Richardson Electronics Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Richardson's Electronics Earnings Call for the Q4 of of question and answer session. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Ed Richardson, Chief Executive Officer. Please go ahead.

Speaker 1

Good morning, and welcome to Richardson Electronics' conference call for the Q4 of fiscal year 2024. Joining me today are Robert Behn, Chief Financial Officer Wendy Diddell, 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'd 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. Fiscal 2024 was a difficult year for Richardson Electronics due to challenging conditions within our semiconductor wafer fab market and program delays across several of our green energy solutions opportunities. Economic uncertainties and higher interest rates also contributed to lower sales in certain segments of our business. While these trends impacted sales and profitability during the year, our teams focused on improving gross margins, reducing inventory levels, strengthening our strong balance sheet and investing in our long term strategic growth opportunities.

Speaker 1

In fact, the 4th quarter marked the 2nd consecutive quarter where we experienced reduction in inventory and the 1st year over year decline in inventory since fiscal 2017. In addition, the company generated $7,200,000 in operating cash flow during the 4th quarter, and we ended the year with no debt and $24,300,000 in cash and cash equivalents. While it was a tough year for sales growth, our business remains strong and I'm pleased with the direction we're headed. The strategies we're pursuing include increased engineered solutions, leveraging our distribution partners and global customer base and supporting opportunities such as green energy. During fiscal 2024, key successes included achieving a significant milestone in the number of wind turbine generator modules sold, expansion of our global customer base in Green Energy Solutions market and the launch of starter modules used to replace lead acid batteries in locomotives.

Speaker 1

In fact, within our GES business, we now offer multiple solutions for lead acid battery replacements and several OEM turbines compared to the Altra 3,000 last year. Greg, Wendy and Jens will provide more details on our business unit performance, including an update on our growth strategies, new product development, program wins and expanding customer relationships. First, I will turn the call over to Bob Binn, our Chief Financial Officer, to review our Q4 fiscal year 2024 financial performance.

Speaker 2

Thank you, Ed, and good morning. I will review our financial results for our Q4 fiscal year 2024, followed by a review of our cash position. In addition, please note that I will be discussing non GAAP financial measures. A reconciliation of non GAAP items to the comparable GAAP measures is available in our 4th quarter fiscal year 2024 press release that was issued yesterday. Net sales for the Q4 of fiscal 2024 were $47,400,000 compared to net sales of $58,800,000 in the prior year's 4th quarter.

Speaker 2

PMT sales decreased by $1,000,000 from last year's Q4, primarily due to lower sales of RF and microwave products. Sales for GES declined $10,600,000 from last year's 4th quarter, which included $11,000,000 of EV locomotive battery modules that did not recur in fiscal 2024. Canvas sales decreased by $500,000 primarily due to economic conditions impacting medical OEM sales in North America. Richardson Healthcare sales increased by $700,000 or 24.3 percent compared to the Q4 of fiscal 2023 as a result of higher systems, CT tube and parts demand. Backlog totaled $147,800,000 at the end of the Q4 of fiscal 2024 versus 100 $47,700,000 at the end of the Q3 of fiscal 2024.

Speaker 2

The sequential increase was in GES, partially offset by slight decreases primarily in PMT and Canvas, which remain healthy. GES backlog of $42,300,000 increased by $5,500,000 since the Q3 of fiscal 2024. Consolidated gross margin for the 4th quarter was 31.1 percent of net sales, a significant improvement compared to 27.9% in last year's Q4. All of our business units had higher gross margin in the quarter versus prior year. PMT's gross margin increased to 31.1% from 29.0 percent due to a favorable product mix.

Speaker 2

GES gross margin increased in the Q4 of fiscal 2024 to 25.5 percent from 23.4% in the prior year's Q4 due to product mix. Healthcare's gross margin increased to 32.5% in the Q4 of fiscal 2024 compared to 23.7% in the prior year's 4th quarter as a result of an improved product mix and lower scrap costs. Canvys' gross margin increased in the Q4 of fiscal 2024 to 33.5% from 32.9% in the prior year's Q4 because of product mix. Operating expenses were $14,800,000 for the Q4 of fiscal 20 24 20 4 compared to $15,000,000 in the Q4 of fiscal 2023. The decrease in operating expenses resulted from lower incentives expense, partially offset by higher R and D expense.

Speaker 2

The company reported an operating loss of $100,000 for the Q4 of fiscal 2024 versus operating income of $1,400,000 in the Q4 of last year. Other expense for the Q4 of fiscal 2024, including interest income and foreign exchange, was less than $100,000 compared to other income of $100,000 in the Q4 of fiscal 2023. Income tax benefit was less than $100,000 and non GAAP income tax benefit was $400,000 for the Q4 of fiscal 2024 versus an income tax benefit of $2,600,000 and non GAAP income tax benefit of $200,000 in the prior year's 4th quarter. The Q4 of fiscal 2024 included $400,000 for an R and D tax credit for the current fiscal year and a one time total credit of $500,000 for fiscal years 2020 through 2023. In addition, the Q4 of fiscal 2024 included $900,000 in income tax expense for the establishment of an Illinois state tax valuation allowance related to the limitation of NOLs.

