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Edited Transcript of RELL earnings conference call or presentation 10-Oct-19 2:00pm GMT

Q1 2020 Richardson Electronics Ltd Earnings Call

LA FOX Oct 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Richardson Electronics Ltd earnings conference call or presentation Thursday, October 10, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. Richardson

Richardson Electronics, Ltd. - Chairman, CEO & President

* Gregory J. Peloquin

Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group

* Jens Ruppert

Richardson Electronics, Ltd. - Executive VP & GM of Canvys

* Robert J. Ben

Richardson Electronics, Ltd. - Executive VP, CFO, CAO & Corporate Secretary

* Wendy S. Diddell

Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development

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Conference Call Participants

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* Denis James Amato

Ancora Advisors, LLC - MD of Microcap Equities and Portfolio Manager

* Mark Zinski

21st Century Equity Research - MD

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Presentation

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Operator [1]

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Welcome, and thank you for joining the Fiscal Year 2020 First Quarter Earnings Call for Richardson Electronics. (Operator Instructions)

With that, I'll turn the conference over to Edward Richardson, CEO.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [2]

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Good morning, and welcome to Richardson Electronics conference call for the first quarter of fiscal year 2020. 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 Jens Ruppert, General Manager of Canvys.

As a reminder, this call is being recorded and will be available for audio playback.

I'd also like to remind you that we'll be making forward-looking statements, and they are 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.

Overall, I'm pleased with our business in the first quarter. We generated net income in the quarter, which was a loss in our last quarter. Our longest-running ALTA750 CT Tube has been in the field for more than 15 months and customers are gaining confidence. As a result, our Healthcare business is significantly improving. At the end of the quarter, we received European approval to use the CE Mark, which opens up more sales opportunities throughout Europe.

PMG repeated its trend of excellent growth. PMG sales continue to increase on a perpetual basis as our partnerships with new technology companies gained traction. Canvys and EDG continue to be the workhorses of the company and contribute significantly to our overall profitability. The only negative in the quarter is that the semiconductor wafer fab equipment market hasn't turned around yet. This segment had its last strong quarter in Q1 FY '19. Our teams are pushing hard for every opportunity and making changes to improve efficiency throughout the organization. We've been told that the semiconductor wafer fab market will show signs of growth in the near term. When this happens, we're well prepared to support our customers and we'll be firing on all cylinders.

I'll now turn the call over to Bob Ben, who will share the highlights of our first quarter, then Greg, Wendy and Jens will provide more details on their business unit performance.

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Robert J. Ben, Richardson Electronics, Ltd. - Executive VP, CFO, CAO & Corporate Secretary [3]

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Thank you, Ed, and good morning. I will review our financial results for our first quarter of fiscal year 2020, followed by a review of our cash position.

Net sales for Richardson Healthcare and Canvys increased for the first quarter of fiscal year 2020 by $0.6 million or 26.8% for Healthcare and $0.1 million or 1.4% for Canvys.

Total company net sales for the first quarter of fiscal year 2020 were $40.7 million compared to prior year's first quarter of $44.2 million, which was a decrease of $3.5 million or 7.9%.

PMT net sales decreased $4.2 million due in large part to the comparison to strong semiconductor wafer fab part sales in the first quarter of fiscal 2019. This decline was partially offset by increased revenue from our new technology partners.

Gross margin for the quarter improved to 31.9% of net sales compared to 31.6% of net sales in last year's first quarter. This was primarily due to a favorable product mix and overabsorption of Richardson Healthcare, partially offset by unfavorable product mix and foreign exchange rates for Canvys. PMT gross margin of 31.7% of net sales was flat to prior year.

Operating expenses decreased to $12.8 million for the first quarter of fiscal 2020 compared to $13.1 million in the first quarter of fiscal 2019. The decrease in operating expenses resulted from lower employee benefits, IT and bad debt expenses. As a result, the company reported an operating income of $0.1 million for the first quarter of fiscal 2020 compared to an operating income of $0.9 million in the first quarter of fiscal 2019. This was an improvement versus an operating loss during our most recent past quarter.

Other income for the first quarter of fiscal 2020, including interest income and foreign exchange, was $0.2 million compared to other expense of $0.2 million in the first quarter of fiscal 2019.

