Todd Kehrli - President, MKR Group Robert Dawson - President and Chief Executive Officer Mark Turfler - Senior Vice President and Chief Financial Officer.

Orin Hirschman - AIGH Investment Partners.

Good day, everyone, and welcome to the RF Industries Fourth Quarter and Fiscal 2018 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded today, Thursday, December 20, 2018. At this time, I would like to turn the call over to Mr.

Todd Kehrli of MKR Group. Please go ahead..

Thank you, operator. Good afternoon, and welcome to RF Industries fourth quarter and full-year fiscal 2018 financial results conference call. With me on today’s call are RF Industries’ President and CEO, Rob Dawson; and Chief Financial Officer, Mark Turfler. Before I turn the call over to Rob and Mark, I’d like to cover a few quick items.

This afternoon, RF Industries issued a press release announcing its fourth quarter and full-year fiscal 2018 financial results. That release is available on the company’s website at rfindustries.com.

This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company’s website. I’d like to remind everyone that on today’s call, management will make forward-looking statements that involve risks and uncertainties.

Please note that except for the historical statements, statements on this call today may constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. When used, the words anticipates, beliefs, expects, intend, future and other similar expressions, identify forward-looking statements.

These forward-looking statements reflect management’s current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements.

Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the company’s periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission.

RF Industries undertakes no obligation to update or revise any forward-looking statements. I’ll now turn the call over to Rob Dawson, President and Chief Executive Officer.

Rob?.

Thank you, Todd. Good afternoon, everyone. Welcome to our fiscal 2018 fourth quarter and year-end earnings conference call. We’re pleased to report record annual sales and a return to profitable growth in fiscal 2018, reflecting the significant progress we are making with the transformation of our business.

As part of this effort, we divested our Comnet division at the end of the fourth quarter, which will increase our profitability going forward and is in line with our goal of unified sales strategy. More on that to come, but first, let’s review our financial highlights.

Net sales for the fourth quarter grew 34% with Comnet and 41% without Comnet, and for the fiscal year, net sales reached a record $58.5 million with Comnet, an increase of 89% year-over-year and we’re up 118% to $50 million, when you exclude the Comnet.

Our offering of high-quality products, flexibility in design, and fast turnaround time is resonating in the market. And with our focus on streamlining operations and sales execution, we’re clearly doing a better job of selling our products.

Our positive financial results include an increase in gross margins for the year from 30% to 34%, and we generated $6 million in income from continuing operations or $0.63 per diluted share for fiscal 2018. This is up significantly from $170,000, or $0.02 per diluted share last year.

We also generated $10.3 million in cash during the year, further strengthening our balance sheet. And lastly, we ended the year with a backlog of $11 million, up from $8 million at the end of the prior quarter. Mark will provide more details on the financials shortly.

But needless to say, I’m very proud of these positive results and the tremendous efforts of everyone at the company behind our improved execution. I also want to thank our customers and our shareholders for believing in us. Fiscal 2018 was a very eventual year for RF Industries.

As many of you know, I joined the company as CEO roughly three months before the start of the year, and found a company that was operating essentially as four separate individual companies.

From my experience in the industry, I knew that the company had high-quality products and significant competitive advantages with its flexibility and fast turnaround times, but it didn’t seem to be fully capitalizing on these advantages or leveraging the combined strengths.

So after evaluating the situation, we started fiscal 2018 in a new direction that involved transforming the culture of the company and its four historical divisions into one operating company and better defining our addressable market segments and the best way to serve those segments. We had some simple goals for the year.

While I review the overall business in our direction, our goals were things like covering the dividend, continuing to control SG&A, and showing some nice solid low double-digit growth.

In reviewing the business, I became convinced we had some clear opportunities to bring the four historical divisions more closely together into one company with a singular set of goals and to begin the process of getting the right one company culture and structure in place.