Speaker 2

Net loss for the Q4 of fiscal 2024 was $100,000 and non GAAP net income was $300,000 compared to net income of $4,100,000 and non GAAP net income of $1,800,000 in the Q4 of fiscal 2023. Loss per common share diluted was $0.01 per share and non GAAP earnings per common share diluted were $0.02 in the Q4 of fiscal 2024 compared to earnings per common share diluted of $0.27 and non GAAP earnings per common share diluted of $0.11 in the Q4 of fiscal 2023. Turning to a review of the results for fiscal year 2024. On a year to date basis, net sales for fiscal year 2024 were 196,500,000 dollars a decrease from $262,700,000 in fiscal year 2023. Net sales decreased by $35,600,000 for PMT, $24,400,000 for GES and $6,900,000 for Canvas, while sales increased by $700,000 for Richardson Healthcare.

Speaker 2

Gross margin for fiscal 2024 was 30.5 percent of net sales compared to 31.9% during fiscal 2023, primarily because of product mix and manufacturing under absorption in PMT, product mix in GES and increased manufacturing under absorption in healthcare, partially offset by a favorable product mix and lower freight costs for Canvas. Operating expenses were $59,500,000 for the fiscal year, which represented an increase of $800,000 from last fiscal year. The increase in operating expenses resulted from higher R and D and salaries expenses, partially offset by lower incentives. Operating income for fiscal year 2024 was $300,000 compared to an operating income of $25,000,000 for fiscal year 2023. Other expenses for fiscal 2024, including interest income and foreign exchange, were 200,000 dollars as compared to other income of less than $100,000 for fiscal 2023.

Speaker 2

Income tax expense was $100,000 and non GAAP income tax benefit was $300,000 for fiscal 2024. The income tax expense of $100,000 for fiscal 2024 resulted from the $900,000 establishment of an Illinois state tax valuation allowance, offset by both current year R and D tax credit of $400,000 and prior year's R and D tax credits of $500,000 The income tax expense was $2,700,000 and non GAAP income tax expense was $5,000,000 for fiscal 2023. Net income for fiscal 2024 was $100,000 and non GAAP net income was 500,000 dollars versus net income of $22,300,000 and non GAAP net income of $20,000,000 during fiscal 2023. Earnings per common share diluted were $0.00 and non GAAP earnings per common share diluted were $0.03 for fiscal 2024 compared to earnings per common share diluted of $1.55 and non GAAP earnings per common share diluted of $1.39 for fiscal 2023. Moving to a review of our cash position.

Speaker 2

Cash and cash equivalents at the end of fiscal 2024 were $24,300,000 compared to $18,900,000 at the end of the Q3 of fiscal 2024 $25,000,000 at the end of fiscal 2023. Cash generated of $5,400,000 in the Q4 of fiscal 2024 was primarily due to decreases in accounts receivable and inventory, partially offset by lower accounts payable. U. S. Cash and cash equivalents were $6,500,000 at the end of fiscal 2024 versus $5,200,000 at the end of the Q3 of fiscal 2024 and $7,600,000 at the end of fiscal 2023.

Speaker 2

Capital expenditures of $1,000,000 in the Q4 of fiscal 2024 were primarily related to our facilities and IT systems versus $2,400,000 in the Q4 of fiscal year 2023. Total capital expenditures were $4,000,000 in fiscal 2024 as compared to $7,400,000 in fiscal 2023. We paid $800,000 in cash dividends in the 4th quarter and a total of $3,400,000 in 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 Q1 of fiscal 2025. As of the end of fiscal 2024, the company had no outstanding debt on its $30,000,000 revolving line of credit with PNC Bank.

Speaker 2

Now I will turn the call over to Greg, who will discuss the results for our PMT and GES business groups.

Speaker 3

Thank you, Bob, and good morning, everyone. While our fiscal 2024 Q4 results for both PMT and our GES strategic business units were challenging, we remain optimistic about the future both short and long term. First, looking at GES with the bookings and backlog being a strong indicator of the health of the business, we were excited to see Q4 was our strongest booking quarter this fiscal year, growing our backlog 16% over Q3. In addition, our bookings in Q4 FY 2024 were up 70% versus Q4 FY 2020 3. Strong bookings include sales to new customers for recently introduced products, including our UltraGen starter modules for locomotives and pitch energy modules in new wind turbine platforms.

Speaker 3

The increase in bookings led to a higher backlog in GES during the Q4 and gives us confidence that Q1 FY 2025 will show sequential growth. In addition, I'm pleased to report that our gross margin in GES improved over the previous year. Looking at our results in more detail, after showing revenue growth in our Green Energy Group in Q3, our revenue decreased to $4,700,000 in the quarter. We had a number of Q4 pushouts into Q1 FY 'twenty five that negatively impacted our shipments during the quarter. However, as we predicted, the second half of FY 'twenty four was up over 131 percent with revenues of $16,200,000 versus $7,000,000 in the first half of the year.

Speaker 3

Our GES growth strategy is still somewhat in its infancy stage and as our new products mature, we will see sales fluctuate from quarter to quarter. On the positive side for FY 2024, we had sales of $23,200,000 with numerous new customers, products and technology partners added throughout the year. The team continues to do a good job identifying customer requirements, establishing design and manufacturing capabilities and launching beta site testing. In a short amount of time, we have designed numerous products, received several patents and developed a growing list of key customers. All of this will help develop a more predictable quarterly revenue stream.

