Welcome, and thank you for joining today's FY 2019 Fourth Quarter Earning Call for Richardson Electronics. Please note that all lines will be muted until the Q&A portion of the call. [Operator Instructions] I will now turn the call over to Ed Richardson, CEO. Please go ahead.

Good morning, and welcome to Richardson Electronics' conference call for the fourth quarter of fiscal year 2019. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Gregory Peloquin, General Manager of our Power & Microwave Technologies Group; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for audio playback. I would also like to remind you that we'll be making forward-looking statements and they 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. Fiscal year 2019 was overall a good year for Richardson Electronics. Our FY 2019 revenues grew 2.1% over prior year on a full year basis. PMG, Canvys and Healthcare all exceeded prior year performance with increased demand coming from investments we've made in our growth initiatives. Our core power grid tube business also performed well, although it was negatively impacted by the continued slowdown in the semiconductor wafer fab equipment market. Our performance was even more remarkable when you consider FY 2018 was a record year and we had one additional week. The teams worked hard throughout the year to overcome market challenges, while continuing to take advantage of our existing global infrastructure. Everyone is focused on efficiency gains. Returning the company to profitability, while investing in our future growth is our top priority. I will now turn the call over to Bob Ben who will share the highlights of our fourth quarter and full year financials. Then Greg, Wendy and Jens will provide more details on their business unit performance.

Thank you, Ed, and good morning. I will review our financial results for our fourth quarter and fiscal year 2019 followed by a review of our cash position. Net sales for the fourth quarter of fiscal year 2019 were $42.2 million compared to the prior year's fourth quarter of $45.5 million, which was a decrease of $3.3 million or 7.3%. Net sales decreased $5.1 million for PMT, which was partially offset by increases of $0.7 million or 10.8% for Canvys and $1.1 million or 68.7% for Richardson Healthcare. Gross margin for the quarter was 29.7% of net sales compared to 34.1% of net sales in last year's fourth quarter. This was primarily due to a less favorable product mix including a higher percentage of power conversion and RF and microwave components as well as higher costs related to CT tube production and Healthcare inventory write-downs. In addition, gross margin in the fourth quarter of fiscal 2018 also included over-absorption in the LaFox manufacturing area associated with higher demand from customers in the semi-wafer fab equipment market. Operating expenses were $12.5 million for the fourth quarter of fiscal 2019 compared to $13.7 million in the fourth quarter of fiscal 2018. The decrease in operating expenses resulted from lower incentive compensation expense as well as lower salary and other related expenses due to headcount reductions throughout fiscal 2019. Operating expenses as a percent of net sales decreased to 29.7% in the current quarter from 30.1% in last year's fourth quarter. In the fourth quarter of fiscal 2019, the company recorded a $6.3 million non-cash goodwill impairment charge, which represented the full amount of goodwill associated with the IMES reporting unit. The impairment resulted from fourth quarter events that decreased the forecasted future cash flows and the fair value of the IMES reporting…

Thank you, Bob, and good morning everyone. In our fourth quarter of fiscal year 2019, PMT sales were $32.1 million versus $37.2 million in Q4 of FY 2018. Our gross margins in the quarter were 30.7% versus 34.3% in Q4 of last year. Q4 results when compared to prior year were once again affected by the downturn in the semi-fab wafer market. However, this market decline was partially offset by the excellent growth with our new technology partners supporting the RF Wireless and Power markets and some market share gains in various of the legacy tube businesses. Our book-to-bill in Q4 was 1.07 as we continue to see major booking trends in our PMG business unit. This growth is based on a demand creation model with our new technology partners, numerous design wins and our unique business model and this strategy allowed us to grow sales in FY 2019 even with such a major downturn in one of our largest markets. We grew the main parts of our core business throughout FY 2019 as we are taking advantage of our long-term customer relationships, while our customer count continues to grow with our expanded product range. Favorable market conditions in the industrial, RF wireless infrastructure or 5G and microwave markets are leading this growth. We will weather the storm of the semi-fab market decline and are prepared to meet the demands when business picks up again. As the market conditions changed, we responded quickly throughout FY 2019 to improve efficiencies and help offset the slowdown. These actions allowed us to generate more opportunities in growing markets, using our existing global infrastructure and headcount. Our revenue growth with our new technologies is being supported by key partners such as Qorvo, MACOM, Anokiwave, Silicon Carbide and Fuji. Our core legacy business continues to…

