Richardson Electronics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 12, 2023

There are 12 speakers on the call.

Operator

Morning, and welcome to Richardson Electronics Conference Call for the Q1 of Fiscal Year 2024. Joining me today are Robert Ben, Chief Financial Officer Wendy Diddell, Chief Operating Officer and General Manager for Richardson Health Care, Greg Pellegrino, General Manager of our Power and Microwave Technologies Group and our newest business unit, Green Energy Solution and Jens Rupert, 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.

Operator

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 Q1 of fiscal year 2024 were below our expectations due concerns regarding economic conditions, rising interest rates, a lagging China economy and the possibility of a recession across our global customer base. It was especially challenging Period, given the downturn in the semiconductor wafer fab market and the timing of new orders in our Green Energy Solutions business. While sales were lower than anticipated, our gross margin improved from Q4 fiscal 2023 and the team did an excellent job managing costs.

Operator

Our core EDG and display businesses were in line with the prior year, and the company remained profitable in the quarter. Despite near term challenges, we've never been more optimistic about our future. We expect the future downturn in the market demand to improve in the coming quarters and we remain committed to our long term strategy. Our strategy growth plan is focused on expanding our product lines, leveraging the deep relationships we have with over 20,000 customers globally. We do this by listening to our customers and helping them solve problems.

Operator

We're currently building a name for ourselves as the technology leader in green energy solutions. In addition, we continue to hear from key customers and technology partners in the semi fab equipment market that they're at the bottom of the semi cycle. These companies anticipate growth in calendar year 2024 that exceeds sales levels during the 2022 cycle. We're taking steps in the interim to address the slowdown without impacting growth in these critical areas. We remain focused on increasing the percentage of our sales that come from our Green Energy Solutions business as well as other products we manufacture.

Operator

Much of this new business is project based and timing is not always easy to predict. The success of these strategies, However, supported by our sales growth, improved efficiency and higher profitability over the past several years. Our balance sheet remains strong with $25,000,000 in cash and no debt. Throughout the company, everyone is focused on turning Our inventory into cash, managing expenses and driving toward annual positive operating cash flow next fiscal year. Bob Benn, our Chief Financial Officer, will review our Q1 financial performance.

Operator

Then Greg, Wendy and Jens will discuss numerous These within our business units, including the significant number of new products, programs and customers that drive our optimism for the future.

Speaker 1

Thank you, Ed, and good morning. I will review our financial results for our Q1 of fiscal year 2024, followed by a review of our cash position. Net sales for the Q1 of fiscal 2024 were down 22.2% to $52,600,000 compared to net sales of $67,600,000 in the prior year's Q1. PMT sales decreased by $9,600,000 or 21.2 percent from last year's Q1, driven primarily by a decline in manufactured products for our semiconductor wafer fabrication equipment customers. Net sales for GES were down by $4,100,000 or 48.4 percent from last year's Q1, primarily due to lower sales of ultra capacitor modules for wind turbines.

Speaker 1

It is important to note that the replacement of lead acid batteries in existing wind turbines is often project based and the timing of orders is difficult to predict. Canvas sales decreased by $500,000 or 5.0 percent, primarily due to lower customer demand in North America. Richardson Healthcare sales decreased by $700,000 or 22.1 percent, primarily due to lower demand in the quarter for parts and equipment. Total company backlog was $148,100,000 at the end of the Q1 of 2024 versus $160,400,000 at the end of the Q4 of fiscal 2023. Gross margin for the Q1 was 32.8 percent of net sales compared to 34.1% in last year's Q1.

Speaker 1

PMT's gross margin decreased to 32.2% from 34.3%, primarily due to product mix and manufacturing under absorption. Healthcare's gross margin decreased to 31.6% in the Q1 of fiscal 2024 compared to 36.7% in the prior year's Q1 as a result of increased scrap expense and manufacturing under absorption. GES gross margin increased in the Q1 of fiscal 2024 to 36.0 percent from 35.5% in the prior year's Q1 due to product mix. Canvas gross margin increased in the Q1 of fiscal 2024 to 34.0 percent from 31.4% in the prior year's Q1 because of product mix and lower freight costs. Operating expenses were $15,800,000 for the Q1 of fiscal 2024 compared to $14,200,000 in the Q1 of fiscal 2023.

Speaker 1

The increase in operating expenses resulted from higher employee compensation expenses, primarily salaries. The company reported operating income of $1,500,000 or 2.8 percent of net sales for the Q1 of fiscal 2024 versus operating income of $8,800,000 or 13.0 percent of net sales in the Q1 of last year. Other income for the Q1 of fiscal 2024, including interest income and foreign exchange, was $100,000 compared to other expense of $300,000 in the Q1 of fiscal 2023. Income tax provision was $400,000 or a 23.7 percent effective tax rate versus an income tax provision of $2,100,000 or a 25.0 percent effective tax rate for the first 2023. Net income for the Q1 of fiscal 2024 was 1,200,000 compared to net income of $6,300,000 in the Q1 of fiscal 2023.

Speaker 1

Earnings per common share diluted were $0.09 compared to earnings per common share diluted of $0.45 in the Q1 of fiscal 2023. Moving to a review of our cash position. Cash and investments at the end of the Q1 of fiscal 2024 were $24,100,000 compared to $25,000,000 at the end of the Q4 of fiscal 2023. U. S.