The income tax provision of $0.2 million for the quarter reflected a provision for foreign income taxes, which was lower than in the prior year's first quarter and no U.S. tax benefit due to the valuation allowance recorded against the net operating loss. Although there is no tax benefit shown on our financial statements from U.S. net operating losses, we can use our net operating losses to offset any cash tax liability reported in our U.S. federal income tax return. The amount of federal NOLs is $14.9 million.

Overall, we had a net income of $0.2 million for the first quarter of fiscal 2020 as compared to a net income of $0.4 million in the first quarter of fiscal 2019.

Earnings per common share diluted in the first quarter of fiscal 2020 were $0.01 compared to $0.03 per common share diluted in the prior year's first quarter. We continue to closely manage our cash position. Cash and investments at the end of the first quarter of fiscal 2020 were $46.5 million compared to $50.0 million at the end of fiscal 2019 and $54.8 million at the end of the first quarter of fiscal 2019.

U.S. cash was $23.9 million at the end of the first quarter of fiscal 2020.

Capital expenditures were $0.3 million in the first quarter of fiscal 2020 compared to $1.1 million in the first quarter of fiscal year 2019. Approximately $0.2 million related to our IT system and another $0.1 million was for facilities and other projects.

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

Now I will turn the call over to Greg, who will discuss the results for our Power & Microwave Technologies Group.

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [4]

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Thank you, Bob, and good morning, everyone. In the first quarter of fiscal 2020, PMT sales were $30.6 million versus $34.8 million in Q1 of FY '19. Our gross margin stayed consistent in the quarter versus prior year at 31.7%. Q1 results, when compared to prior year, were once again affected by the downturns in the semi-wafer fab market. However, this market decline is partially offset by the growth in our new technology partners supporting RF and power markets and submarket share gains in various legacy tube businesses.

We continue to see major booking trends in our PMG business unit. This growth is based on our demand creation model, which capitalizes on our new technology partners' products, numerous design wins and our unique global business model. We are taking advantage of our long-term customer relationships, and our customer count continues to grow with our expanded product range.

As market conditions change, we carefully control SG&A and invest in key areas where needed. We continue to look at improving our efficiencies and increasing the frequency of our customer contact. These actions allow us to generate more opportunities in growing markets using our existing global infrastructure and headcount.

Our revenue growth in our new technologies is being supported by key partners such as Qorvo, MACOM, Anokiwave, United Silicon and Fuji. Our core legacy business continues to be supported by the key tube manufacturers in industry such as CPI, Thales, NJRC and Photonis.

Key markets and applications showing growth this fiscal year include 5G wireless infrastructure, SATCOM and power management. Specific to the 5G infrastructure market, we are continuing to gain traction throughout the world. We have an ever-increasing list of design wins in the base station, mobile test equipment and SATCOM applications. Our global experienced group of field design engineers are even more valuable to our customers and suppliers in this wireless infrastructure rollout. This group of field engineers have hundreds of ongoing designs globally. The overall growth in these markets will help offset the cyclical sales and markets with slower growth rates.

We are very excited about the booking trends in our new growth markets. With our technology partners, we can do component-level designing and support the majority of the customers' board-level needs.

These customers are the key OEMs in the world as well as medium-sized customers that are supporting a portion of the larger OEM system. We've invested in software that allows us to track key customer contacts and opportunities for both our MRO business and OEM designs worldwide. Our customers welcome RELL's local field sales engineering team to support their designs, and the technology partners love our global reach and the ability of our field engineering resources to designing a product and do true demand creation.

I can't stress enough the value of Richardson Electronics' unparalleled capability and global go-to-market strategy that is unique to the power and RF microwave industries. 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.

With that, I'll turn over to Wendy in Richardson Healthcare.

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Wendy S. Diddell, Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development [5]

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Thank you, Greg, and good morning, everyone. Healthcare started off well in the new fiscal year. Sales increased 26.8% versus the first quarter of FY '19. Mostly this growth came from our CT X-ray tube and P3 revenues. Sales also increased as we began to sell parts for newer CT platforms at higher prices.