Thank you, Greg, and good morning everyone. Healthcare sales in the fourth quarter grew 68.8% over the fourth quarter of fiscal 2018. Growth was driven by the sale of replacement CT tubes for Canon equipment, revenue from P3 agreements and increased sales in both parts and equipment. During the fourth quarter, we also shipped four more pre-owned Canon CT systems with ALTA tubes inside which helps create future demand for parts and tubes. We are pleased to announce, we recently achieved a critical milestone in our CT tube plan. We now have several ALTA tubes in the field with more than 400 days' life and counting. We also have several large multivendor service organizations buying tubes for replacement on a regular basis. The OEM still has a very high percentage of systems under contract, but we are making progress. Interest in our P3 capitated risk programs grew throughout the year. A P3 program is a good option for customers who want to avoid the risk of early tube life failure. P3 agreements are recurring revenue contracts where Richardson agrees to provide replacement parts and tubes in exchange for a fixed monthly fee over a three-year period. If the tube fails during the contract period, the replacement is on us, not on the customer. We continue to offer P3s with installation provided by third-party service companies we have trained. This option allows our customers to move away from the OEM and to choose between in-house service, a third-party service provider or a combination of both. Unlike many OEMs, we are flexible in providing programs tailored to our customer requirements. We also provide CT system training for the hospitals IDNs and third-party service organizations as well as 24/7 technical support via the phone. On a full year basis Healthcare sales were up…

Thanks, Wendy and good morning, everyone. Canvys which includes the engineering manufacture and sales of custom displays to original equipment manufacturers in industrial and medical markets delivered strong performance with sales of $7.3 million during the fourth quarter of fiscal 2019 an increase of 10.8% over the same period last year. The revenue increase for the fourth quarter was related to an increased customer demand mainly throughout North America. On a year-to-date basis global sales grew 4.8% compared to a very strong fiscal year 2018 that had sales growth of 29.9% versus fiscal year 2017. Gross margin decreased slightly as a percentage of sales in the fourth quarter fiscal 2019 to 32.2% from 32.7% the same period last year. The decreased gross margin while still very strong for our display business was related to an unfavorable product mix and foreign currency effect. On a year-to-date basis, our fiscal year 2019 gross margin as a percentage of sales increased to 32.5% from 31.5% versus fiscal year 2018. Q4 fiscal 2019 was our strongest revenue quarter since Q3 fiscal year 2018. Even with the strong growth, we were able to increase our backlog quarter-over-quarter again. The healthy backlog position along with projects that are currently in the engineering stage position us well for further growth. Our backlog consists of purchase orders that are typically shipped over one or more years. Customers issue product orders that vary quarter to quarter based on customer demand, regulatory issues and other factors. During the quarter, we received seven new orders from both existing and first-time medical OEM customers. Applications where our displays are used are numerous. Some of these include, optical biometry, measuring the anatomical characteristics of the eye, Cryolipolysis systems that break down fat cells by cooling off body fat. Digital colposcopy for the detection…

Thanks, Jens. We've hit the ground running in FY 2020. And we're optimistic that we'll have another growth year. Healthcare had strong sales in the fourth quarter. And our CT tube sales are picking up. We now have several large customers buying our tubes on a regular basis, and engineering is focused on new tube development. PMG continues to do well with its disruptive technologies. We're working closely with our suppliers to ensure we have sufficient inventory to support the global rollout of 5G. Our industrial Power Tube business and Canvys are performing well. And provide cash to support the company now and in the future. We will continue to conserve cash to support our key initiatives, while the company returns to profitability. At this point, we'll be happy to answer a few questions.

[Operator Instructions] And we do have one question in the queue at the moment. Probably your line is on muted.

Hi. Good morning. Can you guys hear me?

Yes, yes.

Oh Yeah, Mark Zinski, here. Good morning, everyone. Hey! Ed…

Hi, Mark.

I just -- I'm going to try to pin you down a little bit, on some guidance for fiscal year 2020. So, I mean you mentioned, you're expecting growth, so is it -- are you expecting sales growth?

Yes we are. Our plan is for sales growth. A lot has to do with whether the semiconductor wafer fab business recovers quickly. And that business is like a roller coaster. And right now it's pretty much on the bottom. So -- but at the same time the PMG business is growing dramatically, as you can see, and Healthcare is starting to get traction so yes we're predicting growth.

Okay. So just generally speaking, I mean you do have some growth levers. But the greatest unknown is somewhat the semiconductor space and how fast that might recover. Is that fair to say?

