Ed Richardson - Chairman of the Board, President, Chief Executive Officer Robert Ben - Chief Financial Officer, Executive Vice President, Corporate Secretary Greg Peloquin - Executive Vice President of Power and Microwave Technologies Pat Fitzgerald - Executive Vice President, General Manager of Richardson Healthcare Jens Ruppert - Executive Vice President, General Manager of Canvys.

Mark Zinski - 21st Century Equity Research Eric Landry - BML Capital.

Good day ladies and gentlemen and welcome to the FY2017 first quarter earnings call for Richardson Electronics. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ed Richardson, CEO of Richardson Electronics. Please proceed, sir..

Good morning and welcome to Richardson Electronics’ conference call for the first quarter of fiscal year 2017.

Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & Microwave Technologies Group; Pat Fitzgerald, General Manager of Richardson Healthcare; and Jens Ruppert, General Manager of Canvys.

As a reminder, this call is being recorded and will be available for audio playback. I would like to remind you that we will be making forward-looking statements and they are based on current expectations and involve risks and uncertainties. Therefore, our actual results could differ materially.

Please refer to our press release and SEC filings for an explanation of our risk factors. After a very strong fourth quarter, the first quarter of fiscal year 2017 was certainly disappointing, although not completely unexpected. The summer months are always more challenging due to vacations and factory closures particularly in Europe.

Sales were down over prior year. This decline was caused by lower demand from several of our OEM customers in both PMT and Canvys. On a positive note, our healthcare and power management businesses both grew year-over-year, reflecting the investments we are making in these business units.

Gross margin improved in spite of additional expenses which we incurred in the closure of our manufacturing facility in Brive, France. All three of our business units showed improvement. I will now turn the call over to Bob Ben to present our first quarter of fiscal year 2017 financial performance.

After Bob reviews the numbers, Pat, Greg and Jens will share more details on our business unit performance..

Thank you Ed and good morning everyone. I will review our financial results for our first quarter of fiscal year 2017, followed by a review of our cash position. Net sales for the first quarter of fiscal year 2017 were $33.4 million compared to the prior year's first quarter of $37.1 million.

Net sales decreased $1.8 million for PMT and $2.1 million for Canvys, partially offset by $0.2 million increase for Richardson Healthcare. Gross margin increased to 30.7% from 30.4% in last year's first quarter, reflecting a higher Canvys margin as a result of an improved mix and increased sales of significantly higher margin IMES products.

Operating expenses were $12.3 million for the quarter which was flat to last year's first quarter. Decreases of $0.4 million in corporate support functions and $0.1 million in Canvys were offset by an increase of $0.5 million in Richardson Healthcare to support its growth.

As a result, our operating loss for the first quarter of fiscal 2017 was $2.1 million compared to a $1.0 million operating loss in the first quarter of fiscal 2016. Other expense for the first quarter of fiscal 2017, including foreign exchange, was $0.3 million compared to other expense of less than $0.1 million in the prior year's first quarter.

Interest income was $0.2 million lower than the first quarter of last year. Loss before income taxes was $2.4 million as compared to $1.0 million in the first quarter of fiscal 2016.

We had an income tax provision for the quarter of 0.5 million, which primarily reflected a provision for foreign income taxes, an estimate for additional tax due from an audit in France and no U.S. tax due to the valuation allowance recorded against the net operating loss.

Overall, we had net loss of $2.9 million for the first quarter of fiscal 2017 as compared to a net loss of $1.4 million in the first quarter of fiscal 2016. Turning to a review of our cash position. Cash and investments as of August 27, 2016 were $66.3 million, which was a decrease of $4.2 million from May 28, 2016.

Cash used in operating activities for the first quarter of fiscal 2017 was $1.7 million compared to $6.5 million in the first quarter of fiscal year 2016. I would also like to note that the company was successful in repatriating $11.2 million in cash from China to the U.S. in the first quarter of fiscal year 2017, which brought our U.S.

cash balance to $24.6 million.

We had capital expenditures of $2.1 million for the first quarter of fiscal year 2017, compared to $1.0 million in the first quarter of fiscal year 2016, approximately $1.5 million relates to our investments in our healthcare growth strategy, approximately $0.3 million relates to our IT platform and another $0.3 million for other projects.

