Richardson Electronics Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 11, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by and welcome to the Richardson's Electronics Earnings Call for the Second Quarter of Fiscal Year 20 24 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. 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.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to Richardson Electronics' conference call for the Q2 of fiscal year 2024. Joining me today are Robert Penn, Chief Financial Officer Wendy Dadell, Chief Operating Officer and General Manager for Richardson Healthcare Greg Pellequin, General Manager of our Power and Microwave Technologies Group, which includes Green Energy Solutions 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.

Speaker 1

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 Q2 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 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 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.

Speaker 1

We've also made the strategic decision to maintain stable levels of manufacturing employees and sales people as many of the Green Energy Solutions and Semiconductor equipment customers expect demand to recover in calendar 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 Q2 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.

Speaker 1

We simultaneously position the company for future growth. While we acknowledge revenues will be lower in FY 2024 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.

Speaker 1

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 an energy 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 As our GES business gets to scale in the coming quarters 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.

Speaker 1

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 $23,000,000 in cash and no debt. Inventory increased in the quarter in line with purchases of Thales products, which would support our profitable 2 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 Q2 financial performance in detail.

Speaker 1

Then Greg, Wendy and Jens will discuss our numerous opportunities within our business units, including the significant number of new products, programs

Speaker 2

Thank you, Ed, and good morning. I will review our financial results for our Q2 of fiscal year 2024 followed by a review of our cash position. Net sales for the Q2 of fiscal 2024 were down 33.0 percent to $44,100,000 compared to net sales of $65,900,000 in the prior year Q2. PMT sales decreased by $9,300,000 from last year's Q2, driven primarily by a decline in manufactured products for semiconductor wafer fabrication equipment customers. Sales for GES declined $9,700,000 from last year's Q2, primarily due to lower sales of ultracapacitor modules for wind turbines as a result of the project based nature of this product line.

Speaker 2

Canvas sales decreased by $2,800,000 primarily due to customer push outs in North America. However, Canvas backlog increased reflecting higher overall demand. Richardson Healthcare sales were comparable to the Q2 of fiscal 2023 as higher CT tube and parts demand offset lower system sales. Consolidated gross margin for the 2nd quarter was 28.4% of net sales compared to 33.2% in last year's Q2 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

Operator

for the Q2 of fiscal

Speaker 2

2024 would have been 31.3%. PMT's gross margin decreased to 28.5 percent from 34.5%, primarily due to product mix and $900,000 of manufacturing under absorption. GES gross margin decreased in the Q2 of fiscal 2024 to 29.2% from 33.9% in the prior year's Q2 due to product mix. Healthcare's gross margin decreased to 14.8% in the Q2 of fiscal 2024 compared to 23.2 percent in the prior year Q2 as a result of a $300,000 increase in manufacturing under absorption. Canvys gross margin increased in the Q2 of fiscal 2024 to 33.5% from 29.7% in the prior year Q2 because of product mix and lower freight costs.

Speaker 2

Operating expenses were $14,500,000 for the Q2 of fiscal 2024 compared to $14,700,000 in the Q2 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 $2,000,000 for the Q2 of fiscal 2024 versus operating income of $7,200,000 in the Q2 of last year. Other expense for the Q2 of fiscal 2024, including interest income and foreign exchange was $300,000 compared to other expense of 100,000 and the Q2 of fiscal 2023. Income tax benefit was 500,000 or a 21.6 percent effective tax rate versus an income tax provision of 1,500,000 or a 21.5 percent effective tax rate for the Q2 of fiscal 2023.

Speaker 2

Net loss for the Q2 of fiscal 2024 was $1,800,000 or $0.13 per diluted common share compared to net income of $5,500,000 or $0.39 per diluted common share in the Q2 of fiscal 2023. Turning to a review of the results for the 1st 6 months of fiscal year 2024. Net sales for the 1st 6 months of fiscal year 2024 were $96,700,000 a decrease of 27.5 percent from $133,500,000 and the 1st 6 months of fiscal year 2023, which reflected lower sales across our business segments. Gross margin decreased to 30.8 percent from 33.6%, primarily reflecting product mix and manufacturing under absorption in PMT as well as increased scrap expense in manufacturing under absorption in healthcare, which was partially offset by a favorable product mix and lower freight costs for Canvas. Operating expenses were $30,300,000 for the 1st 6 months of the fiscal year, which represented an increase of $1,400,000 from the 1st 6 months of the last fiscal year.

