RF Industries, Ltd. (NASDAQ:RFIL) Q4 2022 Earnings Call Transcript

RF Industries, Ltd. (NASDAQ:RFIL) Q4 2022 Earnings Call Transcript January 12, 2023

Operator: Greetings. Welcome to the RF Industries Fourth Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Jack Drapacz. You may begin.

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Jack Drapacz: Thank you, operator. Good afternoon, and welcome to RF Industries' fourth quarter fiscal 2022 financial results conference call. With me on today's call are RF Industries' President and Chief Executive Officer, Rob Dawson; and Senior Vice President and Chief Financial Officer, Peter Yin. Before I turn the call over to Rob and Peter, I'd like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its fourth quarter and fiscal 2022 financial results. That release is available on the company's website at rfindustries.com. This call is also being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website.

I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on this call today may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When used, the words anticipate, believe, expect, intend, future and other similar expressions identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission.

RF Industries undertakes no obligation to update or revise any forward-looking statements. Additionally, throughout this call we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our GAAP and non-GAAP reporting and present the reconciliation between the two for the periods reported in the earnings release. With that said, I will now turn the conference over to Rob Dawson, President and Chief Executive Officer.

Rob Dawson: Thanks, Jack. Good afternoon, everyone. Thank you for joining RF Industries fourth quarter and year end fiscal 2022 conference call. I'm pleased to report that we capped the year with annual sales of $85.3 million, the largest year by far in our company's 40 year history. A 48% increase year-over-year and above the high end of our previously stated guidance. We also delivered adjusted EBITDA of $6.6 million for the full year. Importantly, as we expected we saw improvements in gross profit margin throughout the year and in the fourth quarter we reached a high of 31%. We believe this reflects our strategic shift to higher value products and solutions and our focus on managing expenses even in an inflationary environment.

This year, we also closed on the acquisition of Microlab, our largest acquisition thus far, and we did it without any dilution to shareholders. Microlab, which is now fully integrated is a very exciting addition to the RFI family. I'll be telling you more about how it expands our opportunity set in a few minutes. On today's call, Peter will cover our financial results in more detail, as well as our guidance for fiscal 2023. For my part, I'd like to take a few minutes to reflect on how far we've come over the past few years and why we have such strong conviction in the future of RF Industries, and our ability to generate sustainable returns for shareholders. 2022 was a challenging but rewarding year for the team. We endured supply chain and transportation headwinds among other macro challenges, yet we still grew sales by nearly 50% with both organic and inorganic increases.

Thank you to our amazing team for making this happen. This team has made tremendous progress reinventing a 40 year old company that was maybe a little sleepy and trapped in a commodity driven business. That said, the company was consistently profitable and had a stellar reputation for quality customer service and the best part, great people. Those were the good bones that I saw when I joined the company at the end of 2017. So five years ago, we set our sights on developing the strategic plan that would unlock the value of our foundational strengths. Our strategy was a two pronged approach, keep fueling the cash cow of organic growth and look for hidden gem acquisitions that could deliver a new value proposition into an expanded market opportunity.

All while launching an aggressive go to market plan to add key distribution and get to the important end user customers, especially in the wireless industry. While I believe we barely scratched the surface of our potential, we made significant headway in 2022 on the disciplined execution of our plan. Since the plan's inception in late 2017, we've nearly quadrupled in size. We're consistently profitable and we've defined our differentiated value proposition in the market. To transform our company, we focused on several core areas. First was to build out a strong team. We've augmented an already impressive team with an enviable list including skilled executives with strong industry experience, many of whom come from larger competitors. Most of our additions are trusted and proven former colleagues.

We also bolstered our corporate governance and strategy with several director changes on our Board of Directors in the past few years. Second thing we focused on is quality. The goal is always to offer quality products that customers need and come back for time and time again. And early on, we discovered we could win on speed by understanding the inventory needs of our clients, we can deliver whatever a customer needs quickly and faster than the competition, through both our production capabilities and our distribution network. With a great team, quality products and a speed advantage, you can accelerate a strong go to market plan. Our go to market strategy has been to influence the key end user customers to include our products and solutions in their bill of material for projects and general business purposes and then make it easy for them to purchase through whatever channel makes the most sense for them.

