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

Good day, and thank you for standing by. Welcome to Richardson Electronics Earnings Call for the Second Quarter of Fiscal Year 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ed Richardson, CEO of Richardson Electronics. Please go ahead.

Good morning, and thank you all for joining Richardson Electronics conference call for the second quarter of fiscal year 2025. Joining me today are Rob 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, which includes Green Energy Solutions; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we'll be making forward-looking statements that are based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. I'm pleased to share an encouraging update on our second quarter performance as we're making significant progress with multiyear growth strategy. During the second quarter, we experienced sequential improvements in sales and delivering positive operating income in October and November. In addition to this operational momentum, we generated positive free cash flow during the quarter. We achieved outstanding growth in our Green Energy Solutions business during the second quarter, with sales more than doubling compared to the prior year. Furthermore, we experienced a significant improvement in revenues from our semiconductor wafer fab business, underscoring the strength of our diversified business segments. Overall, second quarter sales reached $49.5 million, exceeding $44.1 million, which we recorded in our Q2 last year, a solid 12% year-over-year increase. With this overview, I'll now hand the call over to Bob Ben, our Chief Financial Officer, who will provide a detailed review of our second quarter financial results and capital position. Following Bob's remarks, Greg, Wendy and Jens will offer in-depth updates on our business and unit performance, including progress on our growth strategies, new product developments, key program wins and the expansion of our customer relations. Thank you, and now over to Bob.

Thank you, Ed, and good morning. I will review our financial results for our second quarter of fiscal year 2025, followed by a review of our cash position. Consolidated net sales for the second quarter of fiscal 2025 increased 12.1% to $49.5 million compared to net sales of $44.1 million in the prior year second quarter. This was our second consecutive quarterly year-over-year increase in sales. Second quarter net sales growth was led by a 129% increase in sales for our Green Energy Solutions business unit and a 9.9% increase in PMT sales, which was due primarily to higher sales to semiconductor wafer fab customers. Sales growth for the second quarter of fiscal 2025 was partially offset by a 6.0% decrease in Canvys sales and a 22.8% decline in Healthcare sales, reflecting lower demand in the quarter, unrelated to any specific customer or program loss. Consolidated gross margin for the second quarter was 31% of net sales compared to 28.4% during the second quarter of fiscal 2024. The largest component of the 260 basis point increase in consolidated gross margin was due to margin expansion across most parts of our business. PMT's gross margin increased to 30.3% from 28.5% as a result of an improved product mix. GES gross margin increased to 32.0% from 29.2% also due to product mix. Healthcare margin increased to 35.7% from 14.8% because of an improved product mix and manufacturing efficiencies. Partially offsetting these improvements in gross margin was lower gross margin for Canvys compared to the prior year second quarter. Operating expenses as a percentage of net sales improved to 32.3% for the second quarter of fiscal 2025 compared to 32.8% in the second quarter of fiscal 2024. Operating loss was $0.7 million for the second quarter of fiscal 2025 versus an operating loss of $2.0 million in the second quarter of last year. Income tax benefit was $0.3 million or an effective tax rate of 28.8% versus an income tax benefit of $0.5 million or an effective tax rate of 21.6% in the prior year second quarter. Net loss for the second quarter of fiscal 2025 was $0.8 million or $0.05 per diluted share compared to net loss of $1.8 million or $0.13 per diluted share in the second quarter of fiscal 2024. EBITDA for the second quarter of fiscal 2025 improved was approximately breakeven versus negative $1.2 million in the prior year second quarter. Please note that EBITDA is a non-GAAP financial measure, and a reconciliation of the non-GAAP item to the comparable GAAP measure is available in our second quarter fiscal year 2025 press release that was issued yesterday. Turning to a review of the results for the first 6 months of fiscal year 2025. Net sales for the first 6 months of fiscal year 2025 were $103.2 million, an increase of 6.7% from $96.7 million in the first 6 months of fiscal year 2024, which reflected higher sales across our business segments except for Canvys. Gross margin was 30.8% of net sales, which was unchanged from the first 6 months of fiscal 2024. As a percentage of net sales, operating expenses for the first 6 months of the fiscal year were 31.1% compared to 31.3% for the first 6 months of the prior fiscal year. Operating loss for the first 6 months of fiscal year 2025 was $0.4 million as compared to an operating loss of $0.5 million for the first 6 months of fiscal year 2024. Income tax benefit was $0.2 million during the first 6 months of fiscal 2025 versus an income tax benefit of $0.1 million in the prior year's first 6 months. The company reported a net loss of $0.2 million or $0.01 per diluted common share for the first 6 months of fiscal year 2025 versus net loss of $0.6 million or $0.04 per diluted common share for the first 6 months of fiscal year 2024. EBITDA for the first 6 months of fiscal 2025 was $1.7 million versus $1.4 million in the prior year's first 6 months. Moving to a review of our cash position. Cash and cash equivalents at the end of the second quarter of fiscal 2025 were $26.6 million compared to $23.0 million at the end of the first quarter of fiscal 2025. Operating cash flow was $5.5 million compared to $0.8 million in the prior year second quarter. This was the third consecutive quarter of positive operating cash flow. Capital expenditures of $0.5 million in the second quarter of fiscal 2025 were primarily related to our facilities and IT systems versus $1.5 million in the second quarter of fiscal year 2024. As a result, free cash flow was $4.9 million for the second quarter of fiscal 2025. We paid $0.9 million in cash dividends in the second quarter of fiscal year 2025. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the third quarter of fiscal 2025. As the end of the second quarter of fiscal 2025, the company had no outstanding debt on its $30 million revolving line of credit with PNC Bank. Now, I will turn the call over to Greg, who will provide more details for our PMT and GES business groups.