Speaker 3

Last year, GES benefited from several large projects including prototype electric locomotive development and large scale rollout of pitch energy modules to replace lead acid batteries with major owner operators of GE wind turbines such as Nextera, Enel and Anber Energy. In FY 2024, we saw the market share grow with an agreement to outfit 1,000 diesel locomotives with our patent pending starter module. In addition, our pitch energy modules were selected by 4 new wind turbine platforms including Suzlon, Senvion, Nordex and SSB. We now have over 18 wind turbine owner operators purchasing numerous products from us and we are expanding globally with the rollout of the new wind turbine platforms in Europe, Latin America and Southeast Asia. Our customers repeatedly tell us that we have maintained our market share for our core GES power management applications, suggesting the slowdown in shipments in FY 2024 was primarily a timing issue.

Speaker 3

In fact, our customer pipeline and the number of opportunities continue to increase as we take advantage of significant energy transformation projects globally. Turning to Power and Microwave Technologies or PMT, which includes the Electron Device Group, EDG, our legacy tools business and Power and Microwave Group or PMG, sales decreased 3% from $31,500,000 to $30,500,000 in the 4th quarter. This decline was primarily due to the slowdown in our semiconductor wafer fabrication equipment business. However, we saw semi fab demand increase during the quarter as we experienced higher shipments and bookings. In fact, Q4 FY 2024 was our largest revenue quarter this year for the semi wafer fab business, up 71% over Q3.

Speaker 3

We expect to see year over year growth for semiconductor wafer fabrication equipment business in FY 2025 based on customer feedback and market predictions. On the RF and wireless side, we're extremely happy to see a book to bill of 1.38 going into FY 2025. Our combined GES and PMT backlog remains strong at over 102,000,000 dollars Given our inventory position, we'll continue to ship many incoming orders from stock as we're able to do in Q3 and Q4 this past fiscal year. This resulted in reduction of inventory, which will convert to cash in the coming quarters as receivables are collected. We remain focused on managing our business to support customers' needs when they are ready.

Speaker 3

Having inventory on 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 and ensure we can meet our customers' needs. A key to our growth strategy is selectively expanding our global technology partners. In Q4, we added technology partners who fill technology gaps in our offering and support our growth strategy. Often these partnerships we identify opportunities for new products that we design, manufacture and test in house.

Speaker 3

This increases the value we provide customers and allows us to capture more revenue while expanding and diversifying our customer base. These long term supply relationships are extremely strong and when appropriate we work with them on strategic purchases to proper inventory levels. We negotiate special payment terms, stock adjustment privileges and shipping schedules to help improve cash flow. We continue to invest in our infrastructure to support our growth. We are bringing on talented engineers, both field engineers and design engineers and making investment to enhance our design and manufacturing capabilities.

Speaker 3

Our growing in house design engineering and manufacturing teams are doing a great job supporting increased demand for current products and new product designs. With this team and our field sales engineers, we will continue to identify, develop and introduce new products and technologies for green energy and other power management applications along with microwave applications. Going into FY 2025, we remain excited about the opportunities with our PMT and GES businesses. Bookings in Q4 FY 2024 exceeded bookings in Q4 FY twenty three. We did not lose any market share in FY twenty twenty four.

Speaker 3

In fact, we gained market share with our current customers and grew our share with the addition of new products and customers. With the positive outlook in the semi fab market, key customers forecasting growth in FY 2025 and our technology partners continuing to drive our business and the new global business model, we have many reasons to be excited about our growth strategies and the future of our business. I cannot stress enough the value of Purchasing 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 energy markets. We have developed a strong business model including legacy products and new technology partners that fit well with our engineered solutions capabilities.

Speaker 3

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 products and support more than ever. And with that, I'll turn it over to Wendy Dadell to discuss Richardson Healthcare.

Speaker 4

Thanks, Greg. Good morning, everyone. 4th quarter sales for the Healthcare division were $3,500,000 an improvement of 24.3% compared to the Q4 of last year and a $400,000 or 13.3 percent increase over the most recent Q3. CT tubes, parts and system sales were up versus the prior year's Q4. During the quarter, we continued to benefit from sales of our repaired Siemens Stratton Z tubes.

Speaker 4

On a full year basis, healthcare sales were $12,100,000 reflecting a 5.7% increase over FY2023 full year sales. Sales of both CT tubes and parts improved over the prior year by 8% and 6% respectively, while system sales were down by nearly 4%. We sold more Siemens tubes in FY 'twenty four, which were offset by lower sales of the ALTA750 inserts to China. Healthcare's gross margin in the quarter improved to 32.5% compared to 23 point 7% gross margin in the same period last fiscal year. The gross margin improvement was primarily due to a favorable product mix, including higher parts and Siemens tube sales and lower scrap charges.

Speaker 4

On a full year basis, gross margin was 30.4% versus 30.7% in FY2023. This was primarily related to a positive product mix, including Siemens tubes, offset by manufacturing under absorption. During the quarter, we made significant improvements to the Siemens repair program. The Siemens repair program includes 4 tube types, the Straton Z, MX, MXD and MXP-forty six. While the repaired Straton Z is in full production and performing well in the field, we were not able to meet demand in the quarter due to supply chain challenges.