Speaker 2

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 1st 6 months of fiscal year 2024 was $500,000 as compared to an operating income of $16,000,000 for the 1st 6 months of fiscal year 2023. Other expense for the 1st 6 months of fiscal 2024, including interest income and foreign exchange, was 100,000 as compared to other expense of $500,000 for the 1st 6 months of fiscal 2023. Income tax benefit was $100,000 or an effective tax rate of 16.5% during the 1st 6 months of fiscal 2024 versus an income tax provision of $3,600,000 or an effective tax rate of 23.4 percent in the prior year's 1st 6 months. The company reported a net loss of $600,000 or $0.04 per diluted common share for the 1st 6 months of fiscal year 2024 versus net income of $11,900,000 or dollars 0.83 per diluted common share for the 1st 6 months of fiscal year 2023.

Speaker 2

Moving to a review of our cash position. Cash and investments at the end of the Q2 of fiscal 2024 were $22,800,000 compared to $24,100,000

Speaker 3

at the end

Speaker 2

of the Q1 of fiscal 2024. U. S. Cash and investments were $8,800,000 at the end of the Q2 of fiscal 2024 versus $8,400,000 at the end of the Q1 of fiscal 2024. Capital expenditures were $1,500,000 in the 2nd quarter versus $1,300,000 in the Q2 of fiscal year 2023.

Speaker 2

Approximately $1,100,000 related to investments in manufacturing, including facility expansion and included final costs for the renovation of our office space. We paid $800,000 in cash dividends in the Q2 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 Q3 of fiscal 2024. As of the end of the Q2 of fiscal 2024, the company had not made any draws on its $30,000,000 revolving line of credit with PNC Bank. Lastly, The company's Board of Directors created new ownership requirements for outside directors.

Speaker 2

This includes owning a minimum of $150,000 of our stock after a 3 year period. Now, I will turn the call over to Greg, who will discuss the results for our PMT and GES Business Groups.

Speaker 4

Thank you, Bob, and good morning, everyone. As expected, the fiscal 2024 Q2 was challenging for our Green Energy Solutions in Power and Microwave Technologies Group's due to a fluid economic environment, the timing of some project based orders and a decline in sales in the semiconductor wafer fab market. For our GES business in particular, our second quarter results reflect only 2 years ago with new designs and customer requirements establishing manufacturing and test and also launching beta site testing, We expect sales to fluctuate as we get to scale and develop more predictable revenue streams. However, in a short amount of time, we have designed numerous new products, received several patents and shipped over $77,000,000 to an ever growing list of key customers with more than $35,000,000 in backlog going into calendar year 2024. We expect significant bookings to be received in Q3 and Q4 of FY 2024.

Speaker 4

So needless to say, we continue to be very excited about the next 3 years. Last year, GES benefited from several large projects, including electric locomotive development and major owner operators of GE wind turbines such as NextEra, Enel and InVer Energy. Given the project nature of our GES business, revenue from these products are not necessarily consistent quarter to quarter. In fact, many of our customers over the past 3 months completed calendar year 2024 budgets, including our product and will roll out purchases in the first half of calendar twenty twenty four. In weekly conversations with our major customers, they note it is only a matter of time until new orders are placed.

Speaker 4

Our customers repeatedly tell us we have maintained our market share for our core GES applications and have identified new product opportunities. And the decline in revenue we are experiencing is purely a timing issue. In fact, our customer pipeline and the number of opportunities continues to increase as we look to take advantage of significant energy transformation projects globally. Our GES and PMT backlogs remain strong at over $100,000,000 Given our inventory position, we believe we will ship many incoming orders from stock, which we expect will convert working capital into cash in the coming quarters. We are managing our GES business to support our customers' needs when they are ready.

Speaker 4

So with that introduction, let's look at the Q2 performance of GES and PMT Groups in more detail. GES sales were $2,600,000 in the quarter, down from $12,300,000 in the prior year's record Q2. The year over year decline in GES sales was due to timing on several major project based opportunities. Last year, GES revenues included the first phase of rollouts to our wind turbine customers and prototype builds for our EV locomotive customers. During the quarter, we added several major new customers such as BP Energy, EDF Energy and EDP Renewables.

Speaker 4

I'm pleased to report that 90% of our Ultra 3000 sales in Q2 were with new wind customers. We continue to increase our market share with the customers naming our niche patented green energy products. We believe Phase 2 rollouts for our wind customers will begin in Q3 and Q4 of FY 2024, as many of these customers recently completed their 2024 budgeting process. The forecasts they have provided point to growing orders, which we believe will drive stronger GE sales in our fiscal 3rd and 4th quarters. We continue to beta site our patented pending Altra UPS 3,000, which replaces lead acid batteries in the UPS system at the base of the wind turbines.