Thank you, Bob, and good morning, everyone. As we have stated in prior calls, we remain very optimistic about the future, both over the short and long term. Coming out of FY '24, we had a strong backlog, numerous new product introductions and expanded customer base and several development programs transitioning from beta testing to preproduction. Building on this positive momentum, we are pleased to report continued growth in Q2 FY '25 in both our GES and PMT strategic business units, including quarter-over-quarter and year-over-year growth in our semiconductor wafer fab equipment manufacturing business. Starting with our GES business. GE sales grew 129% to $5.9 million. The strong sales growth in this quarter was enhanced by strong bookings and increased backlog growing by over 16% in Q2. Many of our recent achievements have been in development since FY '23 and FY '24, and it is rewarding to see them come to fruition. Our pitch energy modules and other products continue to gain momentum and market share as we add new customers and complete beta testing with our key owner operators. Today, we serve dozens of wind turbine owners and operators, including exclusive partnerships with the top 4 owner operators of GE wind turbines in North America, specifically RWE, Invenergy, Enel and NextEra. Additionally, we continue to grow this program globally, expanding into Europe and Asia with GE and other new products for turbine platforms such as Suzlon, Senvion, Nordex and SSB. As we have mentioned previously, our GES growth strategy is focused on power management applications in the green energy space. In a short time, we have designed multiple products, received several patents and built a growing base of large global and industrial leading customers and partners. This process positions us to establish a more predictable quarterly revenue and booking stream in our GES business scales. We believe our second quarter performance demonstrates the benefits of our multiyear GES growth strategy. Additionally, our customers continue to highlight our strong market position in our core GES power management applications. Our global pipeline continues to grow as we capitalize on numerous opportunities to support the significant energy transformation such as wind turbine repowering projects. Turning to Power & Microwave Technologies Group or PMT, which includes the Electron Device Group, our legacy Tube and Semiconductor wafer fab equipment business and the Power and Microwave Group. Sales were $34.4 million, up 9.9% compared to prior year. We continue to see growth in our RF and microwave components business and with our semi fab equipment manufacturing customers. Our combined GES and PMT backlog remained strong as an increase to over $101 million in Q2. Given our inventory position, we will continue to ship many incoming orders from stock as we did last quarter. We remain focused on managing all aspects of our business to maximize profits while meeting the needs of our expanding customer base. A key component of our growth strategy is selectively expanding our global technology partnerships. We continue to add new partners who address technology gaps in our offering and align with our strategic growth priorities. Through these partnerships, we often identify opportunities for new products that we design, we manufacture and test in-house. This approach enhances the value we provide to our customers and allows us to capture more revenue while expanding and diversifying our customer base. Our technology partner relationships are extremely strong and when appropriate, we collaborate on new component development, strategic purchases and long-term planning. We are investing in our infrastructure to support our growth. This includes hiring talented design and field engineers to enhance our design and manufacturing capabilities. Our growing in-house design, engineering and manufacturing teams are doing an excellent job supporting increased demand for current products and new product designs. Our field engineering team continues to identify new customers and opportunities. With this team, we will keep identifying, developing and introducing innovative products and technologies for green energy, power management and RF and microwave applications. Heading into Q3, FY '25, we are excited about the opportunities within PMT and our GES businesses. As I mentioned, Q2 FY '25 bookings were extremely strong in our GES SBU, and we see a positive outlook in our semi-fab market. Key customers in GES and RF and Microwave are forecasting growth in FY '25. And our technology partners continue to support our unique global business model, driving our business forward. We have many reasons to be optimistic about the growth strategies we are pursuing and the future of our business. Our unparalleled capability and global go-to-market strategy set us apart in the power management, RF and microwave and green energy markets. We have developed a unique business model that combines legacy products with new technology partners and ES capabilities, aligning our growth strategy to deliver engineered solutions to a global customer base. This model differentiates us from our competition. By maintaining our steadfast and creative focus on customers, we continue to excel, capitalizing on opportunities as they arise. The execution of our strategy has never been stronger and is evident that our customer and technology partners rely on Richardson Electronics products and support more than ever. And with that, I'll turn it over to Wendy Diddell to discuss Richardson Healthcare.