Speaker 4

We focused on production processes, which will carry over to the MX series repairs beginning this summer. Unfortunately, we failed to meet our objective on the MX Life Tube test. However, with a critical patent expiring in June, we're now in a better place to repair the MX tubes. As a result of our supply chain challenges and limited production in the 4th quarter, we did not achieve breakeven in the quarter. While we are continuing efforts to improve sales and profitability, the company is beginning to evaluate strategic options for the healthcare business.

Speaker 4

I will now turn the call over to Jens Ruppert to discuss the results for Kansas.

Speaker 5

Thanks, Wendy, and good morning, everyone. Canvas engineers, manufacturers and sells custom displays to original equipment manufacturers across global industrial and medical markets. Canvas reported revenues of $8,700,000 in the Q4 of fiscal year 2024, a modest decrease from the $9,200,000 in the same quarter of the previous year, but a 31.8% sequential improvement from the $6,600,000 in sales during the Q3 of fiscal year 2024. The sequential improvement in sales for this quarter was driven by recovering demand within the North American market. In fiscal year 2024, sales dropped by 17.5% to $32,400,000 largely due to push out earlier in the year from our North American customers.

Speaker 5

We ended the quarter with $42,900,000 in backlog, providing a strong base of business for fiscal year 2025. A significant achievement in the 4th quarter was the improvement of our gross margin. Our gross margin as a percentage of net sales rose to 33 point 5%, up from 32.9% in the Q4 of fiscal year 2023. Our fiscal year 2024 gross margin as a percentage of sales increased to 33.8% from 31.5% in fiscal year 2023. The increase highlights our unwavering commitment to operational excellence and stringent cost control.

Speaker 5

During the quarter, our firm received orders from both repeat and first time medical OEM customers. Some of these applications include systems for polymerase chain reaction, or PCR, pulsed field ablation, patient monitoring, medical device control, microsurgery, dental displays and robotic assisted surgery. These new design wins demonstrate our dedication to delivering solutions that address the changing demands of our medical customers. Additionally, they showcase our capabilities to build and maintain long term relationships with current and prospective customers who demand high standards, ensuring our ongoing expansion within this crucial industry. In fact, today, we serve more than half of the top 10 global medical device companies.

Speaker 5

We also provide solutions for numerous commercial and industrial purposes. Our products are used in control rooms, trained cockpits, as human machine interface for large size printing machines, ticket vending machines and packaging machines. Further, we secured a sizable order for all in ones used in connection with product dispensers in retail environments. Due to significant market uncertainties, including economic challenges, regulatory changes and other factors, we recognize that many of our customers have adopted a conservative stance with respect to new product development and inventory. Nevertheless, we remain cautiously optimistic that customer demand will continue to improve in the upcoming year.

Speaker 5

We are noticing encouraging signs and expect a steady recovery if the market environment becomes more stable. What we hear directly from our customers reinforces this belief. Another key indicator is the increased number of projects our teams are working on. These new opportunities underscore growth within the markets we serve and the recognition and acceptance of our products and services. While our sales organization stays focused on new opportunities, I remain focused on executing our strategic initiatives to drive sustainable growth and create long term value for our shareholders.

Speaker 5

I will now turn the call back over to Ed.

Speaker 1

Thanks, Jens. While it was a tough year for Canvys, your strong backlog and a pipeline of new opportunities with key medical OEMs supports our confidence in a return to growth in FY 'twenty five. As a result, we believe Canvys will continue to exceptional operating performance in the future. Despite headwinds from uncertain economic conditions and higher interest rates, we're optimistic and committed to our long term growth strategies. The list of our opportunities within our Green Energy Solutions business unit continues to grow.

Speaker 1

While the projects have taken more time to develop than we initially thought, we know we are making positive impression on growing list of customers in the global wind energy market, transportation and power management. None of the opportunities we've discussed over the past several quarters have been lost, and we continue to leverage our unique market position with leading technology partners to drive interest in our engineered solutions. A key component to our growth is to cultivate opportunities within our green energy business. By leveraging our core engineering capabilities and relationships with our technology partners, we're expanding our product lines into our large, fast growing global markets. Over the past 2 years, we've announced wins on large global platforms within the wind, transportation and power management markets, and we believe each new platform supports medium to grow multi year revenue opportunities.

Speaker 1

To support our growth strategies, we believe it's critical and important to maintain strong balance sheet. Throughout fiscal 2024, we focused on improving our working capital levels and converting our inventory to cash. I'm pleased with the progress we made this year. We continue to closely manage our balance sheet to provide us with the flexibility to support our growth initiatives. We believe investing in growth produces the greatest return on investment compared to the uses of capital at this point.

Speaker 1

As our growth strategies scale and we're further solidifying our operating cash flow, we look at additional opportunities to allocate capital. While sales mix will impact gross margin on a quarter to quarter basis, we believe our compelling financial model is positioning to produce operating leverage as sales growth. We're starting to see early indications of improved demand within the semiconductor wafer fab markets, which combined with our existing growth strategies support our optimism that we will return to year over year sales growth and higher profitability in fiscal 2025. On behalf of everyone at Richardson Electronics, I look forward to updating you on the progress we're making and we'll be happy to answer your questions.