Our gross margin improved to 33.9% versus 28.6% prior year and 15.3% in our most recent past quarter. This was primarily due to favorable manufacturing absorption as well as the drop in lower-margin equipment sales. There is still room for improvement as margins were held in check by older equipment and noncore CPO tubes, which were sold at low margin.

We are continuing to watch our inventory purchases carefully to ensure we turn this inventory as quickly as possible. The ALTA750, our form, fit and function replacement for the Canon/Toshiba CXB-750D continues to perform very well in the field. Our longest field installations are now nearing 500 days. This helps build confidence that our tube is on par with the OEM tube. More of our customers are starting to switch from the harvested OEM tubes to the ALTA750. We have also been adding resources to our proactive outbound sales organization. As a result, we are reaching more customers and receiving inquiries from companies that haven't yet purchased the ALTA750. This is also contributing to higher tube sales each quarter. We are in discussions with several large customers who are interested in our P3 program. These programs provide parts and/or tube coverage for a fixed monthly fee under a 3-year contract. Each program is tailored specifically to our customers' requirements.

To date, we have used more of our ALTA750 tubes for transactional sales versus replacements under any of our capitated growth programs.

During the quarter, we finally received regulatory approval to use the CE Mark in Europe. This is a significant milestone for the company as we were not able to sell the ALTA750 without the mark in Europe. We will see the impact of this in future quarters, although the European market is challenging, given the stronghold of the OEMs.

Initial response at the recent International Association of Medical Equipment Remarketers and Servicers Convention in Europe was very positive, and our code activity is already increasing. We are also pursuing product registrations for Canada, Russia, China and several other countries. These processes take time but will ultimately expand our sales opportunities.

Our engineering team is making good progress on our next tube. We are on track to begin beta testing next summer with the release scheduled prior to the end of calendar year 2020. We are challenging the development team to work concurrently on several other programs. We remained convinced that we are the only company investing in the development of CT replacement tubes. We will share more details of these programs in the coming quarters.

To accommodate our product range expansion, we are investing in engineers as well as increasing our manufacturing space within the LaFox facility.

I will now turn the call over to Jens Ruppert to discuss first quarter results for Canvys.

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Jens Ruppert, Richardson Electronics, Ltd. - Executive VP & GM of Canvys [6]

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Thanks, Wendy, and good morning, everyone. Canvys, which includes the engineering, manufacture and sale of custom displays to regional equipment manufacturers in the industrial and medical markets, delivered strong performance with sales of $7.3 million during the first quarter of fiscal 2020, an increase of 1.5% over the same period last year.

The revenue increase for the quarter was related to an increased customer demand, mainly through North America. Gross margin decreased slightly as a percentage of sales in the first quarter of fiscal 2020 to 31.9% from 32.2% in the same period last year. The decreased gross margin, while still very strong for display business, was related to an unfavorable product mix and foreign currency effects.

Q1 fiscal 2020 was another strong quarter for Canvys, and we were able to increase our backlog quarter-over-quarter again. Our backlog consists of purchase orders that typically ship over 1 or more years. Customers issue call-off orders that vary quarter-to-quarter based on customer demand, regulatory issues and other factors.

The healthy backlog position along with a number of projects that are currently in the engineering stage position us well for continued growth.

During the quarter, we received several new orders from both existing and first-time medical OEM customers. Applications where our displays are used are numerous. Some of these include: patient monitoring, where our monitors are installed at remote locations such as the central nurse station or CNS; medical device control capturing high-resolution images and live videos from up to 2 surgical imaging devices; intravascular imaging systems, catheter-based systems that allow physicians such as interventional cardiologists to acquire images of diseased vessels from inside the artery; surgical laser for use in general and plastic surgery and in dermatology; surgical robotics, where [guidance] is provided in conjunction with navigation data; radiotherapy, where highly customized displays are used to monitor the patient during the radiation treatment; microsurgery, where our displays are mounted at surgical microscopes; and dental treatment centers, where patients can review radiographic images or live video from an intraoral camera or other video feeds such as educational videos or promotions.

We are proud to support blue-chip companies with recognizable names in the medical industry. Currently, 7 out of the top 10 medical device companies, as defined by Proclinical, are our customers for displays.