Thank you, Greg, and good morning, everyone. In the second quarter of fiscal year 2025, our Healthcare division generated $2.3 million in sales, reflecting a 22.8% year-over-year decline. All product lines experienced lower performance compared to the prior year. Despite the sales drop, gross margin improved to 35.7%, up from 14.8% in the same period last year, and 32.3% in Q1. This growth was driven by improved manufacturing absorption and a favorable product mix, notably higher margin parts and CT tube sales. We maintained steady production of repaired Straton Z tube and advanced our repair program for the Straton MX, MXP and MX P46. Although the first MX Series live tube fell short of expectations, our engineering team quickly isolated the problems and implemented improvements. This allowed us to restart live testing in December, keeping us on track for launch later this fiscal year. Through disciplined expense management and an improved gross margin, our losses year-to-date are less than the prior year. Looking ahead, we are committed to enhancing sales and profitability while exploring strategic options for the health care business. I'll now pass the call to Jens Ruppert to discuss Canvys results.

[Thanks], Wendy, and good morning, everyone. Canvys engineers, manufactures and sales custom displays to original equipment manufacturers across global, industrial and medical markets. Despite some macroeconomic related challenges impacted the second quarter, Canvys remains resilient in its mission to deliver high-quality solutions tailored to our customers' needs. Net sales decreased 6.0% to $6.9 million during the second quarter of fiscal 2025, compared to $7.3 million in the second quarter of fiscal 2024, reflecting a temporary dip due to lower sales in our European markets. Nevertheless, we are confident in our ability to navigate these fluctuations. The German economy, one of our core markets is currently facing headwinds. The IFO Business Climate Index, a key indicator for economic conditions dipped to 84.7 points in December from 85.6 in November, marking the lowest level since May 2020. While this represents challenges, Canvys is poised to adapt and emerge stronger by focusing on innovation and customer engagement in this difficult global economic environment. On a positive note, our backlog grew from $38.1 million at the end of fiscal 2025 first quarter to $39.1 million at the end of the fiscal 2025 second quarter, providing a robust foundation for future business. The increase highlights the trust our customers place in our products and services. Gross margin as a percentage of net sales was 31.7% during the second quarter of fiscal 2025 compared to 33.5% in the same fiscal 2024 period, largely due to increased freight costs. We are actively exploring ways to optimize costs and improve efficiency to enhance our margins moving forward. During the quarter, Canvys secured orders from both repeat and first-time medical OEM customers for a variety of applications. Additionally, our solutions continue to serve numerous commercial and industrial applications. For instance, our products enhanced passenger information systems within trains and buses as well as human machine interfaces, HMI; technologies used in printing, vending, milling and packaging machines. Our strategic initiatives are designed to elevate Canvys' visibility and position us as a leading player in the market. By actively seeking new opportunities and fostering connections with potential customers, we aim to drive sustained growth and innovation. We continue to engage directly with industry players and stakeholders fostering collaborations and strengthening our market presence. Despite recent economic challenges, primarily in our European markets, we remain committed to supporting our customers as they adapt to these conditions. Many are taking a cautious approach to new product development and inventory management and we are here to help them succeed in this environment. Looking ahead, we are cautiously optimistic about improving demand in the North American markets. Positive indicators suggest a steady recovery as conditions stabilize, reinforce by encouraging customer feedback. Our dedicated sales teams continued to explore new opportunities, while I focus on implementing strategic plans to ensure sustainable growth and deliver long-term value to our stakeholders. Our dedicated sales team continues to explore new opportunities, while I focus on implementing strategic plans to ensure sustainable growth and they have a long-term value for our shareholders. I will now turn the call back over to Ed.