Speaker 1

Cash and investments were $8,400,000 at the end of the Q1 of fiscal 2024 versus $7,600,000 at the end of the Q4 of fiscal 2023. Capital expenditures were $1,100,000 in the Q1 of fiscal 2024 versus $1,400,000 in the Q1 of fiscal year 2023. Approximately $900,000 related to investments in manufacturing, including facility expansion and the renovation of our office space. We paid $800,000 in cash dividends in the Q1 of fiscal year 2024. 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 Q2 of fiscal 2024.

Speaker 1

As of the end of the Q1 of fiscal 2024, the company had not made any draws on its $30,000,000 revolving line of credit with PNC Bank. Now I will turn the call over to Greg, who will discuss the results For our PMT and GES business groups.

Speaker 2

Thank you, Bob, and good morning, everyone. In Q1 FY 'twenty four, Power and Microwave Technologies or PMT and Green Energy Solutions or GES Continued to gain market share by developing new products and new customer relationships, while maintaining our market share with our existing customers. However, we did see a slowdown in revenue coming out of a record year in FY2023, which was mainly due to the semiconductor wafer fab industry slowdown and timing of a number of very large project based GES opportunities. PMT sales were down year over year by 21%, primarily based on the semiconductor industry slowdown, which started late in calendar year 2022. Again, it is very important to note that we have not lost any market share in this business segment.

Speaker 2

And through excellent customer relationships communication, we are hearing that sales will reaccelerate in the back half of calendar year 2024 and that 2025 is anticipated to show record demand and sales. We are well positioned to manage this business as the customer demand increases. GES sales were $4,400,000 in the quarter, down $4,100,000 from the prior year due to timing on several major project based opportunities. During the quarter, we added several new customers and increased our market share with customers needing our niche patented green energy products. We have many highlights in Q1 for our GES Group beginning with the wind and energy market.

Speaker 2

During the quarter, we added $1,000,000 in bookings with several new customers for our flagship Ultra 3000 product, increasing our backlog in this product line to over 12,000 units. All of our existing wind customers are significantly expanding their budgets for lead acid battery replacement within the GE turbines over the next couple of years. The market potential for the Altra 3,000 remains at more than 150,000,000 The product is reliable and we are enjoying great success and continued relationships with our Tier 1 owner operators. GE Marketplace, which targets more than 800 wind farm management companies, has also started to produce orders as we work directly with GE farm owner operators, Site managers and technicians. With over 41,000 units in the field, 3 patents and exclusive relationships with the largest owner operators in North America, we continue to be very excited about this product, technology and opportunities.

Speaker 2

Our beta testing of our patent pending Altra UPS 3,000 with Siemens and other owner operators of GE and Siemens Wind Turbines is underway and going well. The Ultra UPS 3000 replaces lead acid batteries in the uninterrupted power supply or UPS that sits at the base of every wind turbine. We are moving forward to testing on other wind turbine platforms such as Senvion, Suzlon and Nordex. Once we begin production, we anticipate expanding to other markets and applications as this product works anywhere a UPS is used. Our Ultra PEM or multi brand pitch energy module is in beta testing with Suzlon on an OEM basis.

Speaker 2

This opportunity is for more than 7,000 turbines in India alone and several 1,000 more in North America. This product is also in final testing with a number of owner operators in Latin America and North America, which have an SSB pitch system. In the EV and diesel locomotive segment of Green Energy Solutions, due to supply chain issues, our superstructure builds for Long Island Railroad In Burlington Northern, electric locomotives will be completed in late Q3 and Q4 of this fiscal year. We have received beta orders for our patented UltraGen 3,000 starter module with 2 large diesel and EV locomotive manufacturers. We'll be doing the beta testing in 25 trains in Q3 FY 2024.

Speaker 2

It is important to note that we are exclusive with both of these customers. We continue to identify other niche applications in this patented technology. We are in beta testing with several refrigeration truck manufacturers where the Ultragen is replacing lead acid batteries. There are currently 500,000 refrigeration trucks in North America and we estimate this market opportunity to be have a TAM of $200,000,000 There are numerous other markets that this product will be applicable to such as construction equipment, including excavators, loaders And backhoes. After a record Q4 and record FY2023, shipments slowed in Q1 and we expect this trend to continue in Q2.

Speaker 2

2024. With bookings and new products along with the forecast and backlog from our project based customers, we feel that Q3 and Q4 will be extremely strong for Green Energy Solutions. We have not lost any market share and we continue to increase our market share with new products, applications and customers. Now turning to PMT, which includes EDG, our legacy tube business and PMG, our Power and Microwave Components Group. Sales decreased 21%.

Speaker 2

Sales were $35,700,000 versus $45,300,000 in Q1 last fiscal year. This decline was due to the major slowdown in the semiconductor wafer fabrication equipment business. The decline was somewhat offset by growth in our Laser and Broadcast II business, which remained steady. We also saw strong bookings in our RF business. The team has been supporting the semiconductor wafer fabrication business and its customers for well over 25 years.