Lastly, during the first quarter $0.8 million was paid out in dividends. Now I will turn the call over to Greg who will discuss the results and plans for our Power & Microwave Technologies Group.

Greg?.

Thanks Bob. Good morning everyone. The Power & Microwave Technologies Group or PMT includes our legacy EDG business plus our new technology business unit which was started in June of 2015. Our strategy is simply to protect our strength, our EDG business customers and suppliers, and expand our business by launching hard our new technologies.

In the first quarter we did just that. Although topline sales were disappointing after our strong Q4 performance, our bookings increased and our margins improved across several of our product lines including our new technology business unit. In the first quarter, PMT sales were down 7% overall versus prior year.

Sales were $25.4 million versus $27.2 million in Q1 FY2016. Gross margin was down slightly from 29.9% last year to 29.4% this year due primarily to additional costs associated with the closure of our plant in France.

The decline in first quarter sales was driven by delay in orders from several major OEMs, strong competition in the CO2 laser and marine markets, and delayed supplier deliveries. This decline in sales was partially offset by continued quarter-over-quarter and year-over-year sales growth in our new technologies business unit.

On a positive note, we are actually gaining market share in our legacy tube business in signing customers for power grid tube solutions. However, we will continue to face declining demand in tubes for which we cannot completely offset by market share gains or price increases.

While the tube business is a critical and very successful business for the company, it is essential that we continue to invest and plan for growth in our new technologies group.

In the first quarter, our growth in new technologies fell short of offsetting the decline in tubes, but we anticipate this to change in the very near future as many of our customers validate the new technologies and orders are released. During the quarter, PMT's overall book-to-bill was a positive 1.01.

Our new technology product lines had a book-to-bill of 1.73, indicating that quarter-over-quarter growth in sales will continue. As we review our booking trends in depth, we can see that our growth initiatives focusing on new products and enhancing capabilities are helping us design into programs with both current and new customers.

This is supported by the growth in sales and backlog for our laser consumables, our new RF and power technologies and revived our capacitor business. Our manufacturing engineered solutions product line which includes magnetrons, microwave generators and customized power solution are showing strong bookings compared to prior year.

Our avionics and even our broadcast product lines are also showing strong growth year-over-year and bookings.

Even though we are experiencing headwinds in each quarter, such as decline in the value of the Pound and continued economic challenges in key countries throughout the world, we are seeing other positive sign that we believe will contribute to year-over-year topline growth in PMT.

Latin America, for example, is showing recovery with sales of 11.3% over prior year. Our Japan business is growing both in revenue and backlogs relating to new supplier agreements and market share gains. We are adjusting our products' cost model and strategies to combat the headwinds we have experienced so far this calendar year.

There is no question we have unparalleled capability and global go-to-market strategy that is unique to this industry. We are the world leader in electron devices supporting legacy equipment. We have design, engineering and manufacturing capabilities to support customer systems and subsystem requirements.

With the new technologies group, we have fast-growing new technology partners to support customers' next generation equipment in each RF and power and microwave markets. We have also recently taken actions to maximize the efficiency of our sales force and marketing organization.

The combination of all these factors in place has us in excellent position to continue to generate improved profitability with topline growth in the future. And with that, I will turn over to Pat Fitzgerald of Richardson Healthcare..

Thank you Greg and good morning everyone. Healthcare sales in the first quarter of fiscal 2017 were $3.4 million, up 5.5% over prior year sales of $3.2 million. The sales increase was driven primarily by growth in IMES products, offset partly by a decline in sales in our PACS display products.

Gross margin as a percentage of net sales decreased to 42.6% during the first quarter of fiscal 2017 as compared to 44.3% in the same period last year due to product mix. Healthcare providers today are under intense pressure to reduce their cost.

They no longer have the luxury of simply signing up for expensive service contracts from the OEM and are increasingly exploring options that include time and material service, third-party service and asset management providers and in-house service.

As a result, there is a growing demand for an alternative source to the OEMs for replacement parts and service on a global basis. We estimate the global market for diagnostic imaging replacement parts and service to be between $7 billion and $8 billion annually.

Our strategy is to play a significant role in the development and sale of diagnostic imaging replacement parts around the world. The IMES business which we acquired last year provided us with a good foundation in this market and an excellent model for expansion.

