Richardson Electronics, Ltd. (RELL) Earnings Call Transcript & Summary

Let's get started with the next company. So up next, we have Richardson Electronics, which is traded on the NASDAQ under the symbol RELL. And with us presenting on behalf of the company is going to be the founder, Ed Richardson. And I'll go to hand to Ed now.

Well, I'm not really the founder. My father started the company in 1947, but I'll take credit for it, if that's okay. All right. . Well, thanks for coming this afternoon to listen about Richardson Electronics. We have been in business for 75 years. This is our 75th anniversary, and I've only been around for 60 years, so we finally got it right. I think things are going pretty well. The whole business is built around what we call Engineered Solutions. We have 20,000 customers on a global basis, 24 foreign subsidiaries, about 75 RF and microwave engineers. And any the customer comes to us and wants us to design a particular module or a piece of equipment, we don't have enough sense to say no. And so a lot of the business you'll see here came out of what we call Engineered Solutions based upon customers' demand, and we've developed various products as the customers tell us what they need. So last year, we did $224.6 million in sales, up from $176 million in the previous year. And the first quarter is the best quarter we've had in years. We did $67.6 million, up 25% from the year prior. Last year, we made $1.31 per diluted share versus $0.13 in the previous year. And in the first quarter, we made $6.3 million after tax. We still have a strong balance sheet. We have no debt. We have $36 million in cash, 490 employees. We've added 80 employees this year since the first of the year. And we've added 6 engineers. We can use more engineers, so all referrals are gratefully received. And again, we sell 20,000 customers over the year -- over the world, and we have 60 locations in 24 countries. So we have 4 business units. The newest one is Green Energy Solutions. We've had so much interest in the green energy space that this first quarter, we broke out the business that we do in green energy, and we'll tell you about that. The Power & Microwave Technology group is $160 million. The Green Energy group on a trailing basis is $28.5 million. Healthcare is $12.4 million and Canvys was $37.2 million. So these are various products that we sell, and we manufacture 60% of what we sell today. So the core business is in the tube business. We started out in the tube business in 1947. We made 25 acquisitions in the tube business, and we have a facility in La Fox, Illinois that's 250,000 square feet where we manufacture these products. And I was told 25 years ago, the tube business won't exist in 5 years. And our tube business went from $100 million to $120 million this year. So I think it still exists. And these are some of the products that we make power grid tube, CW magnetrons, ignitrons, thyratrons, microwave generators, pulps magnetrons and the newest products are ultracapacitors and CT replacement tubes or CT applications and Canvys custom-made medical displays. Sooner or later, I will get this error right. So again, we have 60 locations on a global basis. We have the ability to ship from anywhere in the world to anywhere in the world in 3 days. These are some of the strong core businesses that we have in place. The green energy business is our newest business that we've broken out. We can show you what the growth looks like. Last year in Green Energy Solutions, we did $2.5 million in Q1. We're on a fiscal year that starts June 1. So we finished our first quarter, and we're about 2/3 of the way through our second quarter. And in the Q1 of this year, from June through August, we did $8.5 million. So you can see the growth in that business, and it's certainly our fastest growing area. So what do we include in green energy? We transferred sales from Power & Microwave Technology group. And it's anything that is in green energy. So it includes alternative energy, energy storage, power generators. We manufacture tubes YJ1600 that are used for manufacturing synthetic diamonds. It covers fusion research, sustainable goods, manufacturing and hydrogen production. We estimate the sales this year will be about $40 million, and this growth rate, I'm afraid, is really low. We're saying 15% to 20%, but I think it will be a lot more than that. So they're very much blue chip customers, customers like NextEra Energy, Progress Rail. And Progress Rail is building electric locomotives or the Union Pacific railroad. Also T-Mobile, Northwestern Medical and Siemens. So the ultracapacitor business is one of the fastest-growing areas. We designed and built an ultracapacitor that replaces lead/acid batteries and GE wind turbines. And the GE wind turbines are about 30,000 of them in the United States, and our major customer here is NextEra. Last year. We did $10 million worth of NextEra as they replace lead/acid batteries in 1,000 of their wind turbines. Their objective is to replace at least 1,000 of the lead/acid batteries in turbines each year. And they've given us another order now for $4 million, and they're telling us in January, we'll get another order for $11 million to $14 million. At the same time, there are about 15 companies that we deal with that are also wind turbine operators. It's like a bridge club. They all know each other and they realized we were supplying NextEra. So we're now selling to RWE, Enel, Invenergy, any number of these companies. We think this business will be $15 million this year. One of the most exciting areas is that we're working with a company called Progress Rail, and they're a division of Caterpillar, and they're building electric locomotives. And these locomotives were originally built in Brazil, and they were built in Brazil for the Australian market. Progress Rail came to us about 2 years ago and had seen our patents on ultracapacitors and wanted to know if we could replace lead/acid batteries with ultracapacitors in these electric locomotives they were building. So our engineers work with them and said, actually, the current in your application is too low for ultracapacitors, and we recommended that they use lithium iron phosphate batteries. And we have an exclusive agreement with Amogreen in Korea for those batteries, and they designed the batteries into their unit -- into a battery compartment, which you can see in the upper left-hand corner. And in that unit, there's 162 batteries. And the units, there's anywhere from 1 to 10 of those