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Richardson Electronics, Ltd. (RELL) Q2 2024 Earnings Call Transcript

Richardson Electronics, Ltd. (RELL)

Q2 2024 Earnings Call Transcript

Company Participants

Edward Richardson - CEO

Robert Ben - CFO

Greg Peloquin - GM, Power & Microwave Technologies Group, Green Energy Solutions

Wendy Diddell - COO & GM for Richardson Healthcare

Jens Ruppert - GM, Canvys

Conference Call Participants

Anja Soderstrom - Sidoti

DeForest Hinman - Bumbershoot Holdings

P. Ross Taylor - ARS Investment Partners

Presentation

Operator

Good day, and thank you for standing by and welcome to the Richardson Electronics Earnings Call for the Second Quarter of Fiscal Year 2024 Conference Call. At this time, all participants are on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Edward Richardson, CEO. Please go ahead.

Edward Richardson

Good morning and welcome to Richardson Electronics conference call for the second quarter of fiscal year 2024. 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, which includes Green Energy Solutions; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback.

I would also like to remind you that we will be making forward-looking statements. 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.

Financial results for the second quarter of the fiscal year 2024 fell short of our expectations. Economic conditions, rising interest rates, higher inventory levels and a lagging economy in China negatively impacted customer demand for our products. As we operate over the near term with a more uncertain economic climate, we remain focused on pursuing our long-term growth strategies. These strategies position the business to take advantage of large, rapidly growing global opportunities. The expertise of our management team is a significant asset during this period, as we have successfully navigated difficult economic periods throughout our history. This is exactly why we maintain a strong balance sheet with access to additional sources of capital if necessary.

We've also made the strategic decision to maintain stable levels of manufacturing employees and salespeople as many of the green energy solutions and semiconductor equipment customers expect demand to recover in calendar 2024. Therefore, maintaining continuity in our manufacturing team is important to ensure we can quickly adapt to increased orders and grow market share. Unfortunately, profitability was impacted in the second quarter as our gross margin reflects the under-absorption in our factory. Within our healthcare business, we made some changes to improve inventory and focus on strategic objectives which Wendy will tell you about shortly.

Overall, the team continues to do an excellent job managing expenses, we're focused on driving efficiencies, [which] (ph) simultaneously position the company for future growth. While we acknowledge revenues will be lower in FY ‘24 than previously anticipated, we maintain our optimistic outlook and remain committed to our long-term strategy. We continue to expand our product roadmap for green energy solutions. We are adding new customers for wind, electric vehicles, and rail and the applications that take advantage of energy transition initiatives underway across many geographies. While we're in the early innings of this transformation, we have quickly developed a compelling roadmap of products, technologies, and are establishing Richardson Electronics as a leading provider of innovative engineered solutions for global green energy markets.

Activity across all our business remains extremely strong, and specifically for the green energy’s business. Our pipeline of potential projects continues to increase. In addition to public and private energy transition initiatives that are underway, we believe that the Inflation Reduction Act of 2022 will create further opportunities for the company. One recent example was a new order from a US-based technology company that's using our 100 kilowatt generators to power a pilot reactor to make crystalline diamond materials for high-tech applications. Under the Inflation Reduction Act, this customer is applying for a grant to build a multi-reactor factory which will require significant number of 100 kilowatt generators. We believe other wind and electric vehicle and rail customers will benefit from the Inflation Reduction Act, which we expect to support our higher sales forecast.

As our GES business gets to scale in the coming quarters and years, much of our near-term new business is project-based and timing is not always easy to predict. I want to stress that we've not lost any opportunities and remain focused on capitalizing on market opportunities supported by the Inflation Reduction Act and other energy transition initiatives globally. We're also focused on adding suppliers that will fill our technology gaps. These relationships are critical to our business model as our partners often support new engineered solution opportunities for the company that drive higher and more profitable sales.

Our balance sheet remains strong with nearly $23 million in cash and no debt. Inventory increased in the quarter in line with purchases of Talus products, which would support our profitable to business, as well as long lead time capacitors that are required to support our green energy growth initiatives. The balance of our inventory remained flat. And the transit inventory was down, indicating we are reducing inventory purchases in line with sales.

With this introduction, I'd like to turn the call over to Bob Ben, our Chief Financial Officer, to review our second quarter financial performance in detail. Then, Greg, Wendy, and Jens will discuss our numerous opportunities within our business units, including the significant number of new products, programs, and customers that drive our optimism for future growth.