The investments we are making locally in repair and development of CT tubes and other high-value components are the key to the long-term success of this strategy. We are also complementing our own portfolio in this space with partnerships for new products like MRI coldheads and MRI coil repair and replacement.

IMES is focused on providing CT and MRI replacement parts, training and technical support to end-users who want to maintain their own equipment as well as the third-party service organizations. The expansion of the IMES business from a geographic and product line point of view began shortly after acquisition and continues to be a major focus.

We are beginning to get traction with key customers in Europe following the establishment of our European parts and training center in Amsterdam in March. Our customers are excited to have dedicated parts, training and technical support available on their continent.

Europe is just developing as the market for OEM service alternatives compared to the U.S. market and so we believe our presence in Europe today puts us in an excellent position as this market continues to develop and mature.

IMES traditionally focused on one major brand of CT and MRI equipment and we have been expanding the portfolio to include parts for other major brands including Philips and Siemens. Customer awareness for these new product lines is increasing and sales of these products increased again in the first quarter.

Out key focus now is securing additional inventory so that we can increase our fill rates with these new products. We expanded the IMES portfolio in the first quarter to include MRI coldheads, compressors and other cryogenic management solutions through a partnership with a major provider in the States.

We will represent this partner exclusively to hospitals and integrated delivery networks or IDMs in the United States and non-exclusively elsewhere.

These solutions complement our early expansion into MRI coil repair nicely and together with other system parts, including power grid tubes, allow us to offer customers a complete range of support for MRI system maintenance.

The company continues to make significant investments in its CT and x-ray tube development and manufacturing capabilities including capital equipment and experienced engineering resources. We are making excellent progress on our factory buildout and continue to work on tube repairs in parallel with new tube development.

Having a reliable supply of replacement CT tubes will allow us to significantly increase other parts sales as well as more and more hospitals will be able to move away from expensive OEM service contracts. It will also help reduce our reliance on system purchases which in turn will improve cash flow.

Sales of our image system brand displays for picture archiving and communication systems or PACS and related accessories and equipment for operating rooms were down compared to the same period last year.

More and more hospitals are choosing to replace diagnostic displays on an as-needed basis versus a disciplined total refresh approach due to the cost constraints. Unfortunately, this leaves some hospitals exposed to compliance issues as diagnostic displays fall out of DICOM conformance.

A lot of our marketing efforts in this area are focused on developing awareness of the issue as well as pending regulations in some states and our solution for helping customers with full onsite QC/QA checks as well as remote daily calibration and conformance checks using our proprietary calibration software known as CFS.

We have recently launched a new line of displays, including an exclusive five megapixel color display which extends our product offering and further delineates us from competitors.

With IMES parts, CT and x-ray tubes, PACS and operating room displays, wireless DR upgrade solutions as well as power grid tubes, MRI coils and cryogenic solutions for MRI systems, Richardson Healthcare has established excellent relationships with hospitals and independent service organizations on a global basis.

Over the past year, we have significantly strengthened our value proposition for healthcare providers looking to lower their cost and increase efficiency.

We continue to explore additional acquisitions in this market and are focusing on companies with models that can be expanded internationally and that provides products and services for underserved markets. We are also evaluating additional partnerships and organic investment in product line expansion.

I will now turn the call over to Jens Ruppert to discuss Canvys' first quarter results..

Thanks Pat and good morning everyone. Canvys, which includes engineering, manufacture and sale of custom displays to original equipment manufacturers in industrial and medical markets, had sales of $4.6 million during the first quarter of fiscal 2017, down from $6.7 million to the same period last year.

Sales declined due to lower demand from our customers. This decrease was a result of customers being overstocked with slowdown in demand for their systems. Gross margin increased as a percentage of sales to 29.2% from 25.6% in the same period last year. It was also an improvement over the fourth quarter margin of 27.8%.

The division did a good job in controlling costs and we continue to work closely with our agent partners to deliver the highest quality solutions at competitive prices for our customers. We continued researching and testing new technologies such as HDBaseT as I mentioned last quarter.

HDBaseT, a connectivity standard for transmission of uncompressed ultrahigh definition video, audio, power, Ethernet, USB and control signals over a common category Cat5e cable. This technology could be the game changer. During the quarter, we won several new programs from existing and new customers in the medical space.