go into each locomotive in the battery compartment that uses them in each compartment is about $1.1 million. So we've been selling the battering compartments to Progress Rail, and their supply chain manager lives very close to our factory in La Fax, Illinois. And we suggest to him that there were 35 weeks delivery on these batteries that he ought to place a multiyear contract and lock in the price and make sure he gets delivery when they need them. And about 6 months ago, he gave us a single largest order in our history for $18 million, and that order will be delivered over the next 2 or 3 years. In the meantime, we have received orders from Union Pacific and Long Island Railroad. Help me, Wendy, who else is involved there. And also, they're working with Metra in Burlington Northern. And they want these locomotives built in the United States. So they're going to build them in Muncie, Indiana. And Progress Rail has come to us and said, if you could give us the prints -- if they give us the prints the way they build them in Brazil, could we manufacture the battery compartments in our plant in La Fax, Illinois? And we've worked on those designs. Our engineers have made them a little more are manufacturable. And they've given us a beta order for 4 units at $1.1 million a piece. And if that's successful, they'll be buying the same units for 50 locomotives over the next 3 years. So it's a huge opportunity for the future. We think that Progress Rail ultimately will be our largest customer. To give you some idea, these units are 4 feet by 4 feet in size and 6 feet in height. And when we're finished with it, they weigh 11,000 pounds. They have an air conditioning system in them. They have a fire control system, and it all goes into this huge stainless steel container. We had to build a new shipping dock that would handle the weight, and we've had to order new lift trucks to handle the business. But ultimately, if we're successful, it could be $50 million or more over the next 2 years. So this is a product that we just talked about. And these are some of the other products in the green energy space. We manufacture magnetrons that are used for making synthetic diamonds. The ultracapacitor module that we told you about in wind turbines. We make another one that goes into cellular towers. And the newest venture we're working on are energy storage systems that are used for batteries -- for electrical storage on the grid, companies like Commonwealth Edison, for example. And we're working with a company called the Cie Brown Boveri (sic) [ Brown, Boveri & Cie ] to build those units. And those units, by the way, cost over $1 million a piece. We also worked with a company called Battery Street and designed a unit that's used in cell towers. And those units are about $500 a piece, but there's over 300,000 cell towers in the United States. And we have products into T-Mobile, in a beta site and also with AT&T and Verizon, and we hope this product will go to market in the next calendar year. So the Power & Microwave Technology group is a historic tube business. And then again, the tube business, including the semiconductor wafer fab business we call EDG, went from $100 million to $122 million last year. And the Power & Microwave group includes the green energy that we've broken out, and they had very substantial growth as well. Pictured here is a magnetron that we make, that's used for synthetic diamonds. And that business, we were making about 800 at least a year. And because of the synthetic diamond business, we have orders for over 5,000. We're working with a company in India, it's our largest customer called Carbon Craft. And they not only build synthetic diamonds, but they take used tires, they hit it with microwave, they take the carbon out and they make tile. The same kind of ceramic tile that would be used in your kitchen and any other applications. And these magnetrons only last about 2 years in constant service. So they bought 2,000 from us this year that means they are going to be buying 2,000 a year if the market holds up and right now, it's on fire. Healthcare is the only business. I look at the business as a table with 6 legs and Healthcare is the only one that's not making a profit. We spent $35 million building the most modern CT factory in the world. We have the capacity to build about 1,000 tubes a year. And right now, we're building less than 300. Last year, we lost $5 million in this business, although the company made $16.8 million, even with a loss. But in the first quarter, our loss was less than $0.5 million, and we're very hopeful that by the end of FY '24, this business will turn a profit. It's a huge market, and there's a huge opportunity. We developed first a Toshiba tube, and we've gone to market with 2 of those, and we're working on a Siemens tube now. In the CT market, Siemens is the largest vendor manufacturer in the CT business, followed by Philips and GE and then Toshiba. And Philips is probably 10x the size of Toshiba. So we're really optimistic as we develop these tubes, it's a repair process to begin with. But once we develop those that we can turn this business into a profit. So again, Healthcare sales in Q1 and FY '22 were $2.2 million, major loss, and $3.2 million in Q1 of FY '23 and the loss was cut to about $500,000. Canvys is probably the easiest business to understand. We manufacture very custom displays for medical OEMs. So we have a facility near Donaueschingen, Germany, about an hour from Zurich, engineers that do design work and custom design for European customer. And we have another facility near Boston near Marlborough Mass, a very similar facility, and they handle the U.S. market. So we buy the chassis in -- primarily in Taiwan, but also Korea and China. And then they're brought into the United States for assembly, and our engineers do the custom assembly work. And the customers are medical OEMs. The largest one is Varian Medical. We've been selling Varian Medical display for a linear accelerator for cancer treatment for about 10 years. We also sell the Medtronics, and they use our display in laser-guided surgery where the surgeon actually uses the display to look at the medical instruments while he's doing surgery. And once you're designed into these systems, they're FDA-approved and you're usually into those systems for 10 years or longer. So we have over $40 million -- I think, $47 million of backlog, Wendy? Wendy, by the way, is Chief Operating Officer, and she's the boss. So anytime I make a mistake, she's going to correct me.

