Ladies and gentlemen, thank you for standing by and welcome to the Richardson Electronics Earnings Call for the Second Quarter of Fiscal Year 2021. I would now like to hand the conference over to your speaker today, Edward Richardson, CEO. Thank you. Please go ahead, sir..

Good morning and welcome to Richardson Electronics conference call for the second quarter of fiscal year 2021.

Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power & Microwave Technologies Group; and Jens Ruppert, General Manager of Canvys. We are all calling in from remote locations.

As a reminder, this call is being recorded and will be available for audio playback..

Thank you, Ed, and good morning. I will review our financial results for our second quarter and first six months of fiscal year 2021, followed by a review of our cash position.

Net sales for the second quarter of fiscal 2021 increased to $42.4 million or 7%, compared to net sales of $39.6 million in the prior year second quarter, primarily due to higher net sales for PMT and Richardson Healthcare, partially offset by lower net sales for Canvys.

PMT sales increased by 11.2% from last year's second quarter, as a result of higher sales of Semiconductor Wafer Fab equipment specialty products, as well as power conversion and RF and microwave components.

Power grid tube sales continued to be negatively impacted by the pandemic, however, sales of certain product lines increased from the second quarter of fiscal 2020..

Thank you, Bob, and good morning everyone. PMT sales in the second quarter of fiscal year 2021 were $32.9 million versus $29.6 million in Q2 FY'20. Our gross margin increased in the quarter to 34.2% versus 31.6% in the prior year. Gross margin improved in both EDG and PMG through new designs in engineered solutions.

In terms of revenue, our engineered solutions product supporting the Semiconductor Wafer Fab equipment market, had a extremely strong quarter. We also continue to see strong growth in our Power & Microwave Group.

This is led by a growing line of technology partners supporting 5G infrastructure, as well as alternative energy power management and applications. COVID-19 continue to hurt our MRO business however, we did see quarter-over-quarter growth in our legacy tube business.

We saw an extremely positive booking trend in both EDG or Electron Device Group and PMG or Power & Microwave Group. Our book-to-bill in the quarter was 1.24. The increase in EDG was driven by our Semiconductor Wafer Fab customers and our legacy tube business coming back.

The increase in PMG bookings is a combination of our new technology partners' products, a global demand creation model, numerous design wins, high growth markets and a very unique global business model. Even with the strong quarter results, I believe COVID-19 did have a slowdown effect on our business.

I continue to use the word slowdown, because we have proven again in Q2, the demand for our products and services, did not go away with the pandemic. In fact, we're very excited about the booking trends again this quarter.

This growth in Q2 sales and bookings was amplified as we continue to look extensively, as how to do things differently to achieve success, now and in the future. We developed several unique strategies to support our global customers' designs and products, while working with the restrictions on travel and face-to-face meetings.

These strategies included adding technology partners, where we have technology gaps in our current key markets. This continued in Q2 with addition of Quantum Microwave and new products from these same key technology partners which will be key to our customers working in 5G and Microwave Communication products.

We also increased communication to customer and supplier focus webinars and major web upgrades. Richardson's global go-to-market strategy has allowed us to grow multiple business opportunities during the pandemic, through creative processes and communication procedures.

We are committed, not only to bounce back, but to bounce forward coming out of this pandemic. The Q2 results showed excellent progress in this strategy..

Thanks Greg and good morning everyone. Second quarter was much stronger for the Healthcare division, over the summer hospitals began to reopen for elective procedures and equipment maintenance. This trend continued throughout the fall. We reported last quarter that we sold more ALTA750D Tubes, than any prior quarter other than Q3 of FY'20.

We are pleased to announce that in our second quarter, we sold more tubes than in any prior quarter. As anticipated, a higher percentage of our tubes are still being sold in Europe. We also had a good mix of sales throughout the U.S. and Latin America.

In the second quarter we restarted tube production, we are still experiencing some component delays and risk constraints due to COVID. So, production was not at full capacity. We anticipate reaching our planned production levels in the third quarter. As a result, Healthcare revenue in Q2 exceeded Q1 and also surpassed second quarter last year.

Sales in the quarter were $2.8 million, an increase of 50.9% over the first quarter and 28.2% better than sales in Q2 of last year. Sales of parts, equipment and tubes all increased over prior year's second quarter. Gross margin improved to 25.6% from 5.6% in Q1. Margin was down versus prior year's second quarter margin of 34.3%..

Thanks, Wendy, and good morning everyone. Canvys, which includes the engineering, manufacture and sale of custom displays to original equipment manufacturers in industrial and medical markets, delivered a good performance with sales of $6.7 million during the second quarter of fiscal 2021, a decrease of 14.7% over the same period last year.