Speaker 2

This business has always been cyclical. We anticipate the slowdown in 2023, but again expect the business to recover in the second half of calendar twenty twenty four. Our engineered solutions strategy is driven by our global technology partners such as Qorvo, MACOM, a Nokia Wave, Ellis Materials, AMMO Greentech, Novitas and Fuji Electric. Key 2 manufacturers and partners include CPI, Thales, Nisimbo Micro Devices and Photonis. Each of our global partners helps us meet and manage customer requirements.

Speaker 2

Our team has done an excellent job identifying and cultivating these relationships. We will continue to add technology partners who fill technology gaps in our offering and support our growth. Often So through these partners, we identify opportunities for new products and we design and manufacture in house, increasing the value we provide customers and allowing us to capture more revenue and increase our customer base. These long term relationships are extremely strong and we work with them on strategic long term purchases keep our customer source of supply continually in motion, we negotiate special payment terms and shipping schedules to help improve cash flow. In addition, Having inventory on hand allows us to capture and maintain market share.

Speaker 2

We also continue to invest in our infrastructure to support our growth. We are bringing on talented design and field engineers and making investments to enhance our manufacturing capabilities. Our growing in house design engineering and manufacturing teams are doing a great job supporting the increased demand for current products and new product designs. I'm pleased with the progress. And with this team, we will continue to identify, develop and introduce new products and technologies for green energy and other power management and microwave applications.

Speaker 2

Our growth strategy has been proven to be highly successful over the years. We will continue to develop new products as well as increase our customer base revenue and profits by capitalizing on existing demand creation infrastructure. Our belief in the future based on our customer forecast requires Strategically invest in inventory that positions us to fill the pipeline and ensure we can meet our customers' needs through close collaboration with both our customers and the suppliers themselves. I cannot stress enough the value of Richland Electronics model to our customers and suppliers. Our unparalleled capability and global go to market strategy are unique to the power and energy, RF and microwave and green markets.

Speaker 2

We have developed a strong business model including legacy products and new technology partners that fit well with our engineered solutions capabilities. Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities as they arise. The execution of our strategy has never been better. There is no question our customers and technology partners need Richardson's products and support more than ever. We remain excited about the future as we find opportunities and build our market share for PMT and GES with new products and customers.

Speaker 2

Our team will continue to work closely with our customers throughout the beta testing phase for these exciting patented products. And with that, I'll turn it over to Wendy Diddell to discuss Richardson Healthcare.

Speaker 3

Thanks, Greg. Good morning, everyone. 1st quarter sales for the healthcare division were $2,600,000 down 22.1% versus the Q1 of last year. Sales were down in all product categories, reflecting lower demand for parts and services throughout the most recent summer months. In the quarter, we sold all of our repaired Siemens Stratton Z tubes, helping improve our gross margin to 31.6%.

Speaker 3

While this was lower than the prior year's Q1, this is a significant improvement from the 4th quarter margin of 23.7%. On a year over year basis, gross margin was negatively impacted by higher scrap costs in the quarter. We continue to make good progress on the Siemens repaired tube program. This is a series of 4 tube types including the Straton Z, MX, MXP and MXP-forty six. The Siemens CT install base is considerably larger than the install base for our Alta tubes And there are no third party replacement options for these tube types.

Speaker 3

The repaired Straton Z is in full production and performing well in the field. We expect sales to rise gradually in the coming quarters as we expand our production team in the repair process and add more tubes to inventory on a consistent basis. We also continue to make good progress on the repaired Siemens MX Series. We know demand is strong based on discussions with our customers. While we anticipate launching the 1st repaired MX Series tube around the end of the calendar year, supply will be limited Due to recent challenges, we are experiencing replacing a critical component.

Speaker 3

It is important that we get it right and we believe we are on track to do so. This will delay having sufficient inventory to meet customer demand until FY 2025. While our engineers work on the Siemens repaired tube program, We continue to work our way through the local registration process for reloading tubes in Brazil. We still anticipate this program may have a small yet positive impact on our revenue We remain cautiously optimistic that the ongoing development efforts within the healthcare business will enable the division to achieve its goal of breaking even in the Q4 of this fiscal year. I will now turn the call over to Jens Ruppert to discuss the results for Canvys.

Speaker 4

Thanks, Wendy, and good morning, everyone. Canvys engineers, manufacturers and sell custom displays to original equipment manufacturers in the industrial and medical markets throughout the world, Canvys' performance remains strong with sales of 9,900,000 For the Q1 of fiscal 2024, down slightly from $10,400,000 during the Q1 last year and up from $9,200,000 in the 4th quarter. 1st quarter sales reflected stable customer demand globally And we finished the quarter with a backlog of $42,600,000 which remains strong. Gross margin as a percentage of net sales was 34.0% during the Q1 of fiscal 2024, compared to 31.4 percent during the Q1 of fiscal 2023. The increase in gross margin was primarily related to a more favorable product mix.

Speaker 4

During the quarter, we received several new orders from both existing and first time medical OEM customers. Some of these applications include ophthalmology, laboratory equipment, video documentation systems, Robotic assisted surgery and surgical navigation. In the non medical space, our products are used in a variety of commercial and industrial applications. This includes large size industrial printers, displays used in the public transportation space, Human machine interfaces for packaging machines and industrial automation, tailor prompting, Talent monitors and clocks used in the broadcast market. Over the near term, we expect increasing interest rates Continued high inventory levels will have a short term impact on our business.