Oh! I guess. I mean to give you some idea again last year that total business between several customers was about $20 million and this year it dropped to about $12 million somewhere in that area. So it's an $8 million swing, but so far PMG and Healthcare and Canvys and even EDG have more than made up for that.

Okay, great. And Greg, are you seeing, I guess, I'm looking for some color on the 5G investment. Can we compare it to prior year ramp-ups? Is it progressing that way or is there some delay just because of general uncertainty with China and whatnot?

Yeah. There's -- the rollout of 5G is really unique just, because it's a complete upgrade of the current system. So it will be longer, it will be larger and then in the end with technology we will be more advanced. In talking to our suppliers and our repeat customers, they're seeing large double-digit growth obviously last year. Ours is much higher because we obviously have a little bit less market share, as we're growing. And next year they're looking at the same type of numbers between 20% to 30% growth. In the infrastructure rollout and I want to separate this Mark and I know we've talked about it, the numbers coming out from the 5G rollout include handset business. That is not a portion of business that we address. We're looking directly at the infrastructure rollout, which is based on different parameters than the handset business. But we had an excellent year. We shipped over $25 million into the 5G market last year or in fiscal year 2019, so it's booming. Our book-to-bill was 1.38 in that business in Q4. So, again, anybody you talk, you talk to the service providers, you talk to the OEMs, and you talk to our suppliers, the numbers are varied, but it's somewhere between 25% to…

Okay. Great.

It won't go more than that.

Okay. Are you seeing any subtleties within semi like memory versus storage for instance? There's some evidence that memory is starting to come back a little bit. I mean, is that how you -- do you divide up the semi space that way or does that not matter to you?

It's not that it doesn't matter, but with your memories, your microprocessors, your DSPs, your field programmable products that's kind of on the cloud side and the handset side. On the infrastructure side, we look mainly at the RF content of that, the transmitter content. So you're looking at picocells, microcells, test equipment for the 5G systems, SATCOM which is going to help mitigate the issues of coverage with 5G base stations, they're using satellites. That's really what I look at and that business is still very strong. And again, our portion of it is small now and we continue to grow.

Okay. great. And Wendy, I'm just wondering, if you might be willing to go out on a limb in terms of Healthcare for fiscal 2020 and is there the possibility that you might experience like a step-up growth function? Is that possible? Or are you just kind of seeing a slow gradual-type ramp?

No, I mean, I guess, am I willing to go out on a limb? We absolutely expect good growth in FY 2020. We are seeing on a definite pickup in interest in the CT tubes and as we sell more of the CT tubes, we're seeing growth in our part sales and our equipment sales continue to be very strong particularly in Latin America and some of the other developing countries. So, we feel good about growth. And I think that's where we'll leave it for now, very good about growth. How's that?

Okay. And then Bob last question. For operating cash flow for fiscal year 2020, do you think it will be positive?

I think it will be close to what we had in fiscal year 2019. So I would say fiscal year 2019 was a minus $2.6 million and I think we'll be close to that.

Will be close to that. Great. That's very helpful. Okay. That's it for me. Thank you.

Thanks Mark.

Thanks Mark.

Thanks Mark.

And we'll take our next question. [Operator Instructions]

Good morning. Eric Landry, BML Capital. Can you hear me?

Hi, Eric.

Hi, Eric. Yeah, we sure can.

Okay. Great. So Greg, so PMT was down $5.2 million and I'd just like to sort of piece together the drivers of that. So there were some comments that last year semi-wafer fab was $7 million and currently or at least in the just finished quarter it was running at about $1 million a month. So that's a delta of minus $4 million. And I'm assuming that your PMG business grew quite well so that made up probably a portion of that and also that the other legacy power tube business was also growing so I'm kind of surprised that the delta was $5 million down. I would have thought something in the maybe $1 million to $3 million down. So could you help me understand what -- I guess what sent it down $5 million rather than a smaller number?

Yes. In looking at quarter-over-quarter comparisons Q4 was the largest quarter for LAM or the semi-wafer fab market and that was down close to $4 million just in the quarter. Also the legacy tube business, although we had some product lines that were up there's others that were down surprisingly lower than we thought they would be. And then the increase in the PMG business although the bookings went through the roof was a strong quarter, but it wasn't enough in the quarter to make up the downturn specific to that quarter. However for the year, it completely made up the downturn in the semi-fab market and certain tube legacy product lines that were down. So like we talked about at the beginning of the year I was very confident that the growth in PMG would offset the sales growth decline in the wafer fab market and that's what we were able to do.