Customer demand decreased temporarily due to the coronavirus and the resulting business impact on the OEMs globally. Gross margin as a percentage of sales was 35.5% during the second quarter of fiscal 2021, up from 32.9% during the second quarter of fiscal 2020.

The increased gross margin was related to a favorable product mix and foreign currency effects. Our healthy backlog along with a number of projects that are currently in the engineering stage position us well for continued growth before considering any long-term impact of COVID-19.

It is nearly impossible to predict when our business will return to normal, but we are optimistic that our business will improve in the second half of fiscal 2021. One significant headwind is panel supply, the robust demand for televisions in the U.S.

and China, combined with capacity reductions by the panel makers is leading to else panel price increases at longer lead times. The shortages of some key components such as integrated circuit parts could further compound the situation pushing panel prices even higher.

LCD panel supplier was also negatively impacted by a strong earthquake in Northeastern Taiwan, and a power outage impacting a key class of strap supplier in Japan. The loss of power damaged the feeders that move Moulded Glass from the furnace to the forming process, it will take several months to repair these.

This Japanese supplier is an important supplier to AUO, LG, Analox and other well-known LCD manufacturers. We have seen dramatic price increases on passive components and cables as well, which brings us to the value at that Canvys offers our customers.

Due to our long-term relationships with key suppliers and driven by a future commitments for relatively large and growing procurement numbers, we avoided most of the product price increases. Additionally, we avoid any supply chain disruption by carrying components and finished goods in our inventory.

We are compensating for a lack of face-to-face customer visits and trade shows during the pandemic by focusing on web marketing. We successfully launched our new responsive website in November. The website with a new look and focus, that now also offers multiple application stories started to attract more visitors and potential clients.

We are confident that our online strategy will result in new lease and business growth.

During the quarter, we received several new orders from both existing and first-time medical OEM customers, some of these include; corneal cross-linking and minimally invasive procedure to add stiffness to cornea that have been weakened by disease or refractive surgery, Radio Frequency Ablation, RFA used interrupting pain signals such as those coming from irritated facet joints in the spine, refractive surgery, a laser system for therapeutic and refractive applications of corneal surgery, surgical navigation, a system for tracking the location of surgical instruments throughout vertebrae, intravascular imaging systems, systems that allows physicians to acquire images of disease vessels from inside the artery, patient monitoring and robotic assisted surgical platforms to improve precision and accuracy in spine surgery.

In the non-medical space, we received orders for various display products, applications include displays and all-in-ones, monitors where the PC is integrated. Our products are used to control product expenses and retail stores and in control rooms for railway applications.

They also include touchscreens designed to assist harsh environmental conditions for ticketing machines in the public transportation market. From the verity of customers and applications as well as the value of orders from existing and new customers it is clear we offer our customers outstanding products and service.

While our sales organization stays focused on new opportunities, I will continue to review and adjust our business strategy to improve the operating performance of the division. Maximizing cash flow is an ongoing priority.

We will continue to work with our partners to help reduce inventory while being able to meet the demand of our customers particularly during this pandemic. I will now turn the call back over to Ed..

Thanks Jens. Canvys has performed well in recent years and we're confident growth will continue when the pandemic is under control. A significant percentage of business is in the medical OEM market. As we know from our Healthcare segment, the medical industry has been severely impacted by the coronavirus.

It will be some time before hospitals are spending on new equipment. In spite of the potential long-term impacts of COVID and knowing we're not out of the woods yet, we're optimistic about the future. We're seeing growth initiatives improve revenue, profitability and cash flow. This is clearly reflected in healthcare and PMT performance.

Our challenge now is to determine what changes we've made during the pandemic that should remain as part of our ongoing strategy for growth and improved profitability. We will continue to carefully manage expenses and maximize cash flow. We want to make sure we have funds available to support our growth initiatives and improve our financial returns.

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

Our first question comes from the line of , a Private Investor. Your line is now open..

I was just wondering if you could provide a little bit of color on the inventory levels..

Yes, with multiple business units, it changes from one to another. Certainly, it's requiring more inventory for PMT or the semiconductor portion of the business as the business grows.

Also, in the tube business, we saw an actual decline for a period of time which now seems to be coming back, and in that case, we buy inventory sometimes and are scheduled at a year in advance so the inventories were up there.

But for the most part, I think it's overall blend, it is pretty much normal even Canvys for example has had some additional inventory that they're carrying because customers have pushed out orders. On the other hand, right now, if we had more CT tubes, we could sell more in the healthcare space, so the inventory levels there are down there.