Speaker 4

Customers are forecasting more conservatively and only placing orders when the inventory is at a minimum level. We haven't lost the program, but we expect sales to vary quarter to quarter depending on our customers' inventory levels. Given the number of projects currently in the engineering stage, we believe sales will We accelerate towards the end of this fiscal year. We are proud of the efforts and innovations of our talented engineering team and the ability to design products that help create productivity and value for our customers. During the quarter, We further advanced our high end 4 ks display offering by adding a special film to the LCDs to ensure a super low reflection.

Speaker 4

The monitors have been evaluated by large medical companies with very positive feedback. 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 as we continue to work closely with our partners to meet the demands of our customers. I will now turn the call back over to Ed.

Operator

Thanks, Jens. We understand the near term challenges But we remain confident that Canvas will continue to grow given the stronger relationships and recognition as a leading custom display solutions provider. To conclude, we're excited about the direction we're headed. We remain committed to our employees, our customers, our suppliers and our shareholders. We're investing in our growth initiatives with an emphasis on engineered solutions that improve sustainability.

Operator

We're a GES business just getting started. The products we manufacture are used in aftermarket applications And we have solutions that improve operating efficiencies and help companies achieve their clean energy goals. Much of our legacy business, including EDG, is reoccurring revenue for consumable products. Within the launch of the Siemens repaired tube program, we anticipate improvement in our healthcare business, helping strengthen our bottom line. We'll protect our cash and focus on improving inventory turns.

Operator

Finally, we're confident that we'll emerge from the challenging period stronger and better positioned to grow in sales and profitability later in the year. We continue to believe it's not a matter of if, but when. At this time, we'll be happy to answer your questions.

Speaker 5

Thank And one follow-up. Again, we ask that you please limit yourself to one question and a follow-up until all have had a chance to ask a question, after which we will And our first question comes from Angela Sandstrom from Sidoti. Your line is now open.

Speaker 6

Hi, and thank you for taking my questions. So first, I'm curious for the GS, it came in quite softer than I had anticipated. Can you just talk about the timing there? Was this something that was just shifted into the Q2? Or is it just these larger projects that are you are seeing longer sales Cycles or how should we think about the Q2 for GS?

Speaker 2

Yes. It was a combination of 2 things. First of all, the Phase 1 orders that people in terms of setting their capital budgets, how many farms and how many turbines they were going to Start to implement taking out the lead acid batteries with our Ultra 3000. That phase was expedited. The team did an absolutely fantastic job getting the product to the customer in our fiscal year and then the dates they needed it.

Speaker 2

That was completed. They're installing them over the next couple of quarters. And according to each one of them and we are tied in with every major owner operator of GE wind turbines in North America, The Phase 2 will start early 2024. So in essence, the Q1 of calendar 2024, We'll start seeing the bookings for Phase 2. And right now, it looks like, for example, our backlog today is about Size of our sales last year.

Speaker 2

So we're looking to grow in this fiscal year. The exact timing of how much we'll ship in Q3 and Q4, This project based business is very hard to do that, but inputs from the customers is that will kind of be the progress going forward.

Speaker 6

So the Q2 is could you expect it to be at the same level as the Q1 sort of?

Speaker 2

It will be very close to the Q1 shipments.

Speaker 6

Okay. And then on the flip side, the P and T Was stronger and we saw growth sequentially. What's driving that and how is that continuing into the Q2?

Speaker 2

Yes, both the tube business and then the RF and Wireless component business did good. The RF and Wireless component business We received a lot of strong bookings in Q3 and Q4 of last fiscal year. And so we had very strong shipments and Their backlog grew and they grew year over year in Q1. On the tube side, we had real strong growth in our laser Tube market and also we had large business with some replacement business, Parco Y354. So that's just very consistent business, it goes up and down 5% or 6%.

Speaker 2

But with the recession coming on And this being replacement business, it's not 100% recession proof, but it's because it's repair business, we seem to have consistent numbers throughout the year. So we'll probably see the same type of growth that we saw in Q1 and now in Q2 throughout the year.

Speaker 6

Okay. Thank you. And then inventory seems to be managing that well for the quarter. How What's including that inventory and how are you going to need to start building that in anticipation of these large orders that you expect in the second half?

Speaker 2

Yes. There was 2 main increases in the inventory, very strategic purchases. 1 with some long term lifetime buy orders to support our customers on product that's being discontinued over the next couple of years to make sure our customers we've had for 20, 30 years have a source of supply. And the other part of it was 4 months ago, we had 0 inventory on the Altra 3,000 in many of the GES products. So we're trying to build up inventory where we have A minimum of quarters worth of inventory because just like it's hard to predict these project based orders When they come in, typical customer, they want them in the next month or the next week.

Speaker 2

So we went through 2 years of daily calls on the supply chain issues And we can't let our customers down and we did an amazing job as you saw with the numbers from FY2023 supporting their Phase 1 builds both in The locomotive and wind turbine business.

Speaker 6

Okay. Thank you. I'll get back in line.

Operator

Thanks, Sonia.

Speaker 5

Thank you. One moment for our next question, please. Our next question comes from the line of P. Ross Taylor with ARS Investment Partners. Your line is now open.