Applications included bedside monitors, intrafraction motion and LCD displays used during radiotherapy, customized touch screen to control medical devices and OR room equipment and displays displays for telemedicine.

We also won programs and projects in non-medical areas, transportation, surface inspection, teleprompting and control rooms in the public transportation sector. It is a key area of our customers' projects and services. I will continue to reach and adjust our business strategies with the goal of improving the operating performance of the division.

In the second quarter, we made significant capital reductions to improve efficiency. Maximizing cash flow and managing inventory closely is an ongoing priority. I will now turn the call back over to Pat..

Thanks Jens. So as you have just heard, we are making progress with our growth strategies and momentum continues to build. Richardson Healthcare has made tremendous strides in the repair and manufacture of CT tubes. We remain confident these efforts will continue to contribute to our growth in FY 2017.

Our power management group through the addition of niche technologies and partnering with select suppliers is already showing substantial year-over-year revenue gains. We remain committed to returning the company to profitability as soon as possible.

Last quarter, I mentioned that Bob Ben and his team will lead the company through a series of initiatives to permanently take cost out of the organization and to improve cash flow. While our belief in the expansion of PMT and Richardson Healthcare remains strong, our progress has unfortunately been much slower than planned.

Give our sales performance in the first quarter of this fiscal year, it will be very difficult to achieve our stated objectives while returning RELL to profitability by the fourth quarter. We therefore find it necessary to carefully review our entire organization.

At the end of September, we implemented a reduction in the workforce which reduced our planned FY 2017 salary and benefits expense by 10%. The executive management team members agreed to substantially reduce their compensation in FY 2017. This will save the company nearly $1 million this year.

Every SBU and department then reviewed its resources and workflow and made the tough decision to eliminate 30 positions which will reduce our SG&A by an additional $3 million on an annualized basis. There were many good long-term employees who we have had to terminate and it saddens us to see them go.

We continue to look for savings in other areas of the company. We are renegotiating vendor terms, implementing ways to improve inventory turns, reviewing our travel and entertainment policies and challenging any other expenses where we have an opportunity to reduce costs.

These actions along with other cuts we have made already this year including decreasing salaries and changing our incentive structure will help us conserve cash and ensure we have the resources available to continue investing in our growth strategy. We are confident that we will return the company to growth and profitability in the near future.

At this point, we will be happy to answer a few questions.

May we open up the line for questions?.

[Operator Instructions]. Your first question comes from the line of Mark Zinski. Please proceed..

Good morning everyone..

Good morning Mark..

Ed, I just thought I would start off by kind of diving into topline. First of all, how are you thinking about your topline strategy these days within the context of investing in organic growth versus acquisitions? I know that the investments in the organic growth has probably been -- the results have been slower than expected.

So I am wondering if you are leaning more towards or revisiting acquisitions, for instance?.

Well, we continue to look at acquisitions. I can't tell you that we have seen anything currently that we are willing to pay the price for. I have a reputation of not paying high multiples and we are very interested in the healthcare space, but everything we look at is at multiples we don't know how anybody gets a return on them.

So we are still very pleased with the internal growth strategy, particularly with healthcare and the power management portion of PMT.

Admittedly, it's come along slower than we thought it would, but it is coming along well, and we are really excited about both what the power management group can do, as Greg told you, the book-to-bill is really high right now, so that shows that sales are going to increase here shortly.

And we are just right on the edge of being able to repair CT tubes, which is a major accomplishment and we hope to be able to start delivering new CT tubes next year. So it's coming and we are excited about this strategy. It's just slower than we expected, and because of that we decided to step in and cut costs out.

I can tell you, it's going to be difficult to run this organization with 30 less people, but we have done this before and it's a hard thing to do. But we have done it and I think that everyone understood it needed to be done. And so now we will move forward..

Okay.

And could you comment on how September went for the company at all?.

Yes. We saw improvements. The summer is always slow. What happens in Europe -- and a large portion of our business is in Europe, especially in the power grid, the EDG space. And Southern Europe just about closes up in August, and that really has an impact and it's not unusual. It happens every year.

September picked up and we are seeing the first part of October pick up again..