So are you saying that there were -- well I guess the surprise was that the legacy power tube business didn't grow or wasn't even flat. So the largest piece of the segment which is probably somewhere just under $100 million was a little bit of a negative surprise in the quarter. Is that -- am I kind of reading that right?

The tube business has increased in Q1 so far. It just was timing of certain orders. So the biggest miss or the surprise was the decline in certain product lines of the tube business and Q4 was much more than we thought. And the increase in PMG could not make that up.

Okay.

We didn't get those orders and those shipments until Q1.

So you're saying that the legacy power tube business which I'm guessing is somewhere a little bit less than $100 million on an annual basis you're saying there were some orders that were pushed out or that they didn't materialize like you had thought?

Both. So it was timing of the order. Some were pushed out. Some delivery from the supplier. Just a combination of a number of things made Q4 for the tube business the legacy tube business was down more than we had expected and we couldn't make that up along with the wafer fab business with the PMG growth.

Okay. And I think you also referenced that there were some pushouts in your new high-growth PMG business?

No no.

Okay. So that was -- okay. So you're referring strictly to the legacy power tube business. That's where the negative surprise was and -- I guess I'm still not clear. Those were pushed out or just business that didn't happen?

Both. So we expected some orders. The timing of them since it's an MRO repair business they didn't need the product till Q1 and we thought they were going to take it in Q4 and it didn't happen. So that's why the numbers are what they were.

Okay I got you okay. But you still consider that legacy power tube business to be doing okay sort of status quo? A little up a little down every quarter.

Yes. Right. So flat to plus or minus 3% growth which -- and consistently doing for the past three years we're looking at it doing the same in FY 2020 and it's obviously a great business model, but it's not a growth business it's an MRO repair business. But it's in the bills and if we can keep that flat or up slightly we're in good shape.

And there's no reason to believe it won't be the same in 2020 than it was in 2019?

Yes. We're forecasting small single-digit growth actually Eric.

Okay great. Was there an issue with any orders that you are shipping to clients of Huawei?

Well, I mean, there was a slowdown when they stopped it, but they've turned it back on and we had strong shipments in the fourth quarter to customers supporting Huawei and ZTE. The China market was actually pretty strong in Q4. But now that they've removed that stop things are back on and we're having a good Q4 and it's continuing into Q1.

Okay great. Thanks Greg. Wendy, you mentioned in Healthcare there were some inventory issues. Was that on Canon scanners mostly?

Mostly, Eric. Mostly it was Canon's Toshiba systems. We did have a couple other different brands but the vast majority was the Toshiba systems. Just older systems.

So basically you're saying that there's been pretty widespread deflation in the price of pre-owned equipment in that space?

For older systems, the newer systems are holding their price very, very well. So this is equipment that we bought some time ago. Again on the Toshiba side, it would be what you just said. There is -- there was price deterioration in some of the other categories. The smaller categories kind of the same thing where we bought products and we bought components almost back toward the beginning of our launch of Healthcare and we just didn't move them quick enough. So those are the kinds of changes that we put in place to make sure that when we buy equipment we're flipping it within the 90 to 120-day range, so we don't have these ongoing issues.

Does that imply any type of deflation for tube prices?

No it doesn't really have much to do with tube prices. It really is older scanners that are causing us more problems.

Okay. Is the G in beta testing yet or is it still on the benches there in LaFox?

We've run one on scanner. It's -- at IMES. But we are still in development, so it's not out in the field. It is not in a customer beta site. It'll be a while before we put it into a customer site.

I thought the guidance was last time, we talked that you had hoped to do that by June. Did I get that wrong?

We did have a beta in place in June. So that beta went well and now we're back -- it's back here in LaFox and we're working on making sure that we have all the IP issues worked out that we have sources for all the components and that we can make the tube and make it solid and then put it out into customer beta sites. So we did accomplish our goal of having one in beta in IMES in June. We absolutely succeeded on that front.

So is the June of 2020 date still the target or has that been pushed back?

It's still our target. And we're working very hard to accommodate that, but we want to make darn sure that we get it into the customer sites and that they're there long enough to validate any potential issues before we do a full release.

Okay. I just have a couple more here. So real quick Wendy, I think 40% margin in Healthcare has sort of been the number that's been talked about. Any idea what -- if indeed that's accurate what type of tube volume that requires to get to that level?