Speaker 7

Thank you. I very rarely get the full name. A couple of things. First, revenues were down about $10,000,000 in the semi cap equipment space that carries probably about your best margins in your firm. So would it be safe to assume that on operating profit basis that probably hit you guys by something in the Neighborhood of around $5,000,000

Speaker 2

On the operating profit?

Speaker 1

That's probably a fair assumption. It might be a little less than that, but that's about correct.

Speaker 7

Okay. Do you have any ability to reduce the other costs associated below the operating profit line when you see a drop like that?

Speaker 8

Hi, Ross, it's Wendy. We had A few layoffs, so we were able to take some costs out there. We had some people voluntarily take furloughs. We were able to take some costs out there. Our plan is considerably higher than where the sales actually came in.

Speaker 8

So we have savings in the incentive area. We certainly hold off on adding any non critical adds to staff. And in general, we look at things like travel, can we cut back on that? Marketing, can we cut back on that? But we're not you're not going to see a $5,000,000 reduction in SG and A.

Speaker 8

Okay.

Speaker 7

So It's safe to say that probably cost on an operating basis $0.35 $0.40 a share. You're being told To look for fiscal 2025 that would be at record levels better than you saw Last year, is that true?

Speaker 8

So what we're anticipating is that the business will start improving again in the back Half of calendar year 2024 and the calendar year 2025, they're anticipating that will be a record year.

Speaker 7

Yes. Okay. Calendar 2025, that's even better. Calendar. Calendar.

Speaker 7

Right. Okay. So looking at that setup, Is there any reason to believe that you should not be able to sustain or even improve profitability as you move back to record Levels of revenue in that space?

Speaker 3

We absolutely can achieve that. Yes.

Speaker 2

In addition to that, There's a number of large programs out there on the GES side that would compensate for Any continued comeback with that market. So there's a lot of things in the pipeline that We really think we'll be added to that, that will get us back to these record profits we saw the last year or so.

Speaker 7

Okay. And let's move on to the GES base in Suzelon. They have what 7,000 towers? Each tower? Yes,

Speaker 2

currently have about 9,000 total turbines. We have a biweekly call with the group in India. The first Phase 1 will be 7,000 turbines and those are all in India actually. Okay. And we're all set up to do that beta testing, the 3rd week in October, so end of next week or week after, I guess.

Speaker 2

And we've tested the product in a Suzlon turbine here in the States with one of our owner operating partners and it has worked very, very well. So We're really excited about that program, getting an OEM, and working with them. In addition to that, they also own A number of GE sites, which obviously the Altra 3,000 was designed for. So, we look at that program to be very strong going forward, absolutely.

Speaker 7

Okay. So when we look at the demand for your ultra capacitors on a GE side, it's one for 1, right? So that's if there are 18 batteries, that's 18 ultra capacitors. On the Suzlon, from my understanding of the technology, it's like a 1 for 3. So if there's 9,000 towers, that would mean you need something, each tower having 18 Or the equivalent of, say, 18, you'd end up needing something then in the neighborhood of, 50,000 modules or something like that total.

Speaker 7

Yes. The 7,000 in India alone would be like 42 ks modules that you'd be looking at putting into that. Is that about right? 7 times.

Speaker 2

Yes, that's cool. So the Suzlon module is based on the Alter 3000 technology, but it is a redesign Specific for Suzallon and there's 6 modules in every Suzallon turbine versus 18 modules in every GE turbine. However, this product is a little more expensive than the Altra 3,000.

Speaker 7

Right. So

Speaker 2

it'd be 6x7000, which is what you came up with about 42,000 of these.

Speaker 7

42,000 for this. And so we're looking at That project, that opportunity alone is probably something in the neighborhood of $34,000,000 $40 something million of revenues and operating profits, Something like $14,000,000 to $18,000,000 out of that project alone?

Speaker 4

Yes.

Speaker 7

Okay. How long would it take you to fulfill an order for 42,000 ultra capacitors?

Speaker 2

Well, With the new manufacturing area, it's just about resources. We get the people. Right now, we can produce probably 5000 to 6000 1,000 a month. So it wouldn't take that long.

Speaker 7

So you could easily fulfill that inside a year and if you ramp up, you could Fill it inside 6 months or less type of situation.

Speaker 2

Oh, absolutely.

Speaker 7

Okay, cool. And what's unique about

Speaker 2

this is the large order we received we started this program, they picked sites and they did a complete repower, meaning they took all the lead acid batteries out and put these in. Some of these other owner operators, it's when they have a bet, that's one of the unique things about our product from the competition is that you can put it In a turbine and keep if you want to put 2 in, you can keep the other 16 batteries in the turbine until the Warranty runs out or the batteries fail. So they replace them as the batteries fail versus just doing a sweep of every site. So that's just the timing thing, but great business and great program, great product.

Speaker 7

Okay. And the Technology with Siemens is a little different, is it not? You're saying it's like one at the base, but it's probably a much bigger, more powerful one than What we're seeing is the economics might not be the same as times 18 for GE or maybe times 6 for Suzallon, but I would assume that's a pretty valuable unit at the base of each Siemens tower.

Speaker 2

Yes. So the UPS product is a different technology than the Ultra 3000. The Ultra 3000 is a pitch energy module. The UPS is a power an underground power supply. So there's only 1 per turbine, but it's Five times the amount of an Ultra 3000.