So it's sort of a mix between the SBUs..

Is it fair to say that as the cloud of COVID sort of goes away that we shouldn't see a meaningful rise in inventory going forward? Is that a fair - from an outsider standpoint, is that fair to say?.

Well, certainly in the EDG or the tube portion of the business, inventory levels will be reduced as the business picks up.

But on the other hand, when you look at the Power & Microwave Group in the semiconductor space, that business is growing 20%, 30% a year and it takes additional inventory to service that and also you have more payables or receivables. So it's a mix. There will be an increase in inventory. So far, we're pretty well pleased with our cash flow..

And then just kind of a broader capital allocation question as you know - as the business is recovering or continuing to recover from some of the lockdowns, where is the priority from a capital allocation standpoint for example the Board and the executive team?.

Well, certainly, we want to fund the healthcare business. We've spent about $25 million on equipment. We think we have the most modern CT manufacturing operation in the world right now.

But the majority of the capital has been spent and as you saw the capital expenditures for healthcare was really moderate in both the quarter and the six months, so what we're hopeful is once we can get healthcare to turn profitable that we go cash flow positive, but that's probably still two or three years out something like that.

But the capital expenditures that you're seeing now are pretty much normal..

So paraphrasing it's fair to say that there shouldn't be - are there - from - for the healthcare business there isn't a need for a significant amount of additional capital. It's notable already....

Right. We're always adding new equipment, but there isn't anything substantial coming..

Our next question comes from the line of Eric Landry from BML Capital. Your line is now open..

So, is it correct in assuming that we're basically in quarter number two for Richardson of the wafer cycle right now?.

Semiconductor wafer fab business, is that what you are making reference to?.

Yes, are we in basically the second quarter of an upturn here?.

Yes, and our major customers there are predicting that in the calendar year, this calendar year, that will continue to increase and it's certainly increased for us as you can see.

So, it's good news, where the good news part of that is the last time this occurred business is sort of like a roller coaster, we were working seven days a week to try to accommodate the customers' requirements.

And this time, we were well ahead of that and we are in certain instances working six days a week but not seven and we have a new manufacturing managers since that last uptick and he is really efficient and has cross-trained a lot of people in the assembly area.

So, we're well ahead of the curve and we can handle the uptick without jeopardizing delivery..

Okay.

So I know these things tend to end abruptly, but by all accounts, what your customers are telling you is that there is likely three to four quarters after this, a strong growth in what is one of your most profitable businesses, is that an accurate assessment?.

Yes. Yeah, it is very accurate and the rollout of 5G what that means that big companies like Samsung and Intel and others that are adding capacity in building new wafer fabs, and that's where the tools and equipment go from our major customers. So, it's all good news and they're also retooling older equipment, which is good for us as well..

Okay, great.

Ed, did I hear correctly that you said tube sales have been a little bit restricted by inventory constraints, is that right?.

Yes. We haven't been able to build CT tubes as fast as the customers have required them.

First of all, we did as we had mentioned in the past, we shutdown manufacturing of CT tubes for a quarter or so as we were trying to improve quality and we had our good inventory at that time and we sort of got caught a little bit in between the - by the time we got back into production the requirements had picked up and we're pretty much working hand to mouth right now..

So, that to me sounds like a big change from what you were saying as recently as a quarter or two ago when you were having trouble even people taking calls to buy these things.

So, what has changed here?.

Well, we've - we're doing really well in Europe and some of the EMEA countries, and so that's picked up a lot and it's also picked up in the United States. Now it's - when we talk about large quantities, you know how expensive the tubes are so it's not a matter of hundreds, it's a matter of 10s, but at the same time, it's excellent business..

So a matter of 10 is going to take a long, long time to fill that factory of yours, your brand new fresh factory that has a capacity of 1,000 units with three shifts.

So we're still a long way away from that, has there been any fresh-thinking on how to get that factory up and running with a decent amount of tubes so that we can somehow make some money in healthcare here sooner than later?.

Well, we're adding people. We're adding engineers. We're working - Wendy you might want to address this, but we're working on a partial second shift. What are some of the plans, Wendy you are on top of that on a day-to-day basis..

Well with them programs that we've discussed in the call itself. So we've got the China reloading program coming online and that got good volume potential, Eric.

I would also point out that that was the one area where I feel like we missed the opportunity to ship some tubes in the second quarter was into the - getting that China reloading program going sooner. Then, as we pointed out, we've got the G coming online and that will be mid this year - mid-2021 the calendar year.