Speaker 4

The Altra UPS 3,000 will be used by Siemens and by other owner operators of GE wind turbines going forward. Tests are going well and we have led to important improvements in the product. We're also testing the Altra PEM3000, which supports other wind turbine platforms such as Suzlon, Senvion and Nordex. This is helping us expand our market outside of North America. One major program for the Ultra PEM or multi brand is beta testing with Suzlon in an OEM and replacement basis.

Speaker 4

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 several owner operators in Latin America and North America. We believe initial Ultra PEM orders We'll begin in Q4 of FY 2024. In the EV Locomotive segment due to supply chain issues for piece parts from our suppliers, Our superstructure builds for Long Island Railroad and BNSF Electric Locomotives will be completed in late Q3 and Q4 of this fiscal year. We anticipate Phase 2 for our EV locomotive customers will be in the 3rd and 4th quarters of calendar 2024.

Speaker 4

We also have beta orders for our patented Ultra Gen 3000 starter module with 2 large diesel and electric motor manufacturers. It is important to note that these are exclusive with both manufacturers. We continue to identify other niche applications for the AltaGen 3,000. We are in beta testing with several refrigeration truck manufacturers, where Ultragen is replacing lead acid batteries. There are numerous other markets that can benefit from this solution such as construction equipment, excavators, loaders and backhoes.

Speaker 4

These are longer term opportunities that we expect to add incremental growth in the future periods as we leverage our leadership position utilizing ultracapacitors and other related technologies as power sources across various applications with many large companies throughout the world. In summary, we believe we will begin to see sequential revenue growth in Q3 and Q4 within our GES business, driven by new products, customers and technologies partners, all supported by the forecast and backlog from these project based customers. I want to stress that we have not lost any market share. In fact, we continue to increase our market share with new products, applications and customers and our recent performance is a result of timing issues and the emerging nature of our GES business. So turning to PMT, which includes EDG, Our legacy 2 business and PMG, our Power and Microwave Components Group, sales decreased 22.9 percent to 31,300,000 This decline was mainly due to continued slowdown in our semiconductor wafer fabrication equipment business.

Speaker 4

The semiconductor wafer fabrication business has always been cyclical. We anticipate the slowdown in 2023, but maintain our expectations that the business will recover in the second half of calendar twenty twenty four. This frustration with the cyclical downturn of the Wafer Fabrication business was offset by strong double digit bookings growth in our RF and Wireless business, mainly supporting wireless infrastructure and communication customers. As mentioned, our engineered solutions strategy is led by our global technology partners. We continue to add partners who fill technology gaps in our offering and support our growth.

Speaker 4

Often through these partnerships, we identify opportunities for new products that we design and manufacture in house. This increased the value we provide customers and allows us to capture more revenue while expanding and diversifying our customer base. These long term supplier relationships are extremely strong. And when appropriate, we work with them on strategic long term purchases to maintain appropriate levels of supply. We negotiate special payment And shipping schedules to help improve cash flow.

Speaker 4

In addition, having inventory in hand allows us to capture and maintain market share. We collaborate with both our customers and suppliers and leverage our customers' forecast to help us strategically invest in inventory, ensure we can meet our customers' needs. Our growing customer base and strong relationships with these customers and suppliers Using our version of a customer intimacy model helps us develop new products and opportunities with our existing customer base. We also continue to invest in our infrastructure to support our growth where needed. We are bringing on talented design and field engineers and making investment to enhance our manufacturing capabilities.

Speaker 4

Our growing in house design and engineering manufacturing teams are doing a great job supporting increased demand for current products and new product designs. 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. I cannot stress enough the value of Richardson Electronics model to our customers and suppliers. Our unparalleled capability and global go to market strategy are unique to the Power and Energy and RF Microwave and Green Energy markets. We developed a strong business model including legacy products and new technology partners that fit well with our engineered solutions capabilities.

Speaker 4

Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities when they arise. The execution of our strategy has never been better. There's no question our customers and technology partners need Richardson's capabilities, products and support more than ever. And with that, I'll turn it over to Wendy Dadell to discuss Richardson Healthcare.