Speaker 2

So that's the Siemens design we're working on right now. It's for the UPS, Not the ULTRA 3000.

Speaker 7

Okay. And that's a similar margin? Yes. Okay. Okay.

Speaker 7

So it looks, I mean, that's really setting up. Well, we've got a market here that seems to be focused on looking at its speed and concerned about what's going on, which leads to my next area. And I know I'm always I have to ask 2 questions, but Ed and Wendy know me, so they know that I'm not going to only ask 2 questions.

Speaker 2

That's okay.

Speaker 7

So one of the things I'm looking at is at this point in time, this company is actually selling it at netnetworkingcapital. The market is assigning a zero value to the business. It's literally saying that Richardson is worth nothing Other than what you can liquidate its current assets for. When I look at that, that tells me that there's something really just kind of Wrong with the thinking. And now Ed, you've done an amazing job of changing this company.

Speaker 7

I mean this company going back a number of years was a highly cyclical, really focused Into one primary area and you've diversified it and I think your dad would be really proud of what you've done with it. And to be honest, what I'm hearing on this call, I think in 2 years, your dad is going to be would be beyond satisfied with you. I think he'd be enthusiastic because I'm hearing you guys talk about We put these pieces together. We're looking at a return to not just the level of earnings you had last year, but earnings that can be meaningfully higher than that. Meaning, when I model it out, I get $1.82 a share in fiscal 'twenty five for you.

Speaker 7

And I think that The inability of the market to appreciate that is problematic. But I also want to say that I think that there are some things That we can do with that. One is in the past you've indicated that your banking accord doesn't allow you to buy back stock. When you're selling at net net working capital and I've talked to a banker, I have my one of the guys I golf with is a Vice Chairman of 1 of the world's 4 or 5 biggest financial institutions. They don't bank down at this level, but he tells me it's absolutely asinine you can't buy back stock in your bank accord Given your balance sheet.

Speaker 7

And I think that I for 1 would argue, we need to get a bank accord that reflects what REL is Today and where it is going, which is it's going to go parabolic, it's going to be a massive free cash flow generator. There is no risk To a bank in lending you money. So it's time that we start to get banks that respect us and give us that type of opportunity. So That's my Ross Taylor Smithy comment at the moment on your banking situation. I do think that if you do that, we're looking at a debt stock that's down a lot this year.

Speaker 7

You have 5 plus 1,000,000 you have 100 acres Plus an unused land, that's a zero asset right now, really it's being what it's being farmed at this point?

Speaker 8

Correct.

Speaker 7

What kind of what do you get on leasing out that acreage to be found?

Operator

We get about $3.40 an acre. We sold 55 we sold 2 25 acres, the 55,000 acres. It will tell you pretty much what the value is.

Speaker 7

Right. So right now you're getting about $34,000 A year on that land? That's true.

Operator

Yes. We think that ultimately that the electric locomotives with ProgressRail and Wabtec are going to be huge business and we want to Keep space that we can expand backwards. We're on 25 acres in the front of the 120 Acre property And we want to keep space to be able to expand.

Speaker 7

So if you sold off 50 acres and you've got the 55,000 you did before And you turn that into if you bought 10 year treasuries, you literally increase The income off of that land by a factor of 4 or 5. And so I'd suggest and you could use that I mean that's In this environment and that still leaves you a lot of land to expand, leaves you 50 acres to expand into. But it does strike me as in some ways You're on the cusp of something major here. The market isn't smart enough to figure it out. But there's a reason why I'm look, My career was based on the stupidity of the market.

Speaker 7

I like to tell my daughter. Yes. I tell my daughter that he writes, the markets are stupid. So we look at that going, If we could do something that's in the way of monetizing some of that asset, there's a lot of good things we could do, even if it's just make more money. That's a $0.01 a plus a share pre tax.

Speaker 7

At the same time, you could use that, maybe if your bankers Would wake up, they might let you use some of that to retire stock in the Dutch auction or something and take the selling pressure off in the end of the year because people are looking at their feet, not at the opportunity. So I think that's something we need to look at because there is a zero reason why the stock should trade at netnetworkingcapital. Your business is worth Easily, a low teens multiple on the earnings power of this business. And the net net working capital should be an add in. I don't have anything in my universe It's trading at netnetworkingcapital.

Speaker 7

I challenge people to find much that is in the world. Now onto my next, because I am going to because This is Ross from Moscow's place is working. Yes, Ross,

Speaker 8

black one. We got to give time to everybody else.

Speaker 7

This is it. I'm really frustrated with your Board. You've got 3 directors who've been there for 10 years. They own 0 stock. I'll be honest with you.

Speaker 7

You guys have been there for 10 years shouldn't own less Stock of my dogs, right? I mean, it's not acceptable. And I look at your business, it's changing. Your business is going places you weren't before. I would love to see you change your board.

Speaker 7

I'd love to put have you put people on who believe enough in this company That they're willing to spend the price of a Happy Meal and a lot to pay every day to buy a share of stock. And I also would like to see those people come in with expertise Because, Ed, you've got such a great opportunity here and you've done such a great job with this company that if you surrounded yourself with people who have green energy People who have background in the semi cap equipment space, people who have capital markets background and things of that nature, And those people not just brought their expertise, but brought their pocketbooks and bought stock. I think it would send a message To the Street that they just that they need to look at this opportunity and they need to take you guys seriously. And I know it's always hard. I understand boards tend These are people who have been around for a long time.