And then we have the new tube program which will come online throughout the year as we validate these processes. So those three programs alone are going to fully cover us in the first and possibly going and as Ed already said, into a second shift.

I think what you're looking for is have we made any progress on an OEM program where we would sell tubes to OEM? And at this point, there is some irons in the fire but there is nothing imminent, and our top priority right now are the two programs I just mentioned, the D, the G and the new repair program.

And all of the modeling that we're doing by the way is based on those series of tubes and we will keep our eyes and ears open. Obviously we got to be able to travel in order to really effectively look at any OEMs. They have to be able to come here, we have to be able to go there.

So I think that's still a ways out before we're going to see any true or meaningful effort on the OEM side..

The new two program is that it is that a different manufacturer than Canon, is that what you're talking about or is there something entirely different than that?.

It is. It is a different manufacturer. It's a different, different line..

Okay, so that is still on the - go ahead..

Yes, the replacement volume for that particular manufacturer is much larger than Canon..

But then....

And as we mentioned, there's three tubes in that series, Eric. So it will be - they will be launched independently..

And that's fiscal year 2022 at the earliest type of event?.

Yes, I would say, meaningful results. We will likely start shipping at least one of the three earlier than that. But again, we want to make sure that the product that we're putting out there works that it meets the warranty requirements and then satisfy the customers. So to be conservative, I would say FY '22..

Okay.

Last question here, you may have mentioned of first shift almost fully absorbed, is that correct? Did I hear that correctly?.

With our - with full production, which we will be back in and now we're actually back in full production now. We will be fully absorbed in the third quarter. We should be fully absorbed in the third quarter with one shift. Going to a second shift and the third shift helps leverage some of those costs..

All right.

Maybe I'm not interpreting this correctly, but that does not mean 300 tube annual pace, correct?.

No. Probably not. I would have to go in and count the production with all the three tube series. Sometimes we're running second shift because of an equipment we need to run scanners, for example, when we are testing the G and we're putting that through its paces, it's very helpful to have those scanners running 24-7.

So we'll have people in here at night and on the weekends running scanners and tracking tube status. We may use ovens on second shift for a bake out in some of the processes that require a longer period of time..

Our next question comes from the line of William Wilson, an Individual Investor. Your line is now open..

Just ecstatic about your results there.

But at the same time, I am a little bit under invested and I'm just wondering how that would extrapolate to other investors that might be listening or potential investors which brings to mind the question of whether you've been able to outreach to the investment community or whether that is something that because of travel with the COVID you're still able to do.

I would think that that would present a great or forward-looking opportunity once that breaks loose and you can give up the story about the company?.

Well, that's true. In the past, we've done a lot of conferences, financial conferences and presentations and things of that nature and of course with the COVID issue, that's all stopped.

But certainly as the business continues to pick up and be profitable and as soon as the impact of the coronavirus is under control and there are financial conferences again we will be participating..

And then I look at the chart when going back five years or so when I started investing or more than that actually, and I see that you know we're about 50% at a minimum of what it was and yet if I see the company correctly, you're at least twice as good as far as size, potential markets, products, R&D, manufacturing space etcetera, et cetera.

So my question is, is my perception layoff there or are you twice as good as you used to be five, 10 years ago?.

Well, we certainly agree with you.

We think that particularly addressing some of the markets that are growing rapidly like the healthcare space and also the Power & Microwave Group for 5G and the semiconductor wafer fab business, also Canvys has a big market, we're really very optimistic about the future of the company and we feel like you that the company is certainly undervalued as far as the market value on the street for sure..

And I'll let you go, but one quick last one and this is kind of stretching it too, but south of the border, it would seem that you could only for the tubes grow by replacement, the idea of OEM would probably not come into play there.

But at the same time, if you look at the giant companies Siemens or whatever, who could potentially jump into the market and undercut your prices, do you see sales to South America, Latin America being a long-term potential stabilizing factor there?.

Yes, we sell to Latin America. Currently we sell a fair amount of equipment and also replacement tubes and we install our new tubes in used equipment when the equipment is sold in Latin America. The problem we have there is the economies of the various countries in South and Latin America haven't been that good, but it's certainly an excellent market.

And you're correct, probably especially today, 95% of the tubes we sell are for replacement and existing equipment..

At this time, I'm showing no further questions. I would like to turn the call back over to Ed for closing remarks..

Okay. Well, thank you for joining us and for your ongoing interest in Richardson Electronics. We look forward to discussing our third quarter with you in April and we hope by then we'll be thinking about seeing people face to face again. And then the interim we wish you continued good health and success. Feel free to call us at any time..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..