Okay.

Are you seeing any systemic weakness in Europe that is concerning?.

Well, I think certainly Brexit and what's happened in the U.K. has had a major impact. A good portion of Canvys' business is done in the U.K., and we also have one or two competitors out of the U.K.

with $1 -- , I don't know where it is today, $1.27 [ph], $1.28 [ph] to pound, they are heck of a lot more competitive than they were when it was $1.50 or $1.60..

Okay. And then I guess lastly this is a question for Greg on PMT.

The new technologies segment, are you breaking that out at all?.

No, we’ll verbalize. Internally, we have created two product lines for the new technologies, one for components and one for the engineered solutions part of it, which is still also a major part of that growth. So it's broken out internally, but we keep it as one report within PMT..

Is that material then? The size of the new technologies line item?.

Well, that -- go ahead, Bob..

This is Bob Ben, Mark. Not at this time. It's included in the PMT segment in our financial reporting..

Okay.

And then so Greg again, could you just break down what comprised the year-over-year decline in growth primarily for PMT?.

Yes. The largest portion of it was missed deliveries by some large suppliers that didn't get the product in time. We had the backlog available. And then the majority of the rest of it was really some pushouts by some large OEMs, very large OEMs.

And so our point was that our booking to bill was over one, so we are not losing any market share and that is so important in our strategy of protecting our strength, which right now is our EDG business. But the majority of it was not cancellations or market downturn.

I mean, we mentioned that Latin America being up was a real plus but it was missed deliveries by suppliers and then a handful of large OEMs pushing it out into the end of Q2..

Okay.

So those missed deliveries might give you a little sequential bump this next quarter?.

Yes. As Ed mentioned, some of that did come in, in September. So September, it started off strong and we continue to monitor it. But we have to see how the quarter ends and if that issue happens again, well, it might be a wash. But yes, we should see an uptick and we have seen that in September and the beginning of October, as Ed mentioned..

Okay. Great. That's it for me. Thank you..

Thanks Mark..

Thank you for your question. [Operator Instructions]. Your next question comes from the line of Mr. Eric Landry. Please proceed..

Good morning..

Good morning. So you said that you were disappointed and Greg just outlined that you missed some deliveries and there were some pushouts. I think I have heard more than once that these new suppliers have missed deliveries.

Is that correct, Greg? This is not the first quarter that's happened, right?.

No, the missed deliveries were not from the new technology suppliers we signed over the past 12 months, Eric, that we talked about. It was on the EDG side..

Okay.

The reason I asked is because, was the plan for revenue to be down in the quarter overall companywide?.

Yes. It normally is down in the first quarter just because of the summer quarter and our best quarter is usually the fourth quarter which you can see the comparison this year..

But year-over-year, summer is always summer.

So I mean, was the plan to be flat or was the plan to be down?.

The plan was to be about flat, and the disappointment came from a couple of large OEMs that pushed out orders which we hope to see in the second and third quarter. And then the other portion of it, which Greg mentioned, was some of the suppliers didn't deliver their product on time..

Okay.

So it sounds like the majority of the disappointment was in PMT? Canvys was planned to be down, the 30% it was down?.

Not really. We saw some headwinds, as Greg calls it, in Canvys as well where big OEMs were just pushing out business..

Okay. I have heard that before too in Canvys.

Is there some sort of a run rate long term that Canvys, that we can, I guess, count on? Is this a sub-$20 million business in the long term? Or is it going to trend towards zero as people choose these off-the-shelf solutions?.

No. We feel right now we are on the bottom. And my dad used to tell me, you can't fall off the floor. So we go up from here..

What makes you think that, Ed?.

We are really impressed with Jens. He has only been onboard about a year and he has an excellent track record of improving business. He has some ideas on how to change the strategy and we are really confident he can do that..

Okay..

Can I add something here?.

Sure..

So this is Jens. Hello. I just wanted to add that of course, the Canvys business is really a project-based business, right? So when we start a project with major OEMs in the medical space or other spaces, it takes about two to three years to come to fruition, right? So the final project is large. It's really big.

The team is working very, very hard on the project. So we have a nice pipeline coming up. We have projected to grow this year. We are disappointed by some OEMs. They hold on or delay some projects for FDA approval issues and stuff like that on their side. We deliver component to their systems.