Speaker 5

Thanks, Greg. Good morning, everyone. 2nd quarter sales for the Healthcare division were $2,900,000 down less than 1% compared to the Q2 of last year and improved over our most recent Q1. CT tubes and part sales were up versus the prior year's Q2, while system sales were down due primarily to timing of cash receipts from customers in Latin America. In the quarter, we benefited from sales of our repaired Siemens Stratton Z tubes.

Speaker 5

Healthcare's gross margin in the quarter was very low at 14.8% compared to 23.2% last year. The reason for the decline in margin was due to under absorption associated with our decision to produce fewer ALTA tubes in the quarter as well as higher scrap costs. Throughout prior quarters, healthcare inventory has increased due in large part to our growing supply of ALTA Tubes. These are the replacement tubes for Canon CT scanners. We decided at the end of the quarter to reduce our staff and temporarily suspend ALTA tube production, which will allow us to sell off inventory.

Speaker 5

We did retain critical resources who will focus on continual product design improvements and cost reduction opportunities, but reduced production may continue to drive our overall gross margin lower than anticipated. We did not lay off resources working on the repaired Siemens tube program. In fact, we are Supporting the development team by reallocating some of the employees who are focusing on the ALTA Tubes. We continue to make excellent progress with the Siemens program and with a more focused team anticipate this to continue. The Siemens repair program includes 4 tube types, the Straton Z, MX, MXP and MXP-forty six.

Speaker 5

The repaired Straton Z is in full production and performing well in the field. Straton C sales are just starting to ramp up as we have a steadier flow of production. The first repaired MX series tubes are in test And provided our beta testing goes well, we anticipate introducing these to the market later in the Q3. As we mentioned last period, Sales of the MX series will be limited due to supply until FY 2025. In the quarter, we also received our GMP certification in Brazil.

Speaker 5

GMP stands for Good Manufacturing Practices. These are the standards set by the National Agency of Health Surveillance or ANVISA in Brazil. This paves the way for us to export our tubes to a specific customer in Brazil who will reload and sell our ALTA tubes in country. We anticipate the first shipments to this customer will be made in the quarter with limited sales in the fiscal year. Rest assured, we continue to monitor Healthcare's financial performance with the goal of achieving a breakeven point in the 4th quarter.

Speaker 5

This will be more of a challenge with lower production going through the plant, but we are doing the right things to balance our investments with opportunities in the business. I will now turn the call over to Jens Ruppert to discuss the results for Canvys.

Speaker 3

Thanks, Wendy, and good morning, everyone. Canvys engineers manufacturers themselves custom displays to original equipment manufacturers in the industrial and medical markets throughout the world. Canvys' sales for the Q2 of fiscal 2024 reflect certain customer push outs, primarily in North America. As a result, sales were $7,300,000 for the 2nd quarter compared to $10,100,000 for the 2nd quarter last year. On the positive side, we finished the quarter with a very strong backlog of $48,200,000 which increased by $5,600,000 from the Q1 of fiscal 2024.

Speaker 3

Gross margin as a percentage of net sales improved to 33.5% during the Q2 of fiscal 2024 compared to 29.7% during the Q2 of fiscal 2023. The increase in gross margin was primarily related to more favorable product mix and lower freight costs. During the quarter, we received several new orders from both existing and first time Medics OEM customers. Some of these applications include metrics device controls within the operating room, surgical navigation, laser ablation, Radiotherapy, laboratory equipment, super pulsed laser systems, robotic assisted surgery and microscopy. In the non medical space, our products are used in a variety of commercial and industrial applications.

Speaker 3

This includes displays used in the public transportation space, human machine interface applications and teleprompting, With the rapid rise in interest rates, continued global weakness and expanding geopolitical uncertainty, Our OEM customers have seen a slowdown in ordering, particularly in industrial and more recently some medical applications. Given the strong growth drivers in the various imaging markets and our customers' levels of excitement towards next generation products, We see these current dynamics as temporary. Design cycles at Canvys are long, potentially causing sales to vary quarter by quarter. However, we remain focused on adding new customers and programs globally as we leverage and promote our best in class design, engineering and service capabilities. Despite a more cautious macro outlook over the near term, we believe sales will reaccelerate towards the end of the fiscal year, supported by our growing backlog and the number of products currently in the engineering stage.

Speaker 3

From the variety of customers and applications As well as the value of orders from existing and new customers, it is clear view of 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, Managing inventory and improving Canada's profitability is an ongoing priority as we continue to work closely with our partners to meet the demand of our customers. I will now turn the call back over to Ed.