In the nonmedical space, we received orders for various displays in all-in-ones. Applications include: passenger information systems used on trains, where special certifications are required; product dispensers used in retail stores; human machine interfaces for high-speed, high-precision building machines; and displays used in control rooms. We continue to look for new customers through trade shows, online marketing, referrals and cold calling. We continue to focus on meeting the requirements of the Medical Device Regulation, or MDR, which is required to sell medical devices in Europe. We recently concluded a gap audit to identify areas of improvement.

We will be prepared when the transition period ends in May 2020 and believe this will give us a competitive advantage in the medical display market.

Considering all the new programs we are working on with existing as well new customers, I'm optimistic that we will continue growing our business. We have proven ourselves to be a highly reliable, versatile technology company with ability to meet a diverse numbers of display requirements.

I will regularly review and adjust the business strategy with a goal of further improving the operating performance of the division. Maximizing cash flow is an ongoing priority, and we continue to focus on inventory turns and collections. We will work closely with our partners to help us reduce inventory while being able to meet the demands of our customers.

I will now turn the call back over to Ed.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [7]

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Thanks, Jens. Congratulations on having another excellent quarter, particularly given the economic challenges in Europe. All in all, it was a good start to the year. As you've heard from the team, no one's satisfied with where we are. And with ongoing economic concerns, we'll continue to fight for profitable revenue growth. Healthcare is moving in the right direction. PMT continues to add top line growth, Canvys and EDG are healthy. We have plenty of room to grow within our existing infrastructure. We will continue to monitor our expenses and capital expenditures and use cash wisely to support our key initiatives.

At this point, we'll be happy to answer a few questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) All right. Looks like we do have a couple of callers in the verbal question queue. Caller, your line is unmuted.

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Mark Zinski, 21st Century Equity Research - MD [2]

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Mark Zinski here. I'm going to start off with Greg, if I could. Greg, I wondered if you could give some more color on what you're seeing in the 5G space. Is there more activity in China versus North America, for instance?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [3]

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Yes. So China continues to -- in terms of design wins and getting that product or their protocol to market, again as you read in the news, ahead of the U.S. So the 5G overall market is -- overall, again, it's growing slightly. And these global trade and tariffs will have a disruptive effect the longer it continues.

In terms of our business, it's still very, very strong. That's mainly because of these global tariffs and trade agreements that are going on. China is looking internally or domestically to buy and use as much technology as they can to support their 5G rollout.

The products that we're focusing on in technology, as we've mentioned many times on the call, [Jens'] technology and steer beam antenna technology, which would be the antennas used in these new infrastructure rollouts, they're 10 years away from that technology. So our designs continue to grow. Our portion of that market continues to grow. That speaks mainly of the fact that we have a unique technology that's exclusive to China. So that's where that -- and you'll see a lot in terms of the timing of it. The forecast coming from the OEMs in China is that the first half of calendar year 2020 will be very, very strong. And we have the designs in queue and we are receiving prototype orders. So we're looking to have a pretty strong second half of our fiscal year.

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Mark Zinski, 21st Century Equity Research - MD [4]

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Okay. And then I'm wondering on gross margin. I mean despite the sales drop-off, you were able to keep gross margin the same. Is that -- is there anything new going on there? And is that kind of sustainable? Should sales declines continue?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [5]

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Yes. With -- the drop-off in sales dollars, that was driven by a number of semi-fab customers. And that's where also the growth was. The core legacy tube business is still very strong, meaning flat to single-digit growth, which is good for the tube business. And those margins are very strong. The team has done a great job keeping those margins or expanding them to offset the loss in margin dollars on the semi-fab wafer slowdown. So it's the pricing and our support of customers and keeping our margins on the core legacy business very strong.

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Mark Zinski, 21st Century Equity Research - MD [6]

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Okay. And then switching to Healthcare. Wendy, have you guys publicly stated what you think the, sort of, the gross margin potential is in Healthcare? You're at almost 34% now. Based on, let's say, reasonable sales growth. Have you guys given a number?

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Wendy S. Diddell, Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development [7]

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Yes. I think we've consistently put out a number in the low to mid-40. When production and tube sales increase, that's what we'll see. Yes.

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Mark Zinski, 21st Century Equity Research - MD [8]

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Okay. And then just to clarify, how many tubes are in the market right now?