Robert Ben

Thank you, Ed, and good morning. I will review our financial results for our second quarter of fiscal year 2024, followed by a review of our cash position. Net sales for the second quarter of fiscal 2024 were down 33.0% to $44.1 million compared to net sales of $65.9 million in the prior year second quarter. PMT sales decreased by $9.3 million from last year's second quarter, driven primarily by a decline in manufactured products for semiconductor wafer fabrication equipment customers. Sales for GES declined $9.7 million from last year's second quarter, primarily due to lower sales of ultracapacitor modules for wind turbines as a result of the project-based nature of this product line.

Canvys sales decreased by $2.8 million, primarily due to customer pushouts in North America. However, Canvys backlog increased, reflecting higher overall demand. Richardson healthcare sales were comparable to the second quarter of fiscal 2023, as higher CT tube and parts demand offset lower system sales.

Consolidated gross margin for the second quarter was 28.4% of net sales compared to 33.2% in last year's second quarter due primarily to product mix and under-absorption. Without under-absorption of the company's manufacturing facility, management estimates that the company's consolidated gross margin for the second quarter of fiscal 2024 would have been 31.3%. PMT's gross margin decreased to 28.5% from 34.5%, primarily due to product mix, and $0.9 million of manufacturing under absorption. GES gross margin decreased in the second quarter of fiscal 2024 to 29.2% from 33.9% in the prior year's second quarter due to product mix. Healthcare's gross margin decreased to 14.8% in the second quarter of fiscal 2024 compared to 23.2% in the prior year second quarter as a result of a $0.3 million increase in manufacturing under absorption.

Canvys gross margin increased in the second quarter of fiscal 2024 to 33.5% from 29.7% in the prior year second quarter because of product mix and lower freight costs. Operating expenses were $14.5 million for the second quarter of fiscal 2024, compared to $14.7 million in the second quarter of fiscal 2023. The decrease in operating expenses resulted from lower incentive expenses, partially offset by higher employee compensation expenses.

The company reported an operating loss of $2.0 million for the second quarter of fiscal 2024 versus operating income of $7.2 million in the second quarter of last year. Other expense for the second quarter of fiscal 2024, including interest income and foreign exchange, was $0.3 million compared to other expense of $0.1 million in the second quarter of fiscal 2023. Income tax benefit was $0.5 million or a 21.6% effective tax rate versus an income tax provision of $1.5 million or a 21.5% effective tax rate for the second quarter of fiscal 2023.

Net loss for the second quarter of fiscal 2024 was $1.8 million or $0.13 per diluted common share compared to net income of $5.5 million or $0.39 per diluted common share in the second quarter of fiscal 2023.

Turning to a review of the results for the first six months of fiscal year 2024. Net sales for the first six months of fiscal year 2024 were $96.7 million, a decrease of 27.5% from $133.5 million in the first six months of fiscal year 2023, which reflected lower sales across our business segments. Gross margin decreased to 30.8% from 33.6%, primarily reflecting product mix and manufacturing under-absorption in PMT, as well as increased scrap expense and manufacturing under-absorption in healthcare, which was partially offset by a favorable product mix and lower freight costs for Canvys.

Operating expenses were $30.3 million for the first six months of the fiscal year, which represented an increase of $1.4 million from the first six months of the last fiscal year. The increase was due to higher employee compensation expenses associated with the higher staffing levels in fiscal 2023 combined with severance costs relating primarily to healthcare's reduction in staff.

Operating loss for the first six months of fiscal year 2024 was $0.5 million as compared to an operating income of $16.0 million for the first six months of fiscal year 2023. Other expense for the first six months of fiscal 2024, including interest income and foreign exchange, was $0.1 million, as compared to other expense of $0.5 million for the first six months of fiscal 2023.

Income tax benefit was $0.1 million or an effective tax rate of 16.5% during the first six months of fiscal 2024 versus an income tax provision of $3.6 million or an effective tax rate of 23.4% in the prior year's first six months. The company reported a net loss of $0.6 million or $0.04 per diluted common share for the first six months of fiscal year 2024, versus net income of $11.9 million, or $0.83 per diluted common share for the first six months of fiscal year 2023.

Moving to a review of our cash position. Cash and investments at the end of the second quarter of fiscal 2024 were $22.8 million, compared to $24.1 million at the end of the first quarter of fiscal 2024. US cash and investments were $8.8 million at the end of the second quarter of fiscal 2024 versus $8.4 million at the end of the first quarter of fiscal 2024. Capital expenditures were $1.5 million in the second quarter versus $1.3 million in the second quarter of fiscal year 2023. Approximately $1.1 million related to investments in manufacturing, including facility expansion, and included final costs for the renovation of our office space....

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