Speaker 7

But from my outside perspective, their unwillingness to commit capital to buy stock and the lack of Clear industry expertise and financial expertise tells me that We need as outside investors, I need people to be my champion on your Board and I need people to bring you the skills so that you guys get everything you can out of this opportunity. And so I would strongly advocate we bring some new blood into the board. I'm in my mid-60s, so I hate calling people in their 70s old. But that we need new people on this board who bring that expertise and honestly come in and are excited by this opportunity and say, I right now can buy a stock for $0 to $0.50 above net net working capital that I think is going to earn close to $2 in 2 years And that's insane. And I want to own a lot of them.

Speaker 7

And I'll let others talk now.

Speaker 5

Thank you.

Speaker 7

Yes.

Operator

Well, we certainly agree with you and we had a long discussion with the Board when they were here this week about Buying stock and that's under consideration. We agree, we think this company will be $500,000,000 in the next 3 to 5 years and We have $25,000,000 in cash today. We'll go cash flow positive in 2025. So all the things you say we agree with and we appreciate your Thank you.

Speaker 8

Thanks, Ross. We're going to move on, okay?

Speaker 5

Thank you. Our next question will come from the line of Barry Mendel with Mendel Money Management. Your line is now open.

Speaker 9

Yes, a couple of things. When do you expect your backlog to start increasing? Because I think that would be a catalyst for the stock. I know you expect the big locomotive orders released Last quarter you said sometime in the 3rd or Q4 this year. So when do you expect the backlog to kind of bottom out?

Speaker 2

Yes. On the GES side and the PMT side, we look at the backlog to start having some of these project based businesses The end of Q2, the very beginning of our Q3, and then we expect The delivery will be over the next 6 months after that. So end of Q2, based on some of the beta testing we have and The customer's forecast and then, but Q3 should be a very strong, very strong booking quarter, Q3.

Speaker 9

Your fiscal Q3?

Speaker 2

Our fiscal Q3, yes.

Speaker 9

Okay. In terms of the semi space, as I recall last Order, I thought you mentioned the semi space expected to improve in the first half of calendar 2024, and I just said in the second half calendar 2024. What's the reason for that?

Speaker 8

Hi, it's Wendy. We I think we've been consistent saying it's that the our customers are have been forecasting improvement in the second half. We are hoping that maybe we would see some of that start to come in, in the first half, but it's always been consistent that they were not anticipating Significant or really any recovery until the second half of calendar year twenty twenty four.

Speaker 9

Okay. And then, do you think that's something about the megatron, what was going on with that business?

Speaker 8

I'm sorry, could you repeat that? You're a little bit distorted.

Speaker 9

What's going on with the Megatron business In terms of capacity and sales there?

Operator

With magnetrons, yes. Well, We're building new test equipment. We've improved the characterization of the filament on the tube. And there's a huge demand out there, Probably over 5,000 tubes a year and we're trying to build our capacity to take advantage of that. And we're we have monthly progress in that area, plus the 9 15 megahertz magnetron at 100 kilowatts, there's a huge market For also creating synthetic diamonds and then they make hydrogen out of methane gas, which is another big application.

Operator

So the magnetron business is strong and well and Our restriction is how fast we can develop higher power magnetrons and improve the quality of the ones we make already.

Speaker 9

As I recall, what's the doubling capacity in that business earlier this year in the spring, early summer?

Operator

Yes. We're still having difficulty there. The problem is that tube type equipment is all custom made and We've geared up now where we can build about 240 a month, but we need to get to 500 a month on the YJ-sixteen hundred, which is a 6 kilowatt too. But we're getting there, it's progress, it's slow.

Speaker 9

When do you expect to get to $500,000,000 a month?

Operator

I would say 6 months out.

Speaker 9

Okay. Thank you.

Operator

Thank you.

Speaker 5

Thank you. One moment for our next question please. Our next question comes from the line of Ron Richtsch. Your line is now open, sir.

Speaker 9

Hi. I was wondering in light of all the problems that Siemens is having, I know you're in beta testing right now. Do you have any Guess as to when we might start receiving some orders from Siemens?

Speaker 2

Yes. I think it's similar to the other ones based on how they structure their capital request and money. So there They put in for it, the parts been successful in testing. And again, Q3, Q4 of our fiscal year is when we think we'll be getting per them production orders. We've already received orders for beta testing In alpha testing, but production orders probably Q3, Q4 based on what they're telling us.

Speaker 9

Okay. That's your fiscal Q3, Q4?

Speaker 2

Yes.

Speaker 9

Okay, great. Thank you.

Speaker 8

And that particular product Ron is, It's the Ultra UPS 3,000, which is also intense with other large wind turbine companies. Greg, you want to comment on that?

Speaker 2

Yes. It's again a base design that we're designing for Siemens, But also we have beta testing going on with NxThera and RWE. So, yes, it's and again, it goes in every one of those They're turbines, so we're excited about that product.

Speaker 8

And they're aftermarket. So Siemens might be an OEM opportunity, but the other ones are aftermarket.

Speaker 1

They're both aftermarket.

Speaker 2

They're both aftermarket.