Operator

Thank you. Ladies and gentlemen, due to time constraints, we ask that you please limit yourself to one question and one follow-up. Your first question comes from Bobby Brooks with Northland Capital Markets. Your line is open.

Speaker 6

Hey, good morning guys. Thank you for taking my call. Good morning, Rob. Good morning. So on the 3rd quarter, something that you guys had talked about and you mentioned it a bit in the prepared remarks was just a healthy broadening of customers wanting the Ultra 3000.

Speaker 6

And in the Q3, GES revenues were really strong. Obviously, GES revenues stepped down sequentially. So I'm just curious to hear if that broadening trend seen in the Q3 was extended into the Q4? And could you quantify that for us at all? And then maybe just talk about if that trend continued, then what was the driver of the sequential step down in GES?

Speaker 3

Sure, Bobby. Good to hear from you again. Having fluctuations from quarter to quarter in both revenues and bookings is very, very common when you're introducing new products through NPI process and virtually a business startup. So we're seeing that that's common. But if you look at the fiscal year, what keeps us excited in those numbers, We've added a number of new products and number of new customers throughout the year.

Speaker 3

So in Q2, Q1, Q2, that became revenue in Q3. And so we had a large increase in bookings and actually year over year growth coming out of a record year. And then throughout the year, we've added over 20 new owner operators buying wind turbine pitch energy modules. In addition to that, throughout the year, we've added 4 new platforms with Suzlon, Senvion, Nordex and SSB. We also designed and developed with 2 of the largest locomotive manufacturers start modules, 1 ultra capacitor based, 1 lithium iron phosphate based and some of the large bookings you saw in Q4 were from that.

Speaker 3

So you're going to see fluctuations in both revenues and bookings. We had strong bookings in Q2, which turned into shipments in Q3. We had excellent bookings in Q4 and that's transitioning into what's looking at a very strong Q1 FY 2025 Q1. So that's kind of the premise of where the growth comes and why it fluctuates. We're adding more and more new customers that are buying this product as it becomes well known in the very niche market of wind turbine manufacturers.

Speaker 3

And then we continue to add new technology partners and new products to keep that pipeline going. But until it gets to more of a consistent revenue stream, we're going to see fluctuations quarter to quarter. But the end result is $23,200,000 in revenue, margins up, profits are up, strong backlog of nearly $50,000,000 going into Q1, 4 new pitch energy platforms with 4 new wind turbine manufacturers, which by the way with those like we are with GE, we are exclusive and adding new products to our very large EV and diesel locomotive manufacturers. Again, as I mentioned, starter modules, we also have IGBT inverter modules that we're working on, have small orders for those, both in the wind turbine market and the electric locomotive and diesel locomotive market. And then to tie one last thing on to that Bobby and we talked about that when you're here, we're now expanding that globally.

Speaker 3

So this has mainly been North America is where we launched it. But as of next week, we have beta site testing going on in Italy and France. And as you already know through the press release, we're nearing the end of the beta testing with Suzlon in India. And if you look at these manufacturers, Suzlon has 12,000 turbines worldwide, Senvion has 4,000, Nordex close to 2,000 and the SSP is about 3,500. So we haven't touched the surface as far as I'm concerned.

Speaker 3

And once we get these products introduced in a more consistent revenue stream, you're going to kind of see these upticks from a positive point of view in revenue and bookings, but also kind of updating in quarter to quarter.

Speaker 6

Got it. That's really good to hear. And then switching topics to PMT, Greg, you mentioned that the sales in the wafer fab were up 71% sequentially, but then PMT sales overall stepped down sequentially. So what was weaker within PMT that offset that 71% increase or maybe just that 71% increase in the semi wafer fab stuff was off of a very small base in the Q3?

Speaker 3

Yes. I mean, you get numbers like that of 171% because as compared to the prior year. And as you know, in the prior year, it was a record year for those products. So comparatively, year over year that they were dealing with that comparison. And the Q4 was our lowest year in terms of revenue and bookings for our semiconductor wafer fab companies and we just had a stronger as it comes to pick up their forecast in that backlog.

Speaker 3

That's why you're seeing your numbers like that, but it's a comparison, but it's quarter over quarter growth in bookings and billings.

Speaker 7

Just to clarify, yes, Q4 was stronger than Q3 in revenue for the semiconductor market. And to your point though, it's still was still considerably lower than the run rate it was in FY '23. Right.

Speaker 6

Okay. So it was that nice sequential growth was because it was off on the small base and what we're looking at Yes. Okay. All right. Thank you.

Speaker 6

I'll return to the queue.

Speaker 3

Thanks, Bobby.

Operator

And the next question comes from Anja Soderstrom with Sidoti. Your line is open.

Speaker 8

Hi, and thank you for taking my questions. So a follow-up on this wafer fab. Do you still expect the uptick in fiscal 2025? Or do you see that maybe building up slower than you previously anticipated?