So we are kind of in the mercy of when they ship the complete systems and how they do the market launch on their side. However, we signed agreements. We have POs. So we really hope that everything comes to fruition. And so the business will grow..

You say you have POs in hand?.

Yes. We have POs in hand and we have model promises, of course, but we have POs on hand, of course, yes. So we feel pretty good. We have large OEMs that signed up with us. So these are non-medical..

These are new clients?.

Yes. We have new clients too, every quarter..

More so than offset the clients that leave?.

I would say so, yes. And I can say in the last year that I am onboard, we haven't lost one customer in this area, but we won customers..

I am sorry. I didn't hear you.

You have won what?.

I want to say that we haven't lost any customer the last year in the Canvys part of the business and we actually have won several new projects with new customers that will come to fruition later unfortunately but will come..

Okay. I got you. Thank you Jens..

Yes. You are welcome..

Ed, so am I accurate in thinking that profitability in fourth quarter is still the plan inside the building there?.

That is correct. That's why we took the action that we did to reduce the workforce and to cut out all of these costs. And within that plan, with what we have taken out we should be profitable in the fourth quarter..

Okay. So you used to talk about $180 million revenue line to accomplish that. I assume that's not the case any longer.

Can you sort of go into a little more detail as to what that plan entails for the various segments as far as revenue lines or revenue?.

Well, it's pretty obvious that at the SG&A level we were at that if we were profitable at $175 million or $180 million when we take out $3 million or $4 million, that number comes down substantially. It's almost linear..

Okay.

And we were talking of revenue this year somewhere in the low $150 million?.

Yes. That's for sure..

Okay.

Bob, CapEx at $2 million, is this the sort of quarterly run rate we can expect all year?.

No. I would say you can expect that in the second quarter and then it will start to taper off in the third and the fourth quarter a little bit..

Okay..

So I said in my comments, we did $1.5 million of that $2.1 million in the first quarter was for the healthcare equipment and we will see more of that in the second quarter. But again, it will taper off after that in the third and the fourth..

So then we will get back to a lower terminal run rate for CapEx? Is this the compass right now?.

I think that's a fair statement as long as everything is purchased in the time line that we think it will be. Sometimes there's delays for various reasons. So that's our thinking at this time..

Okay. Great.

Greg, I just want to make clear, the booking for overall PMT in the quarter was 1.01?.

Yes..

So that implies that bookings were down? It doesn't mean it may come -- what's that?.

Book-to-bill is over 1..

Right. But revenue was down, what, 7%. bookings were down slightly too..

Backlog would have been down slightly, right, yes..

Okay. All right. Last thing.

Ed, it seems like you are still fairly confident that in due time this will be a bigger, more profitable company, correct?.

Absolutely..

Okay. So your tangible book value is at 10. Your fire sale liquidation value is somewhere a little bit south of nine.

I am not sure why the Board wants to pay a dividend when it's much more efficient to cancel the dividend and put in place a policy that says, hey, if people are not going to give this business any credit, if we have already blown all of our credibility which is pretty obvious by the stock price that the credibility is low, why not cancel the dividend and say, we are just going to put that $3 million towards buying back stock as long as it stays below book value? Has there been any talk about that or any considerations?.

No. Not lately. I can tell you, we have some history with it. Back in the 2008 time frame, we cut the dividend and the stock dropped $3 overnight..

Okay. That would give you an opportunity to buy more.

I mean, it would be painful, but?.

That is true..

I am not sure the company has ever been in a situation where your future, at least self-described future, is so bright, yet the sort of perception of your future by the market is so dim. Seems to me to be an ideal opportunity to switch your capital allocation strategy to a little bit more efficient strategy. Just my thoughts..

We understand it. And at this juncture, we are pretty excited about the strategy and we are just going to put our heads down and make it happen..

All right. Thank you..

Thanks..

Ladies and gentlemen, thank you for your questions. At this point in time, we would turn the call back over to Mr. Ed Richardson for closing statements. Thank you again for your questions..

Thank you again for joining us and for your ongoing support of Richardson Electronics. We look forward to discussing our fiscal 2017 second quarter results with you in January. Thanks very much..

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and everyone, have a great day..