This approach informed our decisions to add distribution and to acquire specific companies and product areas. Next is to become as valuable to our customers as they are to us. With key acquisitions such as Microlab in 2022, and C Enterprises and Schroff Tech before, on top of our custom capabilities and existing business we've broadened and deepened our product offering to better serve our customers and solve greater problems with higher value bigger ticket items. We have additional product announcement in the coming months that we believe will be game changers for us and will be part of the next phase of growth for the company. Then we had to move beyond commoditized products to those with technical advantages or intellectual property advantages.

Through product development, like with our OptiFlex hybrid fiber solutions and select acquisitions, we have and will continue to compile a more distinctive proprietary product offering that will help us build a protective moat from competitors around our company. The next key is to look at efficiency. We continue to look for ways to achieve scale, reduce redundancy and improve efficiency and margin. Being good stewards of money, cash flow and redeployment of capital has been another important driver. We've consistently been solid with cash flow, but we've been equally strong in deploying our capital smartly. We've made three acquisitions in 3.5 years, including our company's largest in our history last year with Microlab, using cash and low interest loans for all of those.

We haven't caused any dilution for our shareholders. A cornerstone of our business is that we manage our money well. And last but not least, we keep our eyes squarely on growth. We've nearly quadrupled our size in five years, including during a global health pandemic and with other global macro head wins. And with 4G still in deployment and the promise of 5G not yet fully realized, our future for organic growth is bright. With smart acquisition targets, it can be even stronger. And no one here forgets growth comes in many forms. That includes paying attention to our core business which has grown for five straight years. Now I'd like to spend a couple of minutes to reiterate or restate our core value proposition. We focus on our customers' needs with quality, speed and availability and we always have the customer in mind, making us easy to work with.

Our growth plan organically and through acquisition is to provide more of the bill of materials of interconnect products for telecom, wireless and industrial customer applications. This expanded offering allows customers to buy more from RF Industries across multiple product categories, which can help them reduce complexity and supply chain costs. Our go to market strategies and business development efforts have generated significant multimillion dollar orders from existing and new customers, which combined with our steady distribution centric core business led to much of our growth and resulted in a continued healthy backlog of $27.8 million as we entered the new fiscal year. Historically, many of the products we sell like coaxial jumpers and fiber optic jumpers are in very fragmented markets, which means, we're up against multibillion dollar global (ph) as well as mom and pops.

So how do we compete? Two ways: inventory availability through stocking on-site and with distributors; and through our fast turn production. As an example, if you're doing a wireless installation in downtown Los Angeles, you suddenly realize you need 1,000 coaxial jumpers. You're dead in the water without them and your options are limited. You can go to a large competitor with a small order and might wait two or four weeks or you can come to RF Industries and we'll have it for you in a couple of days or better. That's what we do in a piece of our core business. We are really, really good at inventory availability. We either have it on our shelves or on the shelves of one of our six national distributors or we can make it quickly. And along the way, we strengthen our relationships with our distributors by working together to get stocking positions correct.

That's how we create value add in our core distribution business. And that coupled with our custom capabilities is why we do business with all Tier 1 wireless carriers. That's how RF Industries trusted reputation among customers opens the door for more business. And that's why we've continued to add more products in that wireless bill of materials to become more of a one stop shop. Availability, speed and quality continue to be cornerstones of who we are. But that value proposition is evolving and becoming more powerful as we've added higher value and more proprietary products and solutions, both through product development and through acquisition. We've been working hard to elevate our offer to create more of a moat around our business with those higher value proprietary products and solutions that we believe will give us more of a competitive advantage in the market and produce higher profitability in our next phase of growth.

So as we turn to fiscal 2023, we're confident in our ability to deliver a solid shareholder return for all the reasons that I've just outlined. Starting this month, we are consolidating our West Coast operations with a new facility coming online in the next 30 days in San Diego. And in our second quarter, we'll be doing some consolidation on the East Coast in New Jersey. This allows us to streamline operations and achieve greater scale. Although this will create a short term expense impact, the long term synergies and cost savings will be measurable. We've reached a size and scale where we can capitalize on opportunities for centralizing functions and realizing cost savings through integrating previous acquisitions and implementing new processes.

This year, we will also be introducing a new brand strategy. As we've grown, we've acquired a number of products and brands with different names. Some have greater awareness than others. We've completed research to understand the power of the RF Industries brand, as well as the individual brands and product names. In 2023, we plan to roll out a new brand architecture and strategy that will include our overarching positioning, identity -- the identities of our house of brands and a touch points that connect shareholders and customers to those brands, such as our website and collateral. This is an exciting development in the evolution of our company and we look forward to sharing it with you in the coming months. With a shared vision and strong roadmap, I believe we barely scratched the surface of our potential.