I also knew that we needed the team to recognize that this was a significant transformation and would require some serious work to become a growth company. Thankfully, some things went our way this year as we experienced major growth in the top and bottom lines and executed on new strategies focused on becoming better integrated as one company.

Again, I want to thank the entire team for the hard work in making fiscal 2018 the year than it was. When we look back at fiscal 2018, we see the company experienced a step change in sales, as we more than doubled our net sales in the fiscal year.

However, along the way, we saw that our sales could be lumpy or erratic quarter-to-quarter, depending on the timing of orders.

We’re working hard to smooth out our quarterly results and provide a better long-term view of the business, but right now, it’s all about timing of orders, which is why early in fiscal 2018, we started disclosing our order backlog on a quarterly basis.

Our focus on booking new business and building a backlog has given us the ability to see out a few months in a business that historically hasn’t had that visibility. As I said previously, at the end of Q4, our backlog stood at $11 million.

While it’s not our practice to provide guidance, I think, the backlog number helps provide increased visibility into what can otherwise be a hard business to predict.

While historically, we’re in the fast turn business, where we build and ship out customer orders in a matter of a few days, we remain very focused on building a portion of our business around larger projects and then leveraging those into long-term relationships.

This booking and backlog approach also allows us to better manage our workload and supply chain. The good news is that fiscal 2018 proved that we can make money at lots of different revenue levels, by controlling G&A and driving solid gross margins. So even if our sales should vary quarter-to-quarter, we’ll still be profitable.

Now let me take a moment to discuss where we saw the growth in fiscal 2018, and then I’ll spend a few minutes to talk about where we’re going to focus in fiscal 2019. Our biggest wins in fiscal 2018, as we’ve talked about, came from the wireless Carrier Market segment, where we’re finding growth opportunities for our fiber and coaxial solutions.

We benefited from the final stage of the 4G spend in 2018, and had some success at leveraging that into the early stages of 5G that’s still in its infancy. The CapEx spend related to the 5G build should provide us with a nice tailwind in the market, but we’re still only scratching the surface of the opportunity in this space.

The densification of the network will drive demand for traditional macro side upgrades, as well as increased demand for both distributed antenna systems and small cell deployments, where we have a solid offer. Overall, our largest customers during the year were distributors, as expected, which gave us growth in our core cable and connector business.

So we also saw solid results from our OEM and industrial customers. As we focus on further growing sales, leveraging our distribution channels, and maintaining strong margins and profitability, we’re cautiously optimistic about fiscal 2019.

I’ve been asked a lot lately about what’s next for the company? What does the next act look like after a year like that? The scary part is that, we’re not even really that good yet. We have more work to do to further integrate our sales operations in one-company culture. We’ve yet to hit on all cylinders, and that’s why we look forward to fiscal 2019.

In 2019, we’ll continue to work hard to increase sales, improve gross margins, while we maintain cost controls and continue to build a growth culture as one company. As I said, we’re cautiously optimistic about 2019, coming off of a hugely transformational year and the first year in a multiple year overhaul of the company.

A lot of things are out of our control. As I say to the team, focus on driving great results and only worry about the things that we can control. There’s definitely uncertainty that can create some headwinds in 2019.

There’s macro things like the economy, interest rates, tariffs and others that create lots of noise, the 5G spend and how it flows, as well as our continued positioning there. Supply chain in a tight labor market, we saw a couple of weeks during our Q4, where we had supply chain delays.

They seem to be indirectly related to tariffs or labor issues up to supply chain from us, where we can’t always control that. We can only control our execution and outworking everyone else in a similar position, while being creative and responsive to our customers and producing the best possible results.

I expect us to execute on our plan and this is about the long-term. So what am I focused on in 2019? There’s four main things. First, operation strategy. We’re focused on further integrating our approach to production to best utilize our facilities to build quality products at the lowest possible cost and with the best use of our labor.