Thanks, Jens. We knew Q2 would be a challenge. However, it's nice to see the plan to return to growth in the third quarter, supported by incremental growth in Canvys backlog. Despite the ongoing uncertainties in the global and change in the political landscape, we remain steadfast in our commitment to our long-term growth strategies. Our Green Energy Solutions business continues to present exciting opportunities with an expanding pipeline of global customers across the wind energy, transportation and power management sectors. Shipping orders from inventory on a regular basis helps improve our cash flow and expands our gross margin. Product deployment and customer approvals are still taking longer than we'd like, but these partnerships are solid and support our confidence in our multiyear growth strategy. At the same time, we're seeing strong momentum in our semiconductor wafer fab assembly business, rising semiconductor demand driven by advances in AI, increased data center capacity. 5G deployment and efforts to vocalize semiconductor manufacturing is fueling this growth. While we have good visibility for this coming quarter, we anticipated sustained growth in the semiconductor wafer fab equipment market, which provides the resources needed to support the continued investment in our Green Energy Solutions business. Our disciplined approach to managing expenses, optimizing inventory levels and maintaining a strong balance sheet remains a top priority. These efforts will enable us to generate operating leverage as sales continue to grow. On behalf of everyone at Richardson Electronics, thank you for your continued support. We look forward to sharing updates on our progress, and we're now happy to answer your questions.

[Operator Instructions] Our first question comes from the line of Anja Soderstrom from Sidoti.

And congrats on the quarter here. It seems like you are trending as expected with a pickup in the second half. But I'm just wondering with the recent multimillion orders, what time frame are you expecting those to ship within?

Can you hear me? Yes, we've already started to ship. The balance of it was shipped throughout calendar year 2025 but those products, those contracts, we've already started to ship at the beginning of December. So it's moving along great.

And those were for the non-GE wind turbine pitch modules, right?

Well, there were a combination in terms of overall bookings, but the 2 largest orders that I mentioned in the press release were both for GE wind turbine platforms -- from 2 of the largest owner operators of turbines. One of them was a new customer, Xcel Energy, and the other one is RWE.

And how penetrated are you with those? Would there be -- could it be a potential for follow-ups or...

Absolutely. In fact, that's one of the things of ULTRA3000. We shipped close to $30 million and the numbers we see, we haven't even put a dent into the opportunity. So yes, they'll continue. This is Phase 1 of most of it. What they do is, they pick a number of farms. They roll that out, do another capital expenditure at the end of 2025, do another rollout and then it continues until they've completed all their wind turbines. One thing I want to add, which is really fantastic for the company is the large order from this customer was for repower program. And so this is where we are listed on the bill of materials when they do a repower for their entire wind turbine, which is similar to if you took a car apart and replaced everything on it and make it brand new again. And so Richardson being listed on the bill of materials for repowers should expedite the sales growth of the ULTRA3000 and the multi-brand.

