 29.7% from 31.8% because of product mix and foreign exchange effects. Healthcare’s gross margin was 23.2% in the second quarter of fiscal 2023 compared to 24.5% in the prior year second quarter due to product mix. Operating expenses were $14.7 million for the second quarter of fiscal 2023 compared to $13.1 million in the second 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. Operating expenses as a percentage of net sales decreased to 22.3% during the second quarter of fiscal 2023 compared to 24.3% during the second quarter of fiscal 2022.

The company reported operating income of $7.2 million or 10.9% of net sales for the second quarter of fiscal 2023 versus operating income of $4.5 million or 8.4% of net sales in the second quarter of last year. Other expenses for the second quarter of fiscal 2023, including foreign exchange, partially offset by interest income were $0.1 million compared to other income of $0.2 million in the second quarter of fiscal 2022. Income tax expense was $1.5 million for the second quarter of fiscal 2023 or a 21.5% effective tax rate versus $0.6 million in the prior year second quarter due to the use of federal NOLs in fiscal 2022. Net income was $5.5 million or 8.4% of net sales for the second quarter of fiscal 2023 as compared to a net income of $4.1 million or 7.6% of net sales in the second quarter of fiscal 2022.

Earnings per common share on a diluted basis second quarter of fiscal 2023 were $0.39 compared to $0.30 per common share on a diluted basis in the prior year’s second quarter. Turning to a review of the results for the first 6 months of fiscal year 2023. Net sales for the first 6 months of fiscal year 2023 were $133.5 million, an increase of 23.9% from $107.7 million in the first 6 months of fiscal year 2022. Net sales increased by $8.7 million or 11.2% for PMT, $13.3 million or 177.9% for GES, $2.9 million or 16.5% for Canvys and $0.9 million or 16.5% for Richardson Healthcare. Gross margin increased to 33.6% from 31.5%, primarily reflecting a favorable product mix in PMT and GES, decreased component scrap expenses and improved manufacturing absorption in health care, partially offset by unfavorable product mix and foreign currency effects for Canvys.

Operating expenses were $28.9 million for the first 6 months of the fiscal year, which represented an increase of $2.3 million from the first 6 months of the last fiscal year. The increase was due to higher employee compensation and travel expenses. Operating income for the first 6 months of fiscal year 2023 was $16.0 million or 12.0% of net sales as compared to an operating income of $7.3 million or 6.8% of net sales for the first 6 months of fiscal year 2022. Other expense for the first 6 months of fiscal 2023, including interest income and foreign exchange, was $0.5 million as compared to other income of $0.1 million for the first 6 months of fiscal 2022. The income tax provision was $3.6 million during the first 6 months of fiscal 2023 or a 23.4% effective tax rate versus $0.7 million in the prior year’s first 6 months due to the use of federal NOLs in fiscal 2022.

The company reported net income of $11.9 million or 8.9% of net sales for the first 6 months of fiscal year 2023 versus $6.8 million or 6.3% for the first 6 months of fiscal year 2022. Earnings per common share on a diluted basis in the first 6 months of fiscal 2023 were $0.83 compared to $0.50 per common share on a diluted basis in the prior year’s first 6 months. Moving to a review of our cash position. Cash and investments at the end of the second quarter of fiscal 2023 were $31.1 million compared to $35.6 million at the end of the first quarter of fiscal 2023 and $40.5 million at the end of fiscal 2022. The company continued to invest in working capital to support its growth initiatives. Inventory grew to $97.4 million from $89.1 million at the end of the first quarter of fiscal 2023 to support continued increases in sales.

Accounts receivable increased to $34.9 million from $32.6 million at the end of the first quarter of fiscal 2023 due to the high sales growth. Our DSO was 38 days versus 39 days in the first quarter of fiscal 2023. The company is working with its suppliers to better align payment terms with both our suppliers and customers. Capital expenditures were $1.3 million in the second quarter of fiscal 2023 versus $0.8 million in the second quarter of fiscal year 2022, approximately $0.5 million related to investments in manufacturing, $0.3 million for our facilities, $0.3 million for our IT system and $0.2 million was for our health care business. We expect a higher level of capital expenditures in fiscal 2023 as we make additional investments in our manufacturing capabilities and facility.

We paid $0.8 million in cash dividends in the second 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 third quarter of fiscal 2023. Now I will turn the call over to Greg, who will discuss the results for our PMT and GES business groups.

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Gregory 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 second quarter. Our GES group had exceptional growth as the demand for green energy applications such as wind energy, electric vehicles and energy storage continues to grow. We continue to apply and focus on resources to this extremely important strategic business unit and growth opportunity for Richardson Electronics. GEsGES sales were up 15.3% in Q2 and of FY ’23 at $12.3 million versus $4.9 million last fiscal year, and our current backlog is $52.5 million. Gross margin also increased to 33.9% versus 32.3% in the same period last fiscal year.