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Wendy S. Diddell, Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development [9]

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We don't provide that information.

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Mark Zinski, 21st Century Equity Research - MD [10]

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Okay. I mean does a -- model types?

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Wendy S. Diddell, Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development [11]

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Oh, so from the tubes that we are producing here, just the ALTA750D. But then we also sell CPO or certified preowned and harvested tubes.

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Mark Zinski, 21st Century Equity Research - MD [12]

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Okay. And then you're expecting to launch a new tube by the end of 2020?

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Wendy S. Diddell, Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development [13]

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That's correct.

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Mark Zinski, 21st Century Equity Research - MD [14]

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Okay. And does that have basically kind of the same or a similar sales profile as the 750?

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Wendy S. Diddell, Richardson Electronics, Ltd. - COO & Executive VP of Corporate Development [15]

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Yes. What it will help us do is sell more of the ALTA750 because it's -- in order for a lot of the hospitals to switch from the OEM to either a in-house model or a third-party service model, they have to be able to have tubes for all of their Canon systems, and this will allow us to get much more closer to that level of coverage. It'll increase the sales of the ALTA750 as well as the new tube.

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Mark Zinski, 21st Century Equity Research - MD [16]

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Okay. Great. And then finally, Jens, if I could just ask you about Canvys. Did you say that the backlog sequentially went up for Canvys? Or was that year-over-year?

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Jens Ruppert, Richardson Electronics, Ltd. - Executive VP & GM of Canvys [17]

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Yes.

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Mark Zinski, 21st Century Equity Research - MD [18]

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Also...

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Jens Ruppert, Richardson Electronics, Ltd. - Executive VP & GM of Canvys [19]

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It's the highest backlog since at least 3 quarters, yes.

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Operator [20]

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All right. We'll go to the next caller in the question queue. I'm showing that to be Denis Amato.

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Denis James Amato, Ancora Advisors, LLC - MD of Microcap Equities and Portfolio Manager [21]

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I just wanted to first start off by congratulating you on managing what obviously was a somewhat difficult quarter from the top line, but I think you managed successfully the -- that challenge.

I've inquired in the past, and I think you have answered properly regarding why you don't use some of your excess cash to repurchase stock. And I think I understand your long-term strategy and I can accept that. The problem I'm having is after reviewing your most recent proxy statement, I discovered that with the exception of Mr. Richardson, not 1 director -- when you take out stock options, not 1 director owns even 1 share of stock and of your 4 named executives, only 2 own stock. And when I added up all the stock, it's owned outright. I was dismayed to find that I own more stock than all 9 put together. And you've got to admit that, that's not exactly a vote of confidence in the long-term strategy, especially when your stock is yielding over 4%, which I'm sure nobody can get that in short-term investments. So can you provide some type of explanation and give shareholders some kind of comfort as to why there's so little interest from directors and management in owning outright the stock?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [22]

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I couldn't really tell you that. I frankly agree with you, I think they should be buying the stock. I have a fair position. But they all have their own financial responsibilities in their own portfolios and are heavily invested probably in the companies that they were CEOs of before retiring and joining our Board. But at some point, I guess we should ask them and they should comment.

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Denis James Amato, Ancora Advisors, LLC - MD of Microcap Equities and Portfolio Manager [23]

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Well, I mean most companies have some requirement, minimal requirement for directors to own some stock. I mean they're receiving compensation, some of that should at least at this point go into buying the stock. And I mean you can see the message it sends. I mean you're telling shareholders to have confidence in the company, and when -- it's extreme that not 1 director has purchased outright even 1 share. I mean that's a terrible message to send to the investment community. And I would really encourage you to have directors and officers at least do some purchasing of the stock. I mean options are nice, but they're given to them. That doesn't show any confidence in the company. So that's my -- I guess my question in a short form is find out why there is no more confidence in that. Because you can't expect shareholders to have confidence if management and directors don't.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [24]

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No. I understand, Denis. And I will pass the word along to the Board for sure. But let me tell you that in the downturn with the executives staff, we cut incentives substantially. So normally, our key management team has a 50% incentive over their base salary based upon financial achievements. And because the company over the last few years was not profitable, we cut that down. First, the 25%, we cut it in half. And then I believe this year, it's back up to what, 37.5%, but we still haven't gone up. So what we did in place of that was we gave stock grants to compensate them for some of their financial loss. So there's more there than meets the eye as far the executives in the company are concerned.