Okay. And I'm just going to squeeze in one more. Can you just talk to some other GES opportunities that you think could come to fruition in the near term?

Yes. The programs we're working on the multi-brand. We introduced that at the end of Q2 in Europe. That's getting traction, both in Asia and Europe. We have a number of testing going on with our IGBT modules, also in wind turbines. We're in the process of finalizing our ESS strategy. And so these aren't -- it's replacement of lead acid batteries, but these are products that don't exist today, and they have to be designed to support and work in the customers' entire system, not just in that battery box. So the engineering team has done a great job. It takes time. But all those programs are moving forward, and we have weekly and biweekly calls with some large owner-operators to continue making the product fit and work within their system moving forward. So very positive.

Our next question comes from the line of Bobby Brooks from Northland Capital Markets.

So, in the prepared remarks and the press release, new program wins were mentioned as a benefit to the second quarter. So I was just hoping to get some more color on where those wins occurred and why? I know maybe some of it was from the earlier press release of those multimillion-dollar orders. Are those -- and then just secondly, are those program wins expected to be a multi-quarter benefit? Or is it more like a new customer buying ULTRA3000s for the first time for kind of a smaller project?

Yes. I'll touch on the bookings side of it, there are new customers. And again, one of the things I've always mentioned over the past 2 years is we continue to gain market share. We started out with a couple of large customers. Today, we're selling to over 17 of them in North America. And so from a bookings point of view, they were customers that we were working with, doing designs. And then we -- we did a great job supporting it, got approved by engineering. They got their capital expenses approved and they placed the order in the second quarter. So it's new customers. But like I mentioned, the larger orders that we did the press release on were with the ULTRA3000.

Okay. And so just to kind of confirm, those new program wins are really kind of centered within the turbine opportunities? Or was it anything outside of that?

Yes. Majority of it was in the wind turbine application.

Okay. Great. And then just kind of SG&A was up 10% year-on-year compared to sales up 12% on a year-over-year basis. The press release mentioned it was tied to incentives that were tied to sales growth. So I'm just trying to sort out if we see similar growth rates going forward, is SG&A going to continue to increase at a similar pace and I'll just add, in the first quarter, sales were up 2.2% and SG&A was up 2%. So just trying to get a feel of like where SG&A trends as sales grow?

Bobby, it's Bob Ben. Yes, as you noted, most of the increase in the second quarter was due to the incentives tied to the sales growth. In the quarter a year ago, we really didn't pay out any incentives due to the performance then. There was a large loss and sales were low. So this quarter, with the improvement over the 6-month period, there was an increase there. Regarding going forward, I think we expect some sort of an increase in the next 2 quarters, again, based upon sales growth, but not at the levels that you mentioned on the 10%.

So it will lag sales growth more notably?

Yes.

Our next question comes from the line of Brett Davidson from Investletter.

I got a couple of quick questions. One is, can you guys provide an update on the shipping time line for the diesel locomotive family of products?

Yes. The one major program we're working on is expected to ship, it's over $1 million at the end of Q3 and that's the main one. And then they're taking that product and obviously, building up their locomotives and shipping them to their customers to get testing done there. So on the electric locomotives, we have a large shipment going out, which is scheduled to go out at the end of Q3.

Are those starter modules or the battery...

No, that's the electric locomotive. So, on the starter modules for electric and diesel locomotives, those have started to ship. They just gave us their forecast for 1,000 trains this calendar year, and we'll start shipping those this quarter and then throughout 2025, and it's 1,000 trains, 1 per train.

And can you provide color on the drawdown in inventory during the course of the year. Are we looking at a couple of million dollars, $5 million, $10 million. Kind of what does that kind of look like through the course of the year?