As mentioned previously, this group houses numerous successful products such as the ULTRA3000, electric locomotive battery modules, the ULTRAGEN3000 and and products using synthetic diamond manufacturing. In addition, we’ve had numerous products in design, prototype and beta testing. This strategy, developing niche products and technologies, is key to our long-term success. The growth of customers and products in GES continues as several major OEMs are in weekly discussions with our engineering team in the development of energy storage products and other green energy applications. We plan to announce several new products in the first half of calendar 2023. Sales for the Power & Microwave Technologies Group in the second quarter of fiscal 2023 increased 10.2% to $40.6 million versus $36.8 million in Q2 last fiscal year.

Our gross margin also increased in the quarter to 34.5% versus 33.7% in Q2 last fiscal year, which was mainly due to continued success in our RF and wireless infrastructure business and a very strong quarter for our semiconductor wafer fabrication equipment business. Our engineered solutions strategy is led by our global technology partners such as Qorvo, MACOM, Nokia Wave, LS Materials, Amal Greentech and Fuji Semiconductor. Key tube manufacturers and partners include CPI, Thales, the Nisshinbo Micro Devices, previously known as NJRC, and Photonis. Each of our global partners helps us meet and manage customer requirements. Our team has done an excellent job identifying and cultivating these relationships. We will continue to review and add partners that fill technology gaps in our offering and support our growth.

Often through these partnerships, we’re able to 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. We continue to invest in our infrastructure to support our growth. We are bringing talented design engineers, field engineers and making investments to enhance our manufacturing capabilities through our organization. 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. The team also supported product designs for key growth markets, focusing on GES such as the ULTRA3000, ULTRAGEN3000 and a power management module for electric locomotives.

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 as well as increase our customer base, revenue and profits by capitalizing on our existing demand creation infrastructure. While we’re excited about the future, we remain challenged by longer lead times and constraints on the overall supply chain. This affects both our component business and Engineering Solutions products. We are strategically investing in inventory that should position us to fill the pipeline and ensure we can meet our customers’ needs, while we collaborate closely with both our customers and suppliers.

We are also experiencing some headwinds and some markets are showing a slowdown from the highs we hit in 2022. However, we continue to grow both our top and bottom lines by gaining market share, introducing new products and technology partners and expanding the value we provide our customers. I cannot stress enough the value of Richardson Electronics model to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power and RF microwave industries. We have developed a strong business model, including legacy products and new technology partners that fit well with our engineered solutions capability. Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities when they arise.

The combined backlog of PMT and GES is strong at $141.4 million, and the execution of our strategy has never been better. There is no question that our customers and technology partners need Richardson’s products and capabilities and support more than ever. With that, I’ll turn it over to Wendy Diddell to discuss Richardson Healthcare.

Wendy Diddell : Thanks, Greg. Good morning, everyone. Second quarter sales for Health care were $2.9 million, a slight decrease of 4.7% versus Q2 of FY ’22. In the final week of the quarter, 2 Alta tubes were held up due to a canceled flight, and we were not able to recognize the revenue. On the bright side, these sales are a nice start to Q3. Had these shifts as planned, Q2 revenue would have been above the prior year period, and we would be discussing a record sales quarter for the number of CT tube units sold. CT tube sales were helped by strong demand in China for the Alta 750 D&G as well as Stratton Z tubes sold as betas in the Americas. Sales in the quarter were also higher for CT systems when compared to Q2 last year.

Gross margin in the second quarter declined to 23.2% versus 24.5% in Q2 last year, primarily reflecting a lower percentage of higher-margin part sales. While CT tubes remained in production throughout the quarter, we did experience a significant equipment issue, which prevented us from making our CT tube production goals. This resulted in a small negative manufacturing variance. We’ve resolved the issue and are back in full production. We are making steady progress on the Siemens repaired tube program. This is a series of 4 tube types, including the Stratton 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. The Stratton is currently in beta site testing.

— and we remain on track to fully release the repaired tube pending submission of FDA paperwork. We anticipate the Siemens MX series will follow in the first half of calendar year 2023. As noted in prior calls, the Siemens program is a critical element for our Healthcare business unit to reach its goal of providing positive operating contribution to the company by Q4 of FY ’24. In addition to our Siemens program, we are evaluating several new programs that will further improve CT tube sales and factory utilization. These programs include reloading tubes in Brazil, a market where we currently have no tube sales, and partnering with an international company to reload and sell several other tube types in the Americas. These programs may have a positive impact on our revenue in FY ’24, depending on how quickly we can validate and achieve regulatory approvals.

