Good day ladies and gentlemen and welcome to the RF Industries Second Quarter Fiscal 2020 Financial Results Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this call is being recorded today, Thursday, June 11, 2020. At this time, I turn the conference over to Jim Byers with MKR Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon and welcome to RF Industries’ second quarter fiscal 2020 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 second quarter fiscal 2020 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 in the Investor Relations page of the Company's website. I want to remind everyone that during 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 Exchange Act of 1934. When use the words anticipate, belief, expect, 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 outcomes contained in any forward-looking statements. Factors that can cause these forward-looking statements 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. Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release. And now I'll turn the call over to Rob Dawson, President and Chief Executive Officer. Rob?

Thank you, Todd. Good afternoon, everyone. And welcome to our second quarter fiscal 2020 earnings conference call. Thank you for joining today's call. I hope that all of you and your family and friends are staying safe and healthy. I'd like to start my comments by providing some detail around the significant challenges we experienced during the second quarter and how we responded. And then I’ll turn to what we're seeing now and why we think things are moving in the right direction. I don't want to dwell too much in the past of what has been a difficult operating environment for most businesses. But I do think it will be helpful to share our experiences in the quarter to better understand our results, and then get on to what's next as we continue to execute on our growth strategy. As an essential business, we remained open during our second quarter to serve and provide support to our customers, even as much of the world was shutting down. During this period of uncertainty, we continue to focus first and foremost on the health and safety of our employees, our customers and our suppliers. Protecting these resources is of the utmost importance and we've taken significant actions to ensure everyone's safety. On behalf of the board and management team, I want to first thank our employees for their fortitude, innovation and positive spirit in providing essential services to our customers with little interruption. Our production and support teams are the rock stars of this company and kept things moving throughout a difficult time. I can't thank them enough. We stated on our last earnings call in March, which occurred only days prior to the mandated stay-at-home orders that we were unsure of the full economic impact of the coronavirus and anticipated…

Thank you, Robin. Good afternoon, everyone. Jumping right in our net sales in the second quarter were $10.4 million, a decrease of 23.7% or $3.2 million compared to $13.6 million in the second quarter of fiscal 2019. The year-over-year decrease in net sales reflects a decrease in our project-based business, resulting from the slowdown in carrier spending, as well as the other factors that Rob just described. This decrease was partially offset by additional sales contributed by our newly acquired subsidiaries Schrofftech when we did not own in fiscal 2019 and C Enterprises whose prior year quarter results were for a six-week period. At quarter end, our backlog stood at $5.7 million up from the $5 million number and our prior quarter end. The bulk of this increase came from our Schrofftech division, which Rob just spoke about. Gross profit for the second quarter was $2.6 million compared to $4.1 million in the second quarter last year. Gross margins were 25% of net sales, compared to 30% of net sales in the second quarter a year ago. The decline in margins was primarily due to lower sales in our project-based business that resulted in lower coverage of fixed production costs, product mix at the Custom Cabling segment and increase sales at the C Enterprises subsidiary, whose gross margins are lower than the blended margins of our other divisions. Total operating expenses increased $100,000 to $2.8 million or 27% of net sales compared to $2.7 million or 20% of net sales in the second quarter last year. This increase was primarily due to the inclusion of newly acquired Schrofftech's operating expense in a full quarter for C Enterprises. This increase was partially offset by a $300,000 decrease in the valuation of Schrofftech's earn-out liability. Excluding the impact of Schrofftech’s additional operating…

[Operator Instructions] We'll take our first question from Josh Nichols with B. Riley. Please go ahead.

I know you mentioned there's clearly been some revenue headwinds for the quarter as most companies have kind of been experiencing in the current environment, no big surprise there. But one thing I did want to mention is like - the company's historically and this quarter as well done a very good job about managing the bottom line with this variable cost structure. We’re still generating positive EBITDA like despite the revenue headwinds. How should we think about the OpEx expenses going forward as we look at back half of this fiscal year and the company's commitment to kind of getting back to being consistently profitable?

Yes, thanks, Josh. Appreciate the question it's a good one, and it's a hot topic for us obviously at the moment. So I think I mean to your point, we were looking for some positives in the quarter as obviously, there was a lot of challenges and I hate putting together a commentary around how difficult things were, but the ability for us to kind of weather that storm was something we knew we could do, and we've still got a chance to keep doing that but we've got the right to ship on a few expense items. I think the - you know I mentioned the PPP loan that we took at the after Q2 ended. That's allowed us to keep our team generally intact and try to get through what's continuing to be a difficult operating environment. But that money is meant to get you through eight weeks roughly and make sure that everyone's intact, which we've done, our intent is that will be forgiven. We're using that for the correct things. And our expectation is that loan will be forgiven in a timeframe that the CARES Act has set out. So beyond that, I think if we returned to growth levels and sort of see the revenue return that we saw disappear during the quarter I think it gives us an opportunity to keep our team generally intact from an expense load. If we don't see that we'll have to make some adjustments. We've already started to review that pretty aggressively. The one big misnomer that kind of happened in Q2 is our gross margins get hit in a weird way when production when the productivity of our production team falls off. So we need to make sure those folks are able to keep working and we…