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Denis James Amato, Ancora Advisors, LLC - MD of Microcap Equities and Portfolio Manager [25]

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Okay. Well, if you would pass it on to the Board that shareholders are watching and they -- the current shareholders or prospective shareholders, that sends a message that I don't think you want to send.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [26]

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No. I hear you. We're happy to do that. We'll pass it along.

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Operator [27]

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All right. We'll go to the next caller in the question queue. I believe that to be [Mark Phil].

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Unidentified Analyst, [28]

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I've been watching your stock for quite a bit. So I have a few questions. The first one is, how are the tariffs potentially -- or the increasing of tariffs kind of affect your -- the relevant businesses going forward?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [29]

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Well, the majority of the tariffs that impact us are already in place. It's possible of which I'm not aware of, there may be more semiconductors now affected, but certainly the tubes -- the tariffs that were placed on tubes were done initially and pretty much covered the gamut.

Yet, frankly, we buy -- I don't know, our total sales, let's put it that way, of products made in China are probably $3 million or $4 million total, that may be high. And so the impact of the tariff is not large, and we've been able to pass it along. Most of those tubes were propriety and it doesn't make sense. I mean they put tariffs on some tubes that haven't been made in United States for 35 years. And some of those tubes, we moved manufacturing, which I know that isn't the Trump favorite thing, we moved manufacturing from France to China, and now we're bringing some of that manufacturing back due to the tariffs and some FX issues, I will say, but it has very little impact on us.

The biggest impact it does have is the administrative cost of trying to monitor those tariffs, make sure we're collecting them properly, then do all the duty drawback on everything that's sold outside of the United States. 60% of our sales are outside of the United States. So we bring the product in and we test it and package it and so forth here, then reship it to Europe and elsewhere in the world. And on those, we claim a duty drawback. So -- but it's complicated. It's very expensive to monitor. And that's the biggest cost to us, I mean the administrative cost to try to monitor that.

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Unidentified Analyst, [30]

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So on that note, would you look at maybe Vietnam or a cheaper alternative? Or they don't have a technology or the wherewithal to do that?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [31]

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Well, what we chose to do this year, this operation in LaFox, Illinois near Chicago has always been a tube manufacturing facility. And with our production down on semiconductor wafer fab products, we actually laid off some of the employees that were involved in that. But what we decided to do because of the tariffs, we had 1 factory that we set up to manufacture for us and we moved production from the factory in France to that factory 2 or 3 years ago. And they've given us problems with not complying with the argument as far as selling products to other entities besides us, and then with the tariff combined, we're moving some of that manufacturing back here. But not to the Philippines or Vietnam, no. We pretty much sole source our products. So cost is an issue, but availability and quality is more of an issue.

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Unidentified Analyst, [32]

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So you mentioned semiconductor. So you talked about the earnings impacting based on the declines of the PMT semiconductor wafer fab equipment business. Can you give us more color on what you are seeing in the semiconductor industry as a whole and how that impacts you, guys? Because the more -- I've been looking at conference calls, and the more honest CEOs of semiconductor companies are saying, it's not great out there, and then there's other people who are trying to like, maybe be able to be more optimistic when it doesn't really look that way. So I'd appreciate your insight because you are kind of in the front lines.

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [33]

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Yes. This is Greg. Yes, overall, the market for semiconductors has slowed down versus prior year. Even our numbers have slowed down, but we're still growing. And when you look at the overall semiconductor market, it's everything from handset business to the cloud, all the way -- I mean it's huge, and we are such a small niche version of that. The specific customers and products that we design into in those markets, those are growing. And we are growing our market share within those customers and markets. Now this was last year. But again, we're starting from a smaller number. So we continue to gain market share, continue to design wins and these are strong growth markets. And 5G is happening, it's going to happen.

And also the power management market support, along the 5G applications, is also growing. So those are 2 markets we are addressing, and we're doing very well in from an overall percent growth. But again, we're starting from a small number. We have a very small percent of that market right now.