[indiscernible].

Okay. So we're selling that Carestream, to Stryker, to Siemens, to Vatech. They make teleprompters and Karl Stores, and this business is doing extremely well. A year ago, they did $30 million in business. And the year we just finished, they did $35 million, and they're on track to do about $40 million this year. So in those orders, we get frame contracts from these customers. They give us orders for a year or 18 months and release so many displays every month to make sure they have the display for their equipment, and it's a very predictable business and very profitable. So the financial results, in total, as you can see here, we're doing extremely well. We think we'll finish the year at about $255 million or $260 million, up from $224 million last year. We have a strong balance sheet. We have $35 million in cash and no debt. We're using a slight amount of cash right now, particularly on inventory for these new green energy applications, but we think we'll be cash flow positive next year. Total backlog, we ended the quarter at just under $200 million, down slightly. We were $206 million at the end of Q4, but our real challenge right now is just to produce all the products that we have orders for. All right. That's about it. Lots of time for questions. Yes?

[indiscernible]?

No, we're selling to multi-vendor service companies and to service companies that are competing with the OEMs for their aftermarket.

It is consumable.

It is a consumable, right? They last about 300,000 scans in content service, which is 2 or 3 years. We have some products out now that have 700,000 scans on them. So the quality has been good.

Also [indiscernible].

Well, it depends on the manufacturer. Toshiba has really reacted to our being in the market, although we're such a small player. When we got into the market, they were selling their CT tubes for about $125,000, and they've broken their price down now to $90,000 or $95,000. We sell them for about $75,000. They cost us about $30,000 to make.

[indiscernible].

I didn't understand the end of the question.

[indiscernible].

No, not really. I mean at this point we've been competing with the OEMs. The reverse of that is in the -- the wind turbine market, we've had GE come to us. And GE, we've been competing with GE for their aftermarket. And now GE has, I would call, an Amazon website where they're putting all their products for replacement in wind turbines out on a website. There's over 800 operators in the wind turbine business and they want to include our modules that are for replacement in their units on that site. So they've actually blessed what we're doing. And also with Siemens, we're working with them for replacing the lead/acid batteries in their wind turbines. And in that case, they want them private labeled Siemens, and they're going to handle their own aftermarket, which is just fine with us.

[indiscernible] companies, these haven't produced flat revenue for a while and then over the last few years, [indiscernible]. Has there been any like material change in the point that you brought to the company as far as [indiscernible]?

No, absolutely. We went back -- if you go back to 2007 and 2008, this company was $700 million in sales, and we had 1,000 employees, but we were losing money hand over fist, and we had about $200 million worth of debt. So we made a decision to sell off some of the divisions. Wendy helped me sell off the Security Systems division in 2007. We sold it to Honeywell for $75 million. And then we sold our discrete semiconductor business to Arrow in 2011 for $238 million. We paid off all of our debt, bought $65 million worth of stock back, but we were left with a company that was $140 million in size in 24 foreign subsidiaries, and that was very necessary for our historic tube business because we were selling 20,000 customers all over the world, and we needed that infrastructure to handle the business. So from that point until this, we've been adding products and going into new businesses to support the business. And at $160 million, we broke even, $176 million, we made a profit. And as you can see this year at $224 million, we've made $16.8 million even with a loss in Healthcare. So that's the evolution. It's building the business back up again to be profitable. And after 60 years, we finally got it right. Any other questions?

[indiscernible].

I'm sorry.

[indiscernible].

Well, right now, we're probably putting in about $5 million or $6 million a year, but we think that, that will pretty much end and with the profits we're making that will be cash flow positive next year, and we still have $35 million. The problem with the $35 million is we have 24 foreign subsidiaries, and each one requires about $0.5 million. So people are always saying, why don't you buy more stock back, you've got all that cash, but it's not readily accessible to us.

How does the exchange rate affect you?

Well, it's had an impact on our Canvys business, particularly because we buy in euro and quite often sell in dollars, and that hasn't helped us at all. So it's had an impact. Their margin has been down in the low 30s this year because of that, but it seems to be recovering. And the way I look at it, you get these peaks and valleys in the currency, but because we deal in every currency in the world that sooner or later, it balances itself.

[indiscernible] would like to change?

All right. And all of our business, when we write contracts, we have the right to adjust the prices on the contracts in 30 days based upon the currency exchange. Any other questions? Well, thank you.