Speaker 3

Yes. According to the customers and then some of the market reports, which all of you see also, the real uptick that they're suggesting will be in calendar year 2025 or our second half of our FY 'twenty five. So we're going to see growth, as Bobby mentioned, off a smaller base in Q1 and Q2, but the real uptick getting back to some normal numbers from the past will be in calendar year 2025.

Speaker 8

Okay. Thank you. And it sounds like the margin seems like that was helped a lot by product mix. And last year was a little bit pressured, I think, by the prototype in the for the locomotive prototype you shipped. Can we expect something similar to occur in the coming quarters?

Speaker 8

Or is this margin sort of sustainable from here?

Speaker 3

Yes, the margins we make are obviously stronger on products we design, manufacture and test and lower on products like technology partners where we're designing in their components into customers applications. So if we as the uptick grows in our engineered solutions capability, that margin will be maintained. And as we just talked about, we're expecting both Lam and our Green Energy Engineering Solutions to grow quarter over quarter and year over year in FY 2025.

Speaker 8

Okay. Thank you. And then in terms of inventory, you've been working that down, but it seems like you need to keep some inventory for strategic purposes. How should we think about inventory going forward? Should we do you think that should that continue to decline?

Speaker 8

Or is will it start increasing?

Speaker 3

Yes. The inventory itself, we've made some strategic purposes because funny how people forget, we were dealing with for almost a year and a half of supply chain issues where we couldn't get products for 50 to 55 weeks. And so these infrastructure rollouts, I'll call it, that's my background is in the RF base station market, But it's a very similar to the wind turbine market. We made a very strategic decision to buy product, so we could support this growth because we again, as I mentioned before, customers are increasing, new products are increasing. And that's why we're able to have pretty strong bookings and shipments in the quarter and we expect to see that in FY 2025 as the business grows.

Speaker 3

But yes, we just made a strategic decision, brought that product in and now we're seeing sales increase and so that will have a direct effect on lowering our inventory.

Speaker 7

What will impact that Anya is we still have one significant vendor that is doing last time builds for us because they're going to be exiting manufacturing. So that will offset, but the team will continue to focus on and strongly focus on inventory reduction as we go forward to help offset that other vendors product line growth. Does that make sense for you?

Speaker 8

Yes. Thank you for reminding me of that. That was all for

Speaker 7

me. Thanks, Anja.

Operator

Our next question comes from Pete Taylor with ARS Investment Partners. Your line is open.

Speaker 9

Thank you. The curse of a first initial. Congratulations, first of all, on converting inventory to cash. That was a very impressive performance in the last quarter. Also on beginning the strategic alternative exploration for the medical imaging side and just generally how you guys manage the business through what's been a pretty difficult period.

Speaker 9

If we were to see in the calendar year 2025 a return to and a peak level demand out of your semi cap equipment companies, how much would we expect to see the revenues there drop? It's kind of an inverted question in the sense that how much did revenues drop in that area in 20 year fiscal 2024 over 2023? And given that you carry, I think high 40s or even 50% kind of operating margins in that space, that would I think be a very major driver of what both free cash flow and earnings will be going forward. So what kind of numbers are we looking at being able to get back to as this industry recovers?

Speaker 3

Yes, you're exactly right. The revenue with the largest customer was down $25,000,000 in FY 2024 versus FY2023. That was very hard to make up and that's strong margin business because we do manufacture that ourselves and engineering involved. Based on again what the customers are saying, they are saying they expect that to get back to FY2023 levels in FY2025. So from there, it's just math and that has a huge impact on both revenue and profits going forward.

Speaker 3

I don't know if Bob has a breakdown on what that would mean, but that's kind of what we're looking at for calendar year FY 2025.

Speaker 7

Calendar year.

Speaker 3

Yes, calendar

Speaker 6

year for 2020.

Speaker 7

Yes, just to clarify, that's calendar year 2025.

Speaker 9

Yes. So and you said the largest customer was $25,000,000 hit. You do have other customers in the space. What do you think the semi cap equipment space as a whole acted as a drag in this last year on the revenue side?

Speaker 3

Okay. So we've done that much.

Speaker 1

But But last year was $40,000,000 and this year is down in the low, what,

Speaker 10

dollars 12,000,000,

Speaker 1

dollars 14,000,000

Speaker 8

14,000,000

Speaker 1

Yes, 14,000,000. So you can see the decline. And they're telling us that by the end of calendar 25 that it's going to be a higher growth rate than it was in 2023. So if it exceeds $40,000,000 and the margins are very strong, you can get an idea what the impact is on our company.

Speaker 9

Yes, that's hugely powerful. You're looking at it measurable on dollars per share. So looking at and looking at that, how much did the CT tube business cost us in 2024? You were able to see a nice recovery at the end of the year, but still not get back to breakeven. So what was the drag there?

Speaker 7

Yes, it was still right at that $3,000,000 just right under $3,000,000

Speaker 9

Okay. Okay. So what we're looking at is calendar year of 2025 could see both a resolution to the CT tube business, either you get back to breakeven and start making money out of it or perhaps it moves to a new home. And a significant recovery in the semi cap business where you're looking at perhaps a 20 mid-twenty $1,000,000 plus increase in revenues at high margins. So really calendar year 2025 is setting up to be a pretty exciting year, isn't it?