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Unidentified Analyst, [34]

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So that's very helpful. So basically, if I look at the whole semiconductor area, because I know there's a lot of people that are going through inventories, you have a kind of niche market. So I shouldn't just group you guys in if they're having issues in the whole semiconductor space?

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [35]

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Exactly. Yes. And again, you're exactly right. And the overall semiconductor market, these applications, some of the markets that they address is slowing down to maybe even negative. But the specific markets we address, and they are really specific to RF and wireless, microwave, 5G and then power management -- those markets, again, I want to make sure, like you said, they've slowed down since last year. But we've continued to gain market share and are able to grow those markets.

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Unidentified Analyst, [36]

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That's encouraging. I know you have all these different businesses, but gross margins, where can I -- what -- where can I see these gross margins? Where would you be happy? Or really, where is it realistic to see the gross margins in 2020 and beyond? And I know things are lumpy. And sometimes some business is higher than in quarters and lower. But maybe on an average, that would make things helpful to me.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [37]

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Well, a lot of it depends on how fast Greg grows his portion of PMG business because that's slower margin business, it's distribution. And also, the infrastructures to support it is much less cost than the other businesses, particularly in manufacturing.

But if you look at the manufacturing portion of our business and Canvys certainly, probably 35% or the low 30s to 35% is where we should end up.

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Unidentified Analyst, [38]

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That's fair. And so Mr. Richardson, I see that your cash has gone from like $54.8 million to $46.5 million, and I love cash which fall on angels, which you are a part of that, and you also gave a dividend. Where would your cash have to go on the low side for you to say let me just hold off the dividend until we start generating -- until our cash starts going in the other direction?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [39]

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Well, we look at it all the time. Every quarter, we talk about it, and I would tell you the Board is more concerned about cash flow than anything else we're doing. These gentlemen have all been CEOs of their own right and run divisions at 2 companies for the most part or health care companies. So they really concentrate on the availability of cash and we all know how tough it is to borrow any money, especially if you're marginally profitable.

So it's an issue and we'll continue to look at it. We're hopeful that if Healthcare continues the way it did in the last quarter that in the not-too-distant future, we can go at least cash flow neutral if not cash flow positive. So that's the objective. And at the same time, we've reduced the amount of capital that we're spending on Healthcare. We have most of the equipment in place. We have capacity to build 1,000 tubes a year with the equipment we have. So it'll be a while before we invest a lot more capital and equipment in Healthcare. So I think you'll see it tail off and hopefully with Healthcare coming along, we'll start to get cash flow neutral if not positive.

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Unidentified Analyst, [40]

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So looking at your whole business, and I'm not going to hold you to this, is there a part of your area, and I think from the conference call, I kind of surmised, but do you see any part of your business that you could see like some hockey stick type growth that can just like dominate your business? Or you're so diversified, you don't necessarily see that.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [41]

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No. You have 2 segments. Healthcare, for sure. I mean that the total market for replacement parts and service for diagnostic imaging applications is something like $9 billion. So we are so small and have the opportunity with what we're doing, and we think we're -- we think we really sort of have an exclusive position in the design and development of replacement CT tubes to compete with the OEMs, and it's a tremendous opportunity there.

And we guessed at one time that there were 60,000 scanners worldwide with CT tubes that are $100,000 a piece in them, and that's our target market. Then those tubes are replaced about, depending upon the manufacturer, every 3 years or so.

So on the other hand, I always call it Greg's business because he is the one that's built it in the past and building it again. But PMG has a tremendous opportunity for growth.

When Greg -- when we sold the company, Greg was General Manager of RFPD. In 2011, it was $370 million. And then Greg went to Arrow for 3 years, and then wisely came back to us. But when he left Arrow, it was $500 million. So that will give you some idea of the opportunity for those products, and we wish we were close to that. But we've got a long, long way to go to get to that size again. So there's one.

Between the 2 of them -- and Canvys has done quite well. Last year, Jens grew that business 30%. So the market is out there, just right now, he's doing a great job in a very poor economy in Europe of helping the business, and we're getting better operating contribution out of Canvys now than ever. So at the moment, we love that business.

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Gregory J. Peloquin, Richardson Electronics, Ltd. - EVP of Power & Microwave Technologies Group [42]

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Thank you.