Speaker 1

Thanks, Shins. We appreciate your team's efforts to manage customer price outs without sacrificing our long term partnerships. As you heard from Greg, Wendy and Jens, there's much to be excited about in Richardson Electronics. We remain committed to our long term strategy and we'll continue investing in our growth initiatives with an emphasis on engineered solutions that improve sustainability. We will protect our cash and focus on improving profitability and inventory turns in the coming quarters.

Speaker 1

We're also committed to our shareholders and are pleased to announce we've implemented a program requiring our outside directors

Operator

And thank you. Ladies and gentlemen, due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and one follow-up until all have had a quick chance to ask a question, after which we will and answer additional questions from you as time permits. And our first question comes from Anja Sadasam from Sidoti. Your line is now open.

Speaker 6

Hi. Thank you for taking my questions. So for the Altra Pan that you are working with the Indian wind turbine, Sicily and Energy, those are in beta testing. But Are you seeing do you see any risk to those orders being pushed out as well or?

Speaker 4

Specific to the Moltart brand, which is 3 different platforms of wind turbine manufacturers, We're focused on Suezland and Senvion and Nordex. No, right now, the beta testing is going great. We're exclusive. The numbers they have given us for pricing and rollout are still strong. And so far, we do have received orders in North America for people servicing Suzlon Wind Turbans and we're actually going to India in a few weeks To finish up the installation of the beta testing, and again, that's a working unit.

Speaker 4

So we're very excited about that opportunity. I believe I gave the numbers in my opening. So could things be delayed a quarter or 2? Yes, that's just the nature of this Rollout, I mean it's an infrastructure rollout. Historically, I've had a lot of experience in a marketing director role at Motorola.

Speaker 4

We roll out Our technology into the base station arena, this wind turbine market is very similar where when economic Issues are applied in a certain area of the world or globally. For example, one of the things we're seeing in Q1 and Q2 where they have budgeted and forecasted to roll out 5 different sites. They only did 2, but that doesn't change the opportunity or the End result of what we'll be shipping into that customer, it's just a timing thing based on budgets, economic conditions, etcetera. So the reduction would be lowering the number of sites, but the total opportunity, No, we don't see that being limited.

Speaker 6

Okay. Thank you. And in terms of the semiconductor, Sir, how is the conversation there going with Lam Research? And are you still confident in that starting to pick up in the Q3?

Speaker 1

Well, we listen to their vendor calls on a monthly basis and they're telling us that they will even subsidize their vendors to maintain They are a capability because they think by the end of 2024 that the business will be stronger than it's ever been. So that remains to be seen. Our business is Down from about $40,000,000 to $20,000,000 this year. But we're it's sort of like a roller coaster. It goes up and down When it went from 3 gs to 4 gs, it went from 22,000,000 to 7,000,000 and 4 gs to 5,000,000, it went to 40,000,000.

Speaker 1

So we're anticipating according to Lam that it will be higher than ever by the end of 2024.

Speaker 6

Okay. Thank you. And I'm sorry, yes? Yes,

Speaker 5

Anja, just to add to that, we do anticipate in Q3, Q4, We're not anticipating a lot of growth in the Lam business in Q3 and Q4. It will be starting after that, as Ed mentioned, In Q1 and Q2 of the calendar year. Right.

Speaker 4

They're burning off inventory.

Speaker 5

Okay. Excuse me, Q3 and Q4 of calendar year 2024 are Q1 and Q2 of fiscal year 20 25, sorry for the confusion.

Speaker 6

Yes. Okay. And just a quick one, I don't know if you, Wendy, you mentioned you still I think you can reach breakeven for the healthcare unit in the Q4. What do you need in terms of revenue to breakeven at this point?

Speaker 5

We need to sell a lot more CT tube, both the Siemens and the repaired Siemens tube and the Alta 750, in terms of top line, we probably should be at about $1,000,000 or so more than where we were in Q2 in order to hit that Q4 breakeven point, maybe a little bit higher than that. Depends on how our margins fare. As we mentioned, we've had under absorption in the factory, which has hurt our gross margin. We did take the actions in Q2 to reduce our costs there and reallocate those people, some of the people to making more of the Siemens So we should be in good shape, but we'll have to see how the margin holds up.

Speaker 6

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

Operator

One moment for our next question. And our next question comes from DeForest Hinman from Mumbershoot Holdings. Your line is now open.