This includes optimizing our supply chain and our sourcing efforts. Second, further leveraging our distribution channels. We’ve made some significant progress in adding targeted distribution in fiscal 2018, and we expect those relationships and our restructured sales team to provide continued growth.

We also are constantly reviewing new market segments and the best channels to address them. We’re starting to see lift from this strategy. Third, our sales strategies related to our OEM markets.

I spent very little time on our OEM segments, which are primarily the industrial markets, segments like manufacturing, defense and aerospace, oil and gas, transportation, mining, agriculture and others. We have many blue chip customers in these segments that have been loyal to us for a long time.

We have a great opportunity to evolve our sales structure here and our processes to better leverage our successes in these market segments and drive growth. An example of the work we do here is the Honolulu rail project that we released news on a few weeks ago.

Its long-term business that contributes to our backlog and its relationships with customers like this that are key to our growth. And finally, fourth, inorganic growth. We do wisely use our strong balance sheet and cash to further transform the company.

On the M&A front, we’re committed to doing at least one acquisition during the year, and we feel that this is the best use of our cash. While we continue to pay a nice dividend, we believe that the bigger opportunity for us is to invest in our growth.

As far as acquisition targets, I do have a handful of discussions that are a little ways down the path. I’m interested in companies in the $10 million to $20 million range from a revenue perspective, with similar products and channels to ours that give us access to a new product set and new customers or segments.

I’m also very focused on culture, as we can benefit from an easier integration one like mines [ph] are involved. Finally, I’m interested in talent to elevate our team and help accelerate our growth. As I’ve said in the past, I’m focused on getting this right and not just doing it quickly. So let me spend a few minutes on the long-term plan.

Our fiscal 2019 focus areas are part of a three-year plan to grow to $100 million in sales by the end of fiscal 2021. Our goals are to grow organically in the low to mid-teens annually, and add on $20 million to $30 million in acquisitions over the next three years.

Organic growth is important to us through both our distribution strategy and our increased engagement with the OEM channels. We obviously grew much faster organically in 2018 in the mid-teens, but we’re not planning for that kind of growth to continue.

We have a tough task ahead of us to replace the $20-plus million in increased business that we saw in 2018. We don’t expect that full $20 million to repeat in fiscal 2019, but instead, we expect a portion of it to repeat. We need to fill in the rest of it with complementary new or similar business, and so far we’re having some success here.

Our opportunity is to take the large wins and leverage those relationships into long-term business, and again, we’re having some success here. As I’ve said for several quarters now, this is a long-term play. We don’t expect to do everything perfectly overnight, but we’re very focused on our key initiatives in the coming year.

So in summary, we’re a little over a year into a major transformation for the company. We’re not done, but we’ve made some nice progress. While doing some significant overhaul for the company, we drove strong financial success in the last year. That success gave the company a lot more exposure with both customers and the investment community.

That same success can also be a double-edged sword, as we’ve seen some wild swings in our stock, while we work to tell our story and make it more understandable, including getting out to events like the LD Micro Event in Los Angeles earlier this month.

We will continue to be as transparent as possible that this turnaround is going to take sometime and requires more work, but we accomplished a lot in fiscal 2018. I’m not great at celebrating, but I think going from $200,000 to $6 million in net income in one year, is definitely something to celebrate.

As our solid financial results illustrate, our strategy for the long-term is beginning to pay off. I’m proud of the improvements we’ve made to the business so far, but this is only the start. And as I said earlier, we’re cautiously optimistic about our continued success in fiscal 2019.

And finally, with our focus areas and the hard work of the team, we expect to again post solid sales growth compared to the prior year for the current first quarter ending January 31. With that, I’ll now turn the call over to Mark for a more detailed review and discussion of the financial results for the quarter.

Mark?.

net sales in fiscal 2018 were a record $50.2 million, an increase of $27.2 million, or 118%, compared to net sales of $23 million in fiscal 2017. These results exclude Comnet sales. Net sales, including Comnet were $58.5 million, an increase of 89%, or $27.5 million, compared to net sales of $31 million in fiscal 2017.