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Unidentified Analyst, [43]

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Do you see any light at the end of the tunnel in Europe? Or it could be 2021 type of phenomenon?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [44]

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Jens, do you want to comment on that? You know the market better than I.

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Jens Ruppert, Richardson Electronics, Ltd. - Executive VP & GM of Canvys [45]

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I think we receive mixed signals out of the market. The good thing is 70% of our business is really the medical-related. That means there's a much better stability in the market. And we believe that this is a sentiment only right now and we'll get over this. So there's still growth in the market. We have a lot of new opportunities working on and others. But we are working on since years that will come to fruition maybe this year or next year. So there's a lot of growth potential, absolutely. So I'm staying optimistic here.

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Unidentified Analyst, [46]

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I just got 2 more. So a year ago, your stock was about $10.40, and I understand what moved it up as far as earnings and moving it down was earnings. So what was so compelling for someone to buy your stock at $10.40? And are those factors still in place now as your stock has been cut in half?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [47]

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Well, I think the -- we did a -- maybe we're a little bit early, but we were very optimistic on the Healthcare business. And then as usual, excuse me, but the financial market gets impatient in a hurry. And we -- the numbers didn't increase. They actually dropped while we had some difficulty getting traction with the sale of the ALTA tube and some of the other tubes. And typical, they said, jeez, you told us that there is a great opportunity. And 90 days later, it's not a great opportunity and they sell the stock. So I mean you guys know the market better than I do.

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Unidentified Analyst, [48]

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I'm aware of that. That's a fair answer. The last person who made this comment, I kind of agree, it's nice to see insiders buying as I'm potentially going to be a new investor. It's -- again, it's nice to see that they see more than anybody sees. And for them to sit in their hands, to not buy something when it's on sale, it makes me nervous. So no disrespect, Mr. Richardson, but I've invested in a lot of small caps. It's been over 25 years now. I don't know where the time has gone. But your salary looks a little high for a small company, and I don't, again, no disrespect, but do you want to comment on that?

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [49]

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No, I don't get you. If you really look at the history, you would see that it's sort of balancing out. So I don't want to tell you, but in past years, my salary was quite low.

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Operator [50]

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All right. We did get a written question that came in on Webex from [Alex Ludwin]. It says, Mr. Richardson, what do you think about switching to buying own shares from paying dividends? Because I am sure it is very difficult to find alternative investments with the same potential return as RELL shares now.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [51]

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Okay. Well, this is, again, a discussion that we have with the Board every quarter. And what we'd looked at is, yes, we have $46 million in cash at the end of the quarter. But a high percentage of that cash is still trapped with our foreign entities, and we've repatriated as much of that cash as we can and we're still doing some more. But there's certainly a fixed amount that we can't bring back to United States. And it was mentioned earlier in the call, we went from $50 million in May down to $46 million to support the growth of the company in 1 quarter. So the Board continues to be very, very concerned that, I know they did the math for me this last Board meeting, that we have $20 million, $25 million plus in the U.S. to support growth here. And that's where all the investment is for the most part. And on that basis, if you took the last couple of years' history, we're going to be cash poor in 2 years. And so they are more concerned about that than buying our own stock back.

My answer to that was what I said earlier was if we can get some traction on the Healthcare, I think instead of using cash, that will go cash flow neutral, for sure, if not positive in the short term. And that's our objective.

But anyway, the question is the Board is constantly looking at the value of buying stock versus getting cash. And so obviously, when we have a lot of cash, the bank will loan you money. When you don't and you're marginally profitable, they give ice away in the winter. So we're trying to conserve our cash.

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Operator [52]

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All right. I'm not showing any other questions at this time.

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Edward J. Richardson, Richardson Electronics, Ltd. - Chairman, CEO & President [53]

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All right. Well, thank you very much for joining us and for your ongoing interest in Richardson Electronics. We look forward to discussing our fiscal 2020 second quarter results with you in January.

Thanks, Teagan. We'll open it up -- or we -- I guess we've got all the questions, so we'll just thank everybody for their questions and joining the call. And give us a call later, if you've got further questions.

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Operator [54]

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All right. That concludes our conference. Thank you for using AT&T Event Conferencing, and hence you may now disconnect.