Speaker 7

Hey, thanks for taking the questions. Can you just give us some more color On the opportunity within the GES business, I mean, just from a context perspective, really good performance in 2023. It seemed like a lot of excitement a couple of quarters ago. It still sounds like there's a lot of business opportunities There, but the revenue performance has just really been all over the place. I think, I don't know if it was 6 months ago, we were talking about Growth in GES could offset a lot of the softness within the semi space that really hasn't occurred.

Speaker 7

So Can you just reframe what is the revenue opportunity there maybe within the next 6 months, within the next 12 months and then what could this business look like in 2025, Your fiscal 2020, 25 if things start improving? Thank you.

Speaker 4

Yes. Thank you. Great question. So what we saw in 2023 is the rollout of new products, aptly new design, tested, manufactured. The cycle time that we brought those products to market because the customer was in such a need for it Based on the cost and failures of the lead acid batteries, the team did an amazing job.

Speaker 4

And I've been in the new product introduction Process my entire career and getting that done within months versus for example, I mentioned the Motorola part. It took us 3.5 years to introduce LD MOS, which took over the infrastructure market. So that first rollout, we got budgets and forecasts from The top 4 owner operators of GE wind turbines in North America, which the Altra 3,000 was designed for, and that was NxThera, Inver Energy, RWE And you now they give us their forecast and kind of the opposite of this year. They actually Ordered almost 50% more than they budgeted. However, the team did an amazing job.

Speaker 4

You had all those supply chain issues, etcetera, and we were able to meet All the requirements, but we didn't have a part in stock until March of last year. And so what we saw this year A little bit the opposite. The opportunity still the numbers are still there. However, instead of doing, as I mentioned before, 10 sites, they've done 5. But in the meantime, specific to the wind turbine business, we've done beta site testing at other key owner operators.

Speaker 4

And to this day, as of today, we have over 12 customers in North America owner operators, People like I mentioned, I believe in a press release in December, BP Energy, EDP, Longwood Energy Partners, Pattern, EDF. If you add up the turbines that this program represents within their company, it's over 12,000 4 98 turbines. Now, how will that rollout go? It will go over 3 years. Again, we're going to see huge some year and due to other Issues we're going to see less.

Speaker 4

But add on to that, we continue to look outside of North America. And as I mentioned before, the Suzallon opportunity in India. Also in the meantime, we were able to become the exclusive supplier to GE Marketplace for the Altra 3,000. And as new products come out, we'll be adding more and more products to that marketplace application. So you can kind of see why we're excited about just the Altra 3,000 wind turbine business.

Speaker 4

In the meantime, not waiting for The market to come back or for orders to increase, the team, as I mentioned before, has designed other products, both to go into green energy applications and specifically because of the strong relationships with the wind turbine owner operators, the Ultra UPS. Now there's a 1 Ultra UPS in every single turbine that I just mentioned. And that's in beta site testing. It's going very, very well. But the MPI process, there's a lot of, hey, we need to change this, there's changes with the spec, customer needs change.

Speaker 4

But we have a very good team here that works directly with the customer on a scheduled weekly call and of course there's calls every day on specific items. So that's kind of the wind turbine business for the Altra 3,000 and Altra UPS. On the electric locomotive side, That's another program where the customer came with needs needed to be expedited. We needed to design, manufacture, test and build battery modules and also Superstructures and the team, again, with partnership in this case with ProgressRail did an amazing job meeting and exceeding all the requirements. And we have now shipped all of our products that go into that electric locomotive that we finished that in the Q4 of last year.

Speaker 4

So now they're taking our product and of course there are other suppliers for other products. They're building the finished unit And according to them, they're shipping that to their end customer in our fiscal year Q4 and the beginning of FY 2025 Q1 and Q2. So we expect orders for that production quantities sometime in the second half of calendar year twenty twenty four. And just remember, these are prototype builds. And just last year for those prototype builds, we shipped over $24,000,000 worth of products for the prototype build.

Speaker 4

So again, Math after that per train, the numbers that they're talking about as the electric locomotives gets accepted, Like electric vehicles get accepted by the customer base. I needed to say, we've never been more excited. Just doing math this, I've said this before, I don't know what numbers you could come up with, but easily $100,000,000 opportunity. It's just Math after that. And we continue to add new products and new customers going forward.

Speaker 4

So Within that, we also have the UltraGen 3,000, which is the 3rd and 4th product we have. That product is designed and because of our relationships with the electric locomotive market, We've designed and we have orders for over 25 trains today for starter modules for 2 of the top owner manufacturers of electric, diesel and electric locomotives. So that business to us is obviously very exciting. And everything I just talked about, we are exclusive with them. There is not a competitor.