Brett, it's Bob Ben. Yes, the inventory, as you know, was down a little bit in the second quarter. And that's due to improved management. We're trying to bring in less inventory and sell what we have on hand. But going forward, in the third and fourth quarter, as we've said, we're expecting an increase in sales and so I think there'll be some growth, but it shouldn't be that significant. We're going to have to bring in some products to sell for Q3 and Q4 sales, but I don't expect a significant growth there.

Okay. So you're expecting that to track kind of where it is at now, not a drawdown during the course of the remaining portion of the year?

Yes. Probably not a drawdown with increased sales.

Got it.

But again, not a...

[Operator Instructions] Our next question comes from the line of Ross Taylor from ARS Investment Partners.

Congratulations on the progress you guys are making. Quick. In the past, you've talked about the outlook for the semi-cap equipment related space as having calendar '25, particularly second half showing a significant run rate and your key customers indicating that they would expect that second half of '25, first half of '26, you could be running at levels equal to or better than you saw at your peak a few years ago. Is that scenario still playing out, you think?

Right now, I think we mentioned it in the script that visibility is more challenging just that for the -- for example, for us, for the Q3, we have good visibility and the numbers look good. They should increase again. But beyond that, it seems like our customers are kind of keeping their cards a little closer to the best this time. We're not hearing anything to the contrary on that, Ross, meaning they're not telling us, expect a drop off. As a matter of fact, they can tell us -- they tell us to keep the momentum going. That's what we can see right now. So no bad news has been given to us, and we continue to see quarter-over-quarter increases in our revenue and in our demand.

Okay. Great. Great. And second, I think people at times get confused about your wind turbine business, and they see moves or steps that might slow the adoption or implementation of new turbines as being negative to your business. It's my understanding that you're really an aftermarket, a refit, rebuild type play, and that market is still very lightly penetrated even for comments you made on this call today. So, is that really the case where if the U.S. -- if the President or President-elect were successful in slowing the adoption of new wind turbines that shouldn't have a significant impact on your wind turbine related business over the next several years?

Yes, that's correct. Our products go into existing wood turbines today. And as I mentioned before, we've also now started to participate in the repowering of wind turbines, which most people do, instead of buying new ones, again, like ours. So that will have no effect if there's a decrease in new wind turbines being shipped over the next -- or sold over the next couple of years because our business is focused on existing wind turbines and getting the lead acid batteries out of those.

Great. And if I can sneak one or two quick and one with regard to your inventories. Where do you stand with regard to building up your inventory of tubes to cover for the fact that Thales will be stepping out of the business, you've been building that up fairly aggressively. It's a fairly significant portion, I think, of your overall inventories. And at some point, my assumption is you'll probably achieve a level where you're comfortable and at which point then you would stop building them and actually, eventually, those will become cash flow as they move into the market. And the second question I wanted to ask just quickly is regarding the medical imaging space. In the past, you've talked about the idea that it basically needs to either be able to swim on its own or you would take steps to move away from it, monetize it. Where do we stand with regard to whether that's going to be able to swim on its own or need to be monetized. So Thales related inventories as a percentage of overall inventories and medical imaging as a future.

Sure. As far as Thales is concerned, we've had an agreement with Thales now that goes back about 20 years. And so we were manufacturing identical products in Brive, France that we acquired from Philips, and we made an agreement to consolidate our manufacturing facilities with theirs in [indiscernible], France. And it's been a very successful agreement. We do over $20 million a year on those products. The unfortunate part is that Thales has made a decision that they are going to exit the manufacture of those products in the next 2 or 3 years to come. And so it puts us in a position to try to move equipment and technology that belongs to us to other sources. So, in the meantime, we built up a very substantial inventory, which now you're seeing start to level off and they're going to discontinue that, Wendy, is it in 2025?

Right. We have 1 more year of inventory build, Ross, and that will end at the end of December.

So that inventory will go down substantially as we move the equipment to other sources, and you'll continue to see that. We had a similar situation when we closed our business in France and moved to Thales. We took in $10 million worth of inventory. And I can tell you that we sold every one of those tubes. And so although it looks like we're buying a lot of inventory, tubes are like fine wine, they last forever. They're in a vacuum and those tubes are going to sell. Our problem is going to be trying to find other sources for those tubes.