Thanks for the additional detail on that it’s helpful. And then I did want to ask - I know you mentioned that you're in a interesting situation because you were impacted for a large chunk of the quarter in April, quarter end with some better visibility than what some other players who reported March may have been talking about. You mentioned that you've been seeing a pickup in activity. Could you provide any type of color as far as broadly what you're looking for at least for the current quarter? Is it fair to kind of assume I guess what I'm getting at is that 2Q may be like a revenue trough is what we may see at least based on the current trajectory?

Yes, so it's hard to say, I think that's I'd love to give a really definitive answer around some even light guidance for the quarter. I think, when we look at May, May didn't look drastically different than what we saw in April timeframe. You know April, had a few pockets in there where we saw some okay things, some emergency orders and some sort of unexpected new hospitals popping up and things that we were able to participate in which was nice. I think really, what we're starting to seeing now in June is the world seems to be getting back to some purchasing patterns that are more consistent that we understand. We're also hearing the projects that I mentioned a whole bunch of that were kind of put on hold or pushed out. We're starting to hear chatter about timeframes and when they'll be - when customers will be releasing various budgets and expectation of installations. So it's hard for me to know is that going to happen. We're halfway through our third quarter, roughly now. And I think we're in a place where we're starting to see it open more. And I expect to, I'm hopeful that June will be better than what May was. And this is normally a time of year where we've seen acceleration for the outdoor build season in a lot of our wireless business. We've got a nice pipeline of stuff. I can't be certain that all of that is going to hit in the third quarter. So it's hard for me to specifically define it. If we were to have a tough Q3, I think Q4 would be a meaningful recovery over that with what we see at this point. So I know that's not a direct answer to your question.…

Okay. And then what are you seeing as far as 5G spend? Clearly, I mean there was a big push out at least in the first calendar quarter. Is that something that you're just hearing a little bit more chatter on? Or what's your guess that that's going to be more like calendar second half and into 2021? When you’re going to start seeing some of these larger orders potentially flow through.

Yes, so I haven't talked to carriers or distributors, other manufacturers that are partners with ours or peers of ours. People are kind of seeing the same thing. It's different carrier by carrier on what the expectation is, but I think the things that we are expected to start around now. I mean, typically, this is the time of year, or you get into late spring, early summer is when you would see building activities pick-up specifically, especially on outdoor kinds of things. I think, T-Mobile has come out and been pretty aggressive. Although I know there's still right away and zoning issues at times that get in the way of that, Verizon, AT&T have been, I would say a little more passive, at least from what we've seen and cautious and smart about it, which I think we believe is pushing out those projects. And some of that increased spend a little further this year, we already expected this year to be back half loaded from a project perspective for us, which relates to a lot of that CapEx, I think if I'm a betting man, I'm going to say, it'll start to pick-up later this year. But I think end of 2021 is where I would expect there to be a larger sort of increase in that spends that can also change very quickly. But I think to your earlier point, when you start looking at April results for a lot of businesses and most companies released through March and pulled guidance and said, hey, we're not sure what's going to happen next. Having operated through April, it was an interesting time and caused a whole bunch of chaos. And I think that's when we started seeing CapEx get kind of held-off until they were not going to, we're not going to do any projects. We're not going to pull-in any sites. We're not going to take any inventory because we have no one to receive it like those are some of the challenges that are more logistics, you got to have people physically able to receive materials and then go out onsite and do the work. So I'm expecting as states start to reopen, we're certainly hearing the chatter increase, which leads me to believe it's towards the end of certainly second half calendar, maybe a little further weighted towards the end of calendar Q3, end of Q4 and then 2021, I would think we're going to have to see that spend because the demand is still there.

And then just I think we discussed briefly on like the gross margin profile. How should we be thinking about the gross margin going forward as far as the product mix between what you have with like custom cables, cables and RF connectors and how you think that's going to trend based upon what's in the pipeline today?

Yes, so I think the better we do in the Schrofftech business, that'll help us. I mean, what we’ve said in the past is their margin profile is consistent and considerably better than what we have across the rest of our business. So I think I'm encouraged for multiple reasons on that business, but the margin profile will definitely help, the margins we saw this during Q2 were directly affected more by challenges of productivity where you got some overhead built into your production teams and yet you're not able to pump materials out in the same way, I think generally remedied most of those things around the social distancing setup and otherwise, and our margins without that our pricing and our margins on that side kind of stayed the same. It was really more about the variability of our teams and keeping those folks in place. So I expected after Q1, that was kind of the trough in our margins. They obviously came down in Q2, but it was more about productivity than anything else, I think going forward, the better performance we see from our RF business and from the Schrofftech business and some recovery in the custom cable business, and we were really impacted in custom cable, both from an order perspective, but also those two operations where that business primarily happens in Connecticut, in New York were both heavily impacted personnel wise. So I think we still have that 30% kind of low-30s goal out there. And from a gross margin perspective, I think it's very attainable. It's where we should be and we're expecting as the Schrofftech business picks up that that will start to help us pull that margin higher.