Speaker 4

There is not a second source. So as these relationships grow, new products grow, we'll continue to add to that pipeline. But the pipeline as it stands today is a timing issue as they roll out, I'm going to use the word infrastructure because that's what the wind turbine business is, it's energy infrastructure like infrastructure for base stations, which I'm comparing it to, makes us very, very excited on the green energy front.

Speaker 7

Okay. I mean, that's helpful. I mean, obviously, the market is not sharing your Enthusiasm, the stock is trading around probably book value at this point with no debt. So it's a 2 part question. Should we, as shareholders, expect the management team to be buying stock?

Speaker 7

And then should the Board be thinking about buying stock themselves and issuing A share repurchase authorization. Thank you.

Speaker 4

I want to touch on the excitement part of it. I thought the market and the shareholders got very excited last year and the enthusiasm is what I'm going to call Phase 1 rollout of our Green Energy Solutions Strategy. My opinion, I think they should be just as excited about Phase 2, which as I mentioned Today is coming. It's coming. The suppliers, the customers have confirmed that.

Speaker 4

It's project based. But I would be just as excited about the next steps as we roll out this new product line, new products, new SBU Going forward, I'll let Ed talk about that.

Speaker 1

We just instituted a program with our Board that they're required to Buy $150,000 worth of stock, as part of their participation on the Board and that's just been implemented. You'll see that going into place. We have about $22,000,000 or $24,000,000 in cash. The difficulty is we have 24.4 in subsidiaries and only about $8,000,000 of that cash is in the U. S.

Speaker 1

So the answer to our buying stock back is that we won't

Operator

And our next question comes from P. Ross Taylor from ARS Investment Partners. Your line is now open.

Speaker 8

Thank you. First, good morning. Congratulations on the move with the Board and getting the Board to be Invested along with shareholders and management because I think that's a very important step. I've rarely seen small companies succeed when the Board doesn't have as stocks when the Board doesn't have an interest along with that of investors. 2nd So really the first question is you commented saying that Lam is telling you that you should be ready for My words fiscal 'twenty or calendar 'twenty five being the biggest year you've seen from them.

Speaker 8

Is that correct?

Speaker 1

Yes, that's correct.

Speaker 8

And the biggest year you've had in that space was what 2 years ago at $40,000,000 or so in revenues?

Speaker 1

That's right.

Speaker 5

Last fiscal year, Ross, F103.

Speaker 8

Okay. So what you're really looking at is a situation where we would expect that Pretty quickly, once they get this turn going, you're going to see a pretty significant ramp up pushing those effectively like 100% Plus growth in revenues over what they're currently running at?

Speaker 1

That's correct. Yes.

Speaker 8

Okay. And that's Probably carries a better than company average multiple when you get up to that level or operating margin when you get I

Speaker 1

know it's product. We make RF matches and proprietary products where the margin is better than our normal margins.

Speaker 8

Okay. And so that alone, we're talking about $20 plus 1,000,000 in revenues being added at, say, mid-30s Plus operating margin that itself is going to be a huge driver forward.

Speaker 3

Absolutely.

Speaker 8

2nd is, you've talked about the ability to convert inventories and the like into cash. Do you have an idea or thought process on how what kind of cash generation you can get or creation you can get from drawing down your own inventories?

Speaker 1

Well, what do we have about 14,000

Speaker 8

of the ultra capacitor modules already built for wind turbines? What's the total number that we have already built?

Speaker 4

Yes, 14,000 built and about that much on backlog with customers.

Speaker 7

All right.

Speaker 1

So it's a matter of not if it's when, it's all timing when they're going to release. Normally these wind turbines, they do their maintenance in the It's in the spring of the year. And as Greg mentioned, right now, they're all going through a budgeting process. So we have these orders, but they haven't released So it's a matter of timing.

Speaker 8

But what we should see is the ability to convert Several $1,000,000 of inventory into cash as they convert to, okay.

Operator

Multi, which

Speaker 4

is Multi,000,000.

Speaker 8

Multi,000,000.

Speaker 4

Yes.

Speaker 8

Okay. Since it's not several, I'll take multi as being a larger number than several. That's correct.

Speaker 3

Okay.

Speaker 1

In a normal year, we do over $10,000,000 a year with wind turbines alone.