Gross profit increased by $10.1 million to $17.1 million, while gross margins increased to 34% from 30%. The improvement in gross margins was primarily due to the revenue increase at the Custom Cabling segment, which had the effect of spreading certain fixed manufacturing costs over a larger revenue base.

Although selling and general expenses for the year increased $2.2 million, primarily due to increased compensation, resulting from the increase in net sales. As a percentage of sales, selling and general expenses declined to 16% of sales, compared to 26% of sales in fiscal 2017.

Income from continuing operations increased to $6 million, or $0.63 per diluted share, compared to $170,000, or $0.02 per diluted share in fiscal 2017. Income from continuing operations as a percentage of sales was 12% for fiscal 2018, compared to 1% in fiscal 2017.

The loss from discontinued operations, net of tax for 2018 was $180,000, compared to income, net of tax of $212,000 in fiscal 2017. Net income was a record $5.8 million, or $0.61 per diluted share, compared to net income of $382,000, or $0.04 per diluted share in fiscal 2017.

The decrease in our effective income tax rate over the prior fiscal year was largely due to the Tax Act in the benefit of R&D credits. The company invested a majority of the tax savings that we realized back into our team, including key resources to improve our market position. Turning to our cash flow and liquidity.

We generated nearly $5.3 million in cash from continuing operations for fiscal 2018, or $0.57 per common share, while we also provided our shareholders a return on our investment of a $0.08 per share cash dividend. Total cash and cash equivalents were $16.3 million at October 31, 2018, an increase of over $11 million from the prior year-end.

Backlog as of our fiscal year-end was $11 million, which is up from $8 million at the end of our third quarter. That concludes my discussion. I’ll now turn the call back to Rob..

Thanks, Mark. As we’ve discussed fiscal 2018 was the best year in company history, with record sales growth, increasing gross margins, strong cash flow and a record income from our continuing operations. We also declared our 34th consecutive quarterly dividend.

In fiscal 2019, the goal will be to build on these record results by leveraging our strong customer relationships and channel partnerships to further expand our footprint in the marketplace. And to do so in a profitable manner, as we work on our three-year plan to grow to $100 million in sales.

We appreciate the partnerships with our customers, distributors and suppliers, the hard work of our employees and the support of our shareholders. With that, I would like to open the floor to questions. Vicki, we’re ready to take our first question..

Thank you. [Operator Instructions] And we’ll go to our first question from Orin Hirschman with AIGH Investment Partners..

Hi, how are you?.

Good, Orin.

How are you?.

Good, thanks. Hi. Just one quick financial question.

Just in terms of the backlog, is the backlog after the Comnet disposition?.

It is. Yes, the $11 million does not include Comnet. It would have been a little higher if we included Comnet in that number..

And the same thing with the bookings?.

Correct. The booking number was without Comnet..

So, if you were to look at where the increased bookings is coming from and what we do highlight as verticals? And then as a second question, can you kind of highlight where you think what we’re up to in terms of 4G additions, 4G densification, versus coming of 5G?.

Sure. Yes, the verticals that I think impacted our bookings in the quarter and then we’re carrying forward with us. You’ve got the Wireless segment, the Wireless Carrier segment that we continue to see some strength, and that relates to your second question, so I’ll come back to that kind of on the 4G versus 5G piece in a sec.

So, we’re seeing that kind of the core wireless carrier space continues to be strong for us. We also see nice continued growth in our historical core business, cables and connectors, in DAS and small cell kinds of applications. And then in the Industrial segments, things like the Honolulu rail project certainly help us in that.

That’s a piece of business we’ve done for a long time, but we’ve become the only source versus sharing that business with someone else, and so that’s a nice long-term piece of business.

So, I think the biggest number you’ve seen there is still related to the wireless carrier space, but we’re seeing good core growth in really all of our our main market segments. Your second question there, Orin, around 4G versus 5G, we’ve definitely seen a shift to where we’re getting purchase orders for 5G products. We saw some of that.