We remain cautiously optimistic about our ability to break even or provide positive operating contribution 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, manufactures and sells custom displays to original equipment manufacturers in industrial and medical markets throughout the world. Canvys delivered an outstanding performance with sales of $10.1 million for the second quarter of fiscal 2023. We Strong customer demand, primarily in North America, drove the 10.2% increase in sales over the same period last year. Gross margin as a percentage of net sales was 29.7% during the second quarter of fiscal 2023 compared to 31.8% during the second quarter of fiscal 2022. The decrease in gross margin was primarily related to the product mix and foreign currency effects. Our backlog remains very 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 pressure. We continue to deal with extended lead times for selected components from our Asian suppliers. To compensate for this, our inventory on hand increased during the quarter. It is important to note that all our monitors are customer and our inventory is allocated for specific customer orders. So we believe there is a minimal risk to carrying slightly higher inventory levels. During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these applications include cell analyzer, cardiac pulse field ablation, Super pulse laser systems used in lithotripsy, robotic-assisted surgery, medical device control, monitors for dental treatment chair, prostate biopsy systems, surgical navigation to track instruments throughout the procedure, laser systems that treat coronal arterial disease and monitors used in radiation therapy.

In the nonmedical space, our products are used in a verity of commercial and industrial applications. This includes control room monitors for the public transportation space, human machine interfaces, HMI, for packaging machines in the food industry, for radiation measurement systems and for process automation. I am very proud of our teams around the world, and I’m extremely pleased with the exceptional operating performance. Our strong and growing customer relationships, along with the backlog position us 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. We continue to work closely with our partners to meet the demands of our customers, particularly with the challenges brought on by industry-wide supply chain delays. I will now turn the call back over to Ed.

Ed Richardson : Congratulations again Jens on another great quarter. As you’ve heard from the business unit managers, there are many programs fueling our growth. This product market and geographic diversity provides a natural hedge against economic challenges and global political tensions. Many of you are aware of the recent CHIPS Act and its impact on the semiconductor industry. This act presents U.S. semiconductor wafer fab equipment manufacturers from shipping certain advanced technology equipment to China. While we know this will have an impact on our business in calendar 2023, we’re confident that our financial performance will be — remain strong for the balance of our fiscal year. All our manufacturing employees are cross-trained and can be moved to different areas to meet significant growth and demand for our green energy solutions.

By reallocating resources, we can meet demand while maintaining our core competencies in the semi market and cost controls. We remain firmly committed to our employees who have helped shape our path to success and to our partners and our shareholders. With our focus on customer-driven solutions that help improve the environment, we expect strong year-over-year revenue and earnings growth throughout the remainder of fiscal 2023. At this time, we’ll be happy to answer your questions.

Q&A Session

Operator: And our first question comes from Kartik Raja J. from Bloomberg. Our next question comes from Anja Soderstrom with Sidoti. Wendy and Richard.

Anja Soderstrom: Congratulations on the great quarter again I’m just curious, I mean, you touched on the semiconductor. So — what kind of visibility do you have there for the rest of the year? And sort of when do you think you will have visibility into next year in terms of the demand for semiconductor?

Wendy Diddell: So we have good visibility for the rest of our fiscal year. So Q3 and Q4, we feel very strong about, including opportunities with the semi market, but that’s about as far as we’re able to see right now.

Anja Soderstrom: Okay. And I understand you’re sort of — you have a very strong demand in the GS that might make up for any softness in the semiconductor. Can you just talk about maybe some opportunities in the GS that is a little bit further out that you might not have talked as much about?

Ed Richardson: Yes. So the GES program, as I mentioned, has introduced a number of products that are getting huge traction. We also have a number of products in the pipeline — and if we look at the introduction, the SAM for those products and when these beta site testing will be completed and go into production orders, we’re very confident that any gross margin dollar reduction that we’ll get from Lam or the semiconductor wafer fab market will more than make up with current products that are getting traction with other customers, but also some new products we’re introducing in Q3.

Anja Soderstrom: Okay. And I think in your remarks, you talked about some slowdown from highs. We that related to semiconductor or was that related to something else? Or can you sort of elaborate on that?

Gregory Peloquin: Yes, mainly in reference to the semiconductor wafer fab market. As you know, we had record quarters for the past 4 quarters with our semiconductor wafer fab market. So we’re looking at, based on information from them that there could be a slowdown in FY ’24.

Anja Soderstrom: Okay. And in terms of Canvys, I don’t think you mentioned what the backlog stands at for 10bis right now, at the end of the quarter?

Ed Richardson: Jens, do you want to answer that about what?

Jens Ruppert: Yes. Yes, sure. Absolutely. So the backlog is actually up very much. It’s the second highest backlog level we have since ever. It’s $49.4 million. So pretty happy with that.

Anja Soderstrom: And that’s up from about $40 million last quarter, right?

Wendy Diddell: Yes.

Anja Soderstrom: Nice increase.

Wendy Diddell: Sorry, it was $47.1 million last quarter, sorry I guess.