Speaker 1

We think so, for sure.

Speaker 7

Yes. And Rashi didn't even really factor in all of the programs that Greg mentioned on Green Energy. Go ahead, Greg.

Speaker 3

Yes. One thing, I mentioned the number of programs and new products, but let's remember also within the green energy group about $22,000,000 in that repeat. And we hit every schedule that the end customer asked us, the products that were great. However, they're still not delivering the actual full electric locomotive until September to their end customer and then that customer will test it throughout the next 6 months. And so there's a chance that in FY twenty twenty six or the second half of calendar year FY2025, the electric locomotive business that we experienced in that record year in FY2023 will also start coming back.

Speaker 3

And that's big numbers too. So yes, it's there's a lot of things juggling a lot of things and a lot of things have to do with things kind of unfortunately outside of our control. But as a company, we've kept the pedal to the metal and got ourselves in a position with new products, new technology partners and have not lost any market share on these products. So when it does come back, we'll be able to support it all.

Speaker 9

And one quick question. There's a lot of negative press on offshore wind, but the industry is primarily onshore, is it not?

Speaker 3

Yes. And all of our businesses onshore and yes, we talk to them, the GEs, the Siemens of the world and yes, that market or that application is not getting as many legs as they thought. So in the meantime, we have a lot of market share to grab, a lot of SAM to grab with all the stuff that we've been doing over the last couple of years.

Speaker 9

Well, it does look like we're coming out of the jungle and hopefully things '25 calendar 'twenty five, particularly the second half of calendar 'twenty five looks like

Speaker 10

it could be a real lighted up year. Thank you very much.

Speaker 8

Thank you, John.

Speaker 3

Yes, it's coming together that way.

Operator

Our next question comes from Chip Ruwey with Ruwey Asset Management. Your line is open.

Speaker 11

Good morning. Good morning. Thanks for taking my call. Hey, guys. The prior question really set up my question really well because I think the cyclical story in PMT is fairly easy to understand.

Speaker 11

And let's hope it comes through if it's a quarterly kind of in my mind who cares. But maybe Greg on green energy, it seems to me all of your growth there potentially is into existing aftermarket, meaning you're not selling on an OEM basis. And if you think about the GE model, the aftermarket model, whether it's aerospace or healthcare, it's compelling. And I think one of the things to me that's compelling about it is even if it's white space growth for you, it's growth into existing aftermarkets for both wind and rail. So I'm trying to get a better understanding of how quickly those sales could grow.

Speaker 11

The numbers on wind turbines out there are huge and existing locomotives where you could replace the lead acid batteries are huge. So maybe walk through what you think the eventual share of replacement could be? Do you think all of the lead assets will be replaced or some? And maybe why would operator not replace with one of your solutions if it seems to be much better on an operating basis? Is there something else that makes the trade off not work?

Speaker 11

Again, to me, it seems it's a slam dunk. And if it comes through, it could come through fast. But maybe just talk through what you see 25%, 26% on where these sales for the rail and the wind could really come in?

Speaker 3

Yes. So the numbers, you hit it on the head. If you look at the TAM, it's obviously huge with the number of wind turbines globally. However, we started this by in my many years of doing this, I always make look at the SAM that that's where you can be successful. You have a product that either has a technological or a cost advantage.

Speaker 3

And we were able to take over that replacement business of lead acid batteries in existing wind turbines. However, at each time we still look at getting into the OEM side of it. And I should add that is our first OEM business, meaning it's designed into new wind turbines will be with Suzelon. We've worked out with them. We've developed the software.

Speaker 3

They've got in India specifically, they've gotten government approval or financing to produce 1,000 turbines a year, which will have our product in it. So right now, yes, we look at the aftermarket, but there's another play that's come up that we're seeing more and more companies like Avestis or Siemens who many of these companies buy wind turbine farms and they're servicing GE, Soosan, Nordex and SSB wind turbines. And it's the whole repower program. And so what they do is kind of like take your old car when you're in college and just replace everything and get it running. They're making our part standard with that.

Speaker 3

So when they replace the blades and the UPS and the inverter, they're also at that time replacing our product. So what that told me was is that that increased the opportunity in terms of the number of wind turbines that will be either replaced through the aftermarket and then you add on this repowering program, which will include our product. So it's been hard to get what percent of the global wind turbine market they'll do this. They're all telling us that over time they want to replace them all because of the lifetime of these ultra capacitor batteries will last for the duration of the turbine itself. So a wind turbine is not repowered for about 15 to 20 years.

Speaker 3

So that's the batteries fail every 18 months. Our product lasts 10 to 15 years. But the real thing that we noticed this year specifically was and we say push outs and delays, it was really capital expenditures. So wind turbines, they have a lot of issues with different parts other than the lead acid batteries. So I don't think they have to borrow money to put in our product, but they definitely have to borrow money to do repowers and to replace and update and fix other products within that wind turbine.

Speaker 3

And at 8 plus percent to borrow money, they've had to be very selective in what they needed to do. So there's some things they needed to fix to keep them going. Ours is a fix from a profit point of view, meaning the cost of climbing a turbine, putting in a lead acid battery replacement every 18 months with a highly paid technician as opposed to going up one time and replacing with ours for pretty much the life of the turbine, that has been kind of put on hold. But again, as we keep saying, we haven't lost any market share. While we're waiting, we're introducing new platforms.