Obviously more than what we're selling today. I would say to get to a 40%, it's not a lot. I mean again a big part of our issue as I mentioned in the call has to do with more of manufacturing charges and the E&O issues related to the systems we just talked about. So I would say that if we what maybe doubled a little bit more than doubled our tube sales that we'll be -- and then control the other aspects of the gross margin we'll be fine. We'll be sitting close to that 40% mark.

So that's doubled from the annualized most recent quarter or doubled from the overall 2019 level?

Double from overall 2019.

Okay. Great. Just two more here. Bob, I think if I have this correct you mentioned 30.5% would be the OpEx had all the charges not been in there which implies a little bit less than $51 million. Do I have that accurate?

That's correct.

Okay. And I assume that has significantly less incentive comp in there than 2018, right?

That's correct.

Okay. So if you guys managed to grow, I don't know 5% 6% 7% 10% is that likely to flex back up by $1.5 million $2 million somewhere in that area?

Well it's likely to go up because what you just stated the incentives go up as profits go up and our plans are based on targets and the percentages go up when the profits go up on the targets. In addition, we have some merit increases that we have in there. But I don't expect a huge increase. Those would be the two biggest.

Okay thanks. Last one. Ed, you've mentioned in presentations before -- and I don't know if I have this exactly right, but I think it's $175 million is sort of the magic number now with your cost structured where it is where half of every gross profit dollar drops to operating income. Do I have that right?

It really won't be half of every gross margin product dollar. We've got incentives and other things that go up as you just mentioned. But certainly our plan is in excess of that number and if we make the plan, we'll be profitable next year. Let's put it that way.

Okay. Thanks. Thanks for letting me ask all the questions.

Thanks Eric.

All right and we do have an additional question in queue. Caller, please remember to state your name and question.

Hey. It's Kevin Rendino from 180 Degree Capital. Very helpful having all the managers speak about their business. I'm not sure that's really the problem. This is as much for the independent directors to listen to, and I certainly wanted to get your opinion and answer on this. But, the lack of consideration for the shareholders given the dual split class is pretty well known. From my perspective, it violates every last rule of what proper corporate governance should be. Over the last 19 years, you've generated a minus 50% return for your shareholders. And yet you're hiding behind the voting interests, instead of being accountable. If I was an independent director, who oversaw the governance of how you've ruled this company, I would be ashamed. I would either make changes or I'd quit. I certainly recommend they do the right thing and create a proper voting structure. Other than that, this underperformance is going to go on forever. So Ed, what's the reason for having the dual structure in your words? Thanks.

Well, it's part of the history of the company. It was put in place in 1983, and it's remained there ever since and the board supports it. And we appreciate your opinion, and I'm sure they will take that to heart, but so far, we haven't decided to make any change.

Expect a letter from us to the board for the record. And possibly even the public letter. Thanks.

Okay.

All right, and we do have a couple of written questions that have come in.

The first is could you describe please IMES goodwill impairment change is more accounting procedure or we really lost this value?

Yes, it is an accounting procedure, and we don't feel that we've lost any value in IMES. We're higher on the organization in Healthcare than we've ever been.

Okay. And that question was from Alex Litvin with a second question as well.

What is the current amount of cash in U.S., and what is the threshold for starting repurchase of shares from market?

I'll let Bob, tell you about the cash in the U.S.

The cash in the U.S. as of the end of fiscal 2019 was $20.7 million.

And so far, of course, we -- right. So far, we, of course, just had a board meeting again, and we discussed the cash position and the board's concern and their priority is as you saw we used about $10 million worth of cash last year. And it's possible with the increase in the inventory for PMG and Healthcare that we might use $10 million worth of cash again this year. So the immediate concern is that we have cash to fund the business. In the meantime, one CT tube or two doesn't make a company, and we're already looking at plans to develop a third tube, and to develop the CT tube takes somewhere from three to five years and $5 million minimum. And so, we really want to have cash reserves to develop our Healthcare strategy to its fullest, and that's the board's priority at the moment.

All right, and I'm seeing that we have no additional questions, so Ed I'll just turn the call back to you.

Okay. Well, thank you again for joining us and for your ongoing interest in Richardson Electronics. We look forward to discussing our fiscal 2020 first quarter results with you in October. We encourage you to attend our annual shareholder meeting or visit us anytime if you're in the Chicago area. It's far easier to understand the story here when you can see our state-of-the-art manufacturing and engineering facility, and we'd love to show it to you. So come and visit us. Thank you very much.

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