Before I close out my remarks, I want to acknowledge and provide my sincere appreciation to our 340 employees. Our continued success and strong standing with our customers is due to their relentless commitment to our company's performance and serving our customers. I'm obviously pleased with the progress that we've made in growing the business over the last five years. But as always, I believe the best is still ahead of us. And with that, I'll now turn the call over to Peter Yin, our CFO to delve into the details of our financials. Peter?

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Peter Yin: Thank you, Rob, and good afternoon, everyone. As Rob mentioned, we are pleased to report record sales and adjusted EBITDA for our fiscal year. Before diving into the details of our fourth quarter and our year end results, I want to note that fourth quarter results represent a more normalized reporting of our financials. However, when comparing the full fiscal year results, there are impacts from the Paycheck Protection Program loan forgiveness and the employee retention tax credit, both the PPP loan forgiveness and the ERC were recognized in the second and third quarter of fiscal 2021. On today's call, I will be excluding the impacts of the PPP loan forgiveness and the ERC when applicable to make the full fiscal year results more comparable.

Sales in the fourth quarter were $23 million, a year-over-year increase of $1.9 million or 8.9%. For the full fiscal year, sales increased $27.8 million or 48% to $85.3 million. Microlab product contributed $15 million since the acquisition in March. Organic growth year-over-year accounted for $12.8 million, which represents growth in most of our product areas, but primarily driven by the growth in our OptiFlex product line, which is our hybrid fiber solution that is used to support the build out of wireless power sites. Adjusted EBITDA for the fourth quarter was $1.9 million compared to $1.5 million, a 22% year-over-year increase. Adjusted EBITDA for the full fiscal year was $6.6 million, which is an increase of $3.9 million or 143% year-over-year from $2.7 million.

The increase is primarily due to the higher sales along with a more favorable product mix, primarily driven by Microlab products. Fourth quarter gross profit margin increased to 31% from 25.3% in the fourth quarter last year. The 570 basis point increase in our year end margin was driven by favorable product mix. Our sales team continues to work on increasing sales of our higher margin offering and our operations team is working hard to control costs and reduce costs where we are able. We continue to be impacted by the elevated cost of shipping and materials as a result of inflationary pressures, as well as the ongoing wage pressures we have discussed previously. Recently, we have seen pricing for our materials start to stabilize and believe that the supply chain constraints we've been facing while still ongoing are lessening.

We believe there is room to further improve our margins as we believe our sales increase will be driven by our higher value products and solutions. Operating income was $715,000 for the fourth quarter and net income of $451,000 or 4% per diluted share. Non GAAP net income was $1.5 million or $0.15 per diluted share. At the end of the fourth quarter, our balance sheet remains strong with cash and cash equivalents of $4.5 million with working capital of $26.7 million and our full $3 million revolver remains available. Our inventory was $21.1 million, up from $11.1 from last year. The increase in inventory is to support the increase in sales and to mitigate against supply chain disruptions. Microlab accounted for $4.9 million of the inventory increase, but it is also important to note that we have also invested to increase the inventory levels of Microlab products, which has increased $1.2 million since the acquisition.

We believe our current inventory level supports our strategic business model of inventory availability, which is essential to meet demand as we expect increased CapEx spend related to the continued build out of 4G and 5G wireless networks. While supply chain issues have eased, once we believe that they have resumed to more predictable levels, we will be able to lower our carried inventory, bringing up cash for other investments. Moving on, we continue to see momentum building around new business. Our backlog remains healthy going into fiscal 2023 with $27.8 million on fourth quarter bookings of $20.2 million and as of today, our backlog currently stands at $26 million. Before I discuss our guidance for fiscal 2023, I want to take a moment to expand on something Rob discussed.

Our company has been undergoing a thorough reinvention over the course of the last few years. We are all excited about the potential ahead, both from a top line growth rate, as well as the margin improvement we expect to realize. As our sales mix shifts from more traditional products to solutions that are pivotal to continued deployment of 4G and 5G networks, as well as overall infrastructure build outs. We believe we will see increases in our operating income from economies of scale as we continue to grow and from efficiencies and synergies we will realize when we move into two new facilities and consolidating operations in 2023. As for fiscal 2023, we expect the usual seasonal impact that we have experienced in our first fiscal quarter and we anticipate increased sales throughout the year.

We expect revenues to be in the range of $90 million to $94 million for fiscal 2023. That concludes my comments. Operator, we are ready to open the line for questions.

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