We talked about that last quarter. We’re seeing that continue the style of cables that’s being ordered. From a macro site perspective, we’re seeing orders around 5G.

On the densification side of whether it’s 4G or 5G, I think that’s picked up as well and that’s more DAS and small cell specific cable type in the DAS world that’s tested in a certain way, low noise thresholds.

Those cables have picked up again aggressively, so that’s been going on for a while, but we’ve seen some nice uptake in those sales that are part of the results that we’re looking at here..

Obviously, it is a nice [ph] bookings quarter, any thoughts on when the wheel growth begins to start over the 5G? I know you’re finally starting to see a trickle in nuance.

My question is, how did you know it’s 5G versus 4G? When do you really think you can gain theme or how do you think you can gain theme if you have any insights?.

Yes. So, we’re in an interesting position, because I think we’re, in some cases, we’re early in the cycle where people are putting tables up or at least not getting cables ready to take out to the macro sites. On the other hand, we’re getting a little piece of this action.

So in talking to the carriers and in talking to other suppliers in similar markets, it feels like we’re all kind of looking at next year or you get into the middle of the end of next year, the spend should pick up.

We need some radios in the market that can truly pull off the 5G capabilities, then I think we’re all kind of looking at 2019 as a year where we should see some significant growth.

But it’s also been an interesting kind of a whole thing starting and stopping spend on this, where it’s aggressive speed and then slowdown and then aggressive speed and then slowdown. So it’s hard to pinpoint exactly, but I think I do expect calendar 2019 to have some significant spend to get going in the 5G world..

And finally, you had chipped that big order.

I mean, the question whether that was actually being used and put into the field , do you feel that, that it fully deployed at this point and there’s no fact how [ph]?.

When you say big order, you’re talking about kind of the large orders we received late last year or early 2018 that’s what you’re talking about?.

Yes, we feel those will work their way through..

Yes. So I think they’re – I don’t know that they’re fully deployed. There does seem to be a constraint in getting tower companies or people that climb towers and do this tower integration, finding resources to get that done. I heard from multiple folks that that’s a constrained labor market finding the good ones to do that work.

But I think we’ve got our materials as far as we know, positioned out in markets, ready to go if they’re not already being deployed. So we do think that that’s out there on location. I don’t know if that’s fully printed through there or I guess fully flowed through the deployment yet..

Okay. And just one follow-up on that and then I’ll let other people ask.

But if that’s not fully deployed, how the bookings are strong or it’s different 5G versus that was 4G densification versus DAS?.

Yes. I think, the bookings are strong, because we’re seeing some early stages of 5G, which would be incremental to what was put out there in place, a different style of cable for a different style of radio. So I think those two things have a little bit of a layering effect on them.

I also think we’re just doing a better job of getting into more piece of the business.

We’re at the LD Micro Show, I think, one of the things that I talked about was total addressable market in all of these different spaces is in the tens of billions or hundreds of billions of dollars, and we just came off a record year, where we did north of $50 million.

So as we spread out a little bit and get into some deeper conversations with people and find opportunities to do more, I think, in almost any instance there’s a chance for us to book more regardless of whether the spend is flowing aggressively or it’s slowing down, it will be affected by as just like anyone else.

But I feel like at our size, we should be able to win some business in that addressable market..

Okay. Thanks so much..

Sure. Thanks, Orin..

[Operator Instructions] At this time, I hand the call back over to Mr. Dawson for closing remarks..

Thanks, Vicki. That was a 30-minute call. It’s our longest call yet, so we’re making progress. Thanks, everyone, for your interest and support of RF Industries. Mark and I look forward to reporting our fiscal 2019 first quarter results in March 2019. Thanks again for joining our call. Happy holidays to everyone, and have a great day..

That does conclude today’s conference. We thank you for your participation..