Speaker 3

But that's kind of the progression of what we're seeing as we learn about this and I'll call it wind turbine infrastructure rollout to support energy needs of a growing world. Does that answer your question or was it?

Speaker 11

Very helpful. And given what the power industry is saying about the need for power, probably compelling. Can you give us the same kind of overview on the electric battery and the starter modules for trains?

Speaker 3

Yes. So it's the same scenario where all these companies are trying by 2,030 to reach a certain number of having their product be less emissions. And so part of that is these all these products like wind turbines and also electric trains. We talked a little bit I think in the past maybe in one of the investor presentations of starter modules for refrigeration trucks. But anyway, the starter modules replace lead acid batteries in the electric and diesel locomotive.

Speaker 3

And those products were designed specifically with 2 of the largest diesel train manufacturers in North America and kind of similar to how we started out in the Altra 3,000 if you will from design to orders was about 6 months and we have now between the 2 of them over $4,000,000 in backlog, which will be shipping over FY 2025. So that product was based on the UltraGen product, which can be used with people like Kohler and Generac and we have a lot of things going on. But specific to the starter modules, that has been a great success. And as I mentioned, I think earlier this morning, we have a contract for 1,000 trains for 1 of the largest train manufacturers in North America. So it's kind of taking the same technology and we have a very, very knowledgeable group on ultracapacitor technology and battery technology.

Speaker 3

And then we have a very strong design team that understands power management in all these applications. And all these new applications, all these current existing products have to change their power source or power management to meet either green energy needs or for them to introduce new products. And we're just in a great place in terms of technology partners. The components, for example, the starter modules that we're making have 5 different technology partners designed into them. So it's such a unique model in this industry where we have better pricing and relationships and know what the next technology is, kind of what they have in terms of new technology coming out before it's even introduced that we can design in.

Speaker 3

We have those agreements. Then we have an engineering team that can design, test and manufacture these, I call them niche products, but at these numbers, it's not so much niche to us. And then the ability, as I talked about, to bring these technologies globally to customers throughout the world, it's just a great model. And we're doing everything we can to continue that pipeline to support all three of those cells.

Speaker 11

Thank you.

Operator

And our last question comes from Andrew Rym with Odinson Partners. Your line is open.

Speaker 7

Good morning, Andrew.

Speaker 10

Good morning, guys. Hi. Wendy, I'm sorry. Can you maybe give some color on when exactly does the patent expire and you get kind of blue sky for your portfolio of tubes?

Speaker 7

So the patents that you're questioning Andrew already expired in June and that was a patent on the window. So what that does is it allows us to repair more tubes in the MX series. So I think that's what you're referring to.

Speaker 10

Yes. So then when we think about the breakeven, so you said you lost $3,000,000 on the year. How should we think about I mean, what's kind of the gono go decision? How much time do you give yourself? Because it sounds like basically it just started or is the window just kind of opened.

Speaker 10

How long do you allow how much time do you need to kind of determine this is worth continuing to own or not?

Speaker 7

Well, I think we've made it clear that we're exploring options while we work on the profitability element. So there is no defined timeframe. I will tell you that during in our planning session, we definitely show a significant improvement in the operating performance of the healthcare group as we move forward with the Siemens repaired tube. So Andrew, that's I think all we're prepared to say right now.

Speaker 10

Can you say what the annualized loss was just in the Q4?

Speaker 7

In the Q4, it was about 600 or 700. But what I'll also well, I can't tell you anything else. That's it, yes.

Speaker 10

And then Greg, can you just clarify The backlog in PMT specifically, so you gave the backlog in GTS, but what was it in PMT?

Speaker 3

The backlog number real quick, Bob, for PMT.

Speaker 2

Yes.

Speaker 3

And the backlog is made up mainly of Engineering Solutions, so it would be LAM and then the balance of that, the largest backlog of it is power and microwave components used for mainly base stations, SATCOM and one of the biggest growing parts of the RF and wireless group is defense and radar applications. Total $102,000,000 total. So about $54,000,000 for PMT. Yes. Does that answer your question?

Speaker 10

Yes. I guess it doesn't quite add up. If it was 54 and you had 42 roughly in GES and you're saying the total was 102?

Speaker 2

Yes. Then that would be 60.

Speaker 3

Yes. Okay. So what was it for being

Speaker 2

$42,300,000 for GEF, so $60,000,000

Speaker 3

Okay. Sorry, PMT was $60,000,000 dollars in backlog going into FY 2025.

Speaker 10

Okay. Thank you. Yes.

Speaker 7

Thanks, Andrew.

Speaker 8

I'll talk to

Speaker 7

you soon, Andrew.

Operator

I would now like to turn the call back over to Ed for closing remarks.

Speaker 1

Thanks, Michelle. Well, thanks to all of you again for joining us today and we appreciate your investment and interest in Richardson Electronics. We look forward to our ongoing discussions and sharing our fiscal 2025 Q1 with you in October. Please don't hesitate to call us anytime. We're happy to take your calls and thank you very much.

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Earnings Conference Call
Richardson Electronics Q4 2024
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