Speaker 8

For turbines To be built. So if that's your concern with Siemens, that's not an issue.

Speaker 2

Yes. No, it's not based on new builds.

Speaker 9

Okay, great. Thanks for the color. Appreciate it.

Operator

Thank you. Thank you.

Speaker 5

Thank you. One moment for our next question, please. Our next question comes from the line of Michael Hughes of SGF Capital Markets. Your line is now open.

Speaker 10

Good morning. Thanks for taking my questions. First one, can you just Hi, Brian. Hi. Can you break out the backlog by segment for the quarter, please?

Speaker 10

Bob,

Speaker 9

you got that?

Speaker 1

Yes. Hi, Michael. This is Bob Ben. Yes. So again, the total backlog at the end of the quarter was $148,100,000 of that approximately $67,400,000 PMT, dollars 36,500,000 was Green Energy Systems, dollars 42,600,000 was Cannabis and the remaining $1,600,000 was Healthcare.

Speaker 1

Okay.

Speaker 10

And then, Wendy, I think you referenced an issue with a critical components for the Siemens II program. Can you elaborate on that a little bit?

Speaker 8

A little bit. I don't want to get into too much detail on this Paul, but it is a part that we thought we could use a refurbished Part or a part that's already been used on another tube. And unfortunately, that method is not going to work. So we have we need to wait till the patent expires. In the interim, there are a number of the MX Series that we can repair without replacing that specific component and that's what we'll focus on, which is why I say we'll have limited Supply until next summer.

Speaker 10

When does the patent expire?

Speaker 8

During the summer of 2024.

Speaker 10

Okay. Right, right. Okay. That makes sense. And then last question for you.

Speaker 10

I'm not sure if you'll disclose the precise number, but was the semi cap equipment revenue Up or down sequentially?

Speaker 9

It was down, yes, certainly.

Speaker 6

From Q4.

Speaker 2

It's pretty much flat.

Speaker 6

Flat, yes.

Speaker 10

So flat for the May quarter?

Operator

Yes. It's running about $4,000,000 or $5,000,000 a quarter.

Speaker 10

Okay, great. Thank you very much. I appreciate

Speaker 6

it. Thank

Speaker 5

you. One moment for our next question. Our next question comes from the line of Andrew Rehm with Odinson Partners. Your line is open.

Operator

Good morning, Andrew.

Speaker 11

Hey, guys. Thanks a lot. Just on the beta test coming up in October, What needs to be proven in that beta test?

Speaker 2

They just they run it, they Take the turbine and shut it down, so there's electrical fault to see if it works. They just for the most part, just want to run it in a specific turbine for a period of time and it varies. Some want to do it for a year, some want to do it for 6 months, Some for 3 months. But it's just the beta testing we've done almost all the testing you can get in the data in our labs and either a local turbine. But then when we go to the large orders, these large customers, it averages between 3 months to a year.

Speaker 2

They just want to run it in the turbine to make sure it works.

Speaker 11

Okay. So now if I take kind of

Speaker 2

There might be a

Operator

Go ahead.

Speaker 2

I was just going to say, in beta testing, so then there might be a mechanical issue, meaning the way it fits into the box We might have to do a tweak here and there, but it's just a handful of tweaks, but it's really the performance of it. They just need to run it for a certain period of time.

Speaker 11

Okay. Setting aside the nuance with the mechanical box piece, just If we try to think reasonably expectation, you've talked about 7,000 Wind towers. But realistically, knowing that the beta test could take 6 months plus, It probably wouldn't be until the back half of calendar 2024 where you might start seeing Full rollout of that kind of deployment. Is that a fair assessment?

Speaker 2

Yes. The and that's specific to the Suzanne opportunity in India. If everything goes perfectly, Yes. We'll see shipments in our Q4 and in the early part of fiscal year 2025. But Yes, based on history and the way these things work and I've been doing MPIs or new product introductions for almost 40 years.

Speaker 2

Second half of twenty twenty four Calendar year will be when we see the large production orders going on.

Speaker 11

All right. I want to tag on, I think the questioner a couple of people ago, I think your same as Rob, Mentioned this comment about stock buyback. I want to pile on to that comment by suggesting You might want to take a look at foregoing dividend payment and do a stock buyback because that would be a much higher return Profile for investors. So it's a way to both pay the investors back. It's a more efficient way to do it because they don't have

Operator

to pay taxes.

Speaker 11

And obviously, you should be able to do if you realize what you guys are trying to do here, obviously, the stock should be significantly Higher. So that would be a great return on investments for you and shareholders. Also what he said about The Board, I would double down on that in terms of ownership. So I guess that's 2 votes for a couple of different thoughts there. And then lastly, just Ed, sounds like maybe you have a cold, so Hope you get well soon.

Speaker 11

Thanks a lot you guys.

Operator

Thank you.

Speaker 5

Thank you. I would now like to turn the conference back over to Mr. Richardson for closing remarks.

Operator

We appreciate all your comments and we appreciate your investment and interest in the company, Richardson Electronics. We look forward to our ongoing discussions And sharing our fiscal 2024 Q2 with you in January. Do not hesitate to give us a call anytime. We're happy

Speaker 7

Thank you.

Speaker 5

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

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Earnings Conference Call
Richardson Electronics Q1 2024
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