Speaker 8

It seems to me that listening to you guys talk, reading your release that there was a this quarter was a combination of Unfortunate uncorrelated, correlated events, they all hit in the same quarter. But at the same time, that this should be the nadir For what we see going on and so we're really moving beyond this quarter as you move to the second half of your year, we should start to see some Incremental and then what's the idea what they always say about going broke slowly first and then rapidly, that we should see incremental and then rapid Growth in top line earnings, free cash flow generation at all? I mean, listening to this is actually the most bullish call you've had and it's Kind of ironic that it's occurring with the stock down 20% on the day and trading under $10 a share.

Speaker 1

No, we fully understand. I have a saying, you can't fall off the floor. So with all of these things we have going, we think that the 50% of our business will be green energy going forward and we think within 5 years we'll be $500,000,000 and extremely cash flow positive.

Speaker 8

And that really that this is as you said, since you can't fall off the floor, this is a point from which you don't think you can fall from?

Speaker 1

No, we are absolutely amazed that it's just like you've fallen off a cliff that the business went to this level. But it did and that's where we are. But we have the backlog, we have the inventory. So it's a matter of timing, not if, but when.

Speaker 8

And can you give a little bit of background on the opportunity in hydrogen Market size? Yes.

Speaker 1

We're just starting to work in that area. So they're buying 100 kilowatt generators that we make and they're converting methane gas Into hydrogen and acetylene. And actually at this point, the acetylene has more value than the hydrogen. But a lot of companies, including Caterpillar, are talking about having their equipment run on hydrogen in the future. And one of the most profitable ways to generate that hydrogen is using 100 kilowatt microwave generators that we manufacture.

Speaker 1

They use a tube that's about $10,000 and the generator is like $100,000 So that could be a profitable business for us in the future.

Speaker 8

And how many tubes do you need?

Speaker 1

There's 1 tube in each generator. We have one customer that we mentioned that's making this crystalline for synthetic diamonds for industrial applications, And they're talking about buying 200 generators over the next 2 years.

Speaker 8

Over the next 2 years?

Speaker 1

Several years.

Speaker 8

Several years.

Speaker 4

Yes.

Speaker 8

Okay. And then so we look at this and I guess part of what that business model is you end up You sell the acetylene and if you sell the acetylene, then actually reduces or eliminates the cost of making the hydrogen. And then you have the hydrogen as a benefit beyond it. Yes, that's correct. Okay.

Speaker 8

Well, as I said, I think it's fascinating. This isn't the most bullish call I've heard you guys have. And Don't get discouraged by the fact that investors look at basically drive by looking at the hood of the car.

Speaker 1

Well, we've only been around for 76 years. And in my history, the stock has been $3.75 $29 So we'll get there, Just a matter of when.

Speaker 8

Let's get back to new highs.

Speaker 5

Okay. Thank you, Rod.

Speaker 3

Congratulations.

Operator

And thank you. And one moment please. One moment. Okay, one moment for our next question. And our next question comes from Ronald Richards.

Operator

Your line is now open.

Speaker 1

Good morning, Ron. Hey, guys. I got a question. Good morning. I saw you got those orders coming in India.

Speaker 1

And I was wondering about Yes,

Speaker 4

the biggest opportunity is The Suzallon multi brand specific to Suzallon in India, but that also is going to be tested at their facility to make it an OEM product, meaning it will be designed and it won't be replacing that asset batteries in their wind turbines. It will actually be the PEM system within their Turbine, that is by far the biggest opportunity. We have numerous opportunities not nearly as large with Enel in Italy, with Nordex in Germany. So it's getting Because of these relationships and the new products, getting the North American GE market, Not 100% exclusive, but grabbing all the market share we can now and we continue to train our global sales force on these products, Because again, they're brand new to them too. So we are seeing opportunity, but the biggest Probably the next 12 months is going to be Senvion globally, because once we go into production for India, That will transcend to all their turbines and owner operators throughout the world.

Speaker 4

Suzlon. Suzlon, I'm sorry.

Speaker 8

Okay.

Speaker 4

That sounds so much alike.

Speaker 1

Okay. Thank you.

Speaker 4

Thank you.

Operator

Okay. Thank you. And I am showing no further questions. I would now like to turn the call back over to Ed Richardson, CEO for closing remarks.

Speaker 1

Thanks, Justin. Well, we want to wish you all a very happy and prosperous New Year, and we appreciate your investment interest in Richardson Electronics. We assure you that it's only up from here and not a matter of if, but when. And we look forward to discussing our fiscal year 2024 Q3 with you in April. We're available to take your calls at any time, so don't hesitate to call us.

Speaker 1

Thanks very much.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Richardson Electronics Q2 2024
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