And then last question for me, good to see that there's a number of opportunities in the pipeline, but the recent acquisition of Schroff, how much revenue contribution was there from that acquisition just so I could get a little bit better apples-to-apples comparison and to like, given the company's balance sheet and then a lot of these smaller competitors are probably in a tough operating environment, I would assume but maybe without your financial wherewithal, would you consider this to be like kind of a target rich environment and in a position where you might be looking to do an acquisition into over the next couple of quarters?

Yes, so on the first part, Schrofftech they had a light quarter largely we had one specific project that we expected to ship out that, that didn't go but they did just $1.2 million maybe in sales, something like that in the second quarter which was generally consistent with what they did in the first quarter. That's not what we expect that business to be short-term or long-term, frankly. Yes, that's we expect a growth engine there. But there was a definite impact on the small cell side of being able to get out and do a lot of that work because just the sheer definition of small cell is going in a densely populated area. Well, that made it really tough in places like New York and New Jersey where we have meaningful business and that space came to a halt for obvious reasons. So we expect their contribution to certainly increase over time. Even with that as a profitable business, they do a good job. And that teams doing a nice job of helping us find these additional opportunities. To your second question around M&A, so we have a bunch of conversations going on leading into the world shutting down. And some of those have continued, I think sellers at the moment are a little skittish on, are they going to get real valuations? And do they feel like it's a fair time to do this? With that said, I think as time goes on, it'll get a little easier to understand new levels of revenue or profitability or difficulty in operating. And I do think there will be some, some decent targets, I'm still getting a few opportunities a week that come across my desk from a variety of sources. I think the thing that we just need to be cautious of is not getting lowered into a bunch of little acquisitions that would be very difficult to do. Anyway, that's a lot of work for a small return in an environment like today, can you physically get out, see an operation, get involved and do the things you need to do to get involved. So I'm cautious but I think over the next quarter or so absolutely interested in going that direction and finding some of those targets. I think I've already got some in our conversations. We just need to let a little time go by and make sure that what we're seeing is realistic.

[Operator Instructions] We'll take our next question from Hal Granger with Great Quarter Research. Please go ahead.

I wanted to congratulate you guys in a very, very difficult quarter on having positive EBITDA and a loss of only $0.02 per share and maintaining your super strong balance sheet which these days is more and more important. At the same time is taking care of your employees and your customers. So that's, I think you guys did a good job with all that. So congratulations.

Thank you.

Housekeeping item to start with, right of use asset, does that have to do with Schrofftech?

It’s a lease accounting, it's the new lease accounting that we have to go through on the way we handle that from a balance sheet perspective. So that's what you're seeing there.

Right. Okay, so that's independent of Schrofftech?

It is, yes.

Okay. Can you review so the dividends which I think it's fine that you guys focus more on operations and growth and not so much on dividend, so I agree with the Board's decision there. Can you give some sense about what the boards or your feeling might be regarding dividends in the future?

Yes, so it's something that, we obviously review every quarter, the company has had a long standing dividend in place going back 10 years, something like that or close to it. And it's been a nice way, I think to provide a return. That has become a 1%, 1.5% kind of yield over the course of the last little while, as we've seen the current stock position. So we still review it quarterly. This was a tough conversation. And I think there's, there's reasons why I'm certain there's some folks that are in our stock that appreciated the dividend. There's a whole separate set that wants the growth focus. And I think the discussion in this case really came down to something that I've said publicly for a few years, which is if we have a better use of capital, I think we would rather deploy that around growth and one of the things that we've done and are in the process of doing a little more, I mentioned this is we can't, we can't just sit back and hold our breath and wait for everything to get better from a sales and business generation perspective. I think that's for us, that's a dangerous game to play. I mean you saw the impact in Q2 of some projects being pushed out. Fine, I don't love it. But it's the way things worked out. There's a chance for us to double down on some of these newer pieces of technologies Schrofftech and otherwise that we've invested in. And I think there's some business generation resources that we need to continue investing in and adding to the business as well as upgrading talent overall, and it's not a huge expense. But when you look at it on an annual basis, paying out $750,000 or $800,000 in dividend payments, and then you look back on the last couple of years and the M&A that we've done. We've gotten some affordable and fair deals on the M&A side. We've added some good members to the team. I think investing in that now is a great time to do it with the intent of coming out of whatever this thing is in a stronger fashion with the right people in the right seats, we still need to streamline the operations in some spots to some earlier comments that I made. But I think the better use of that capital is to both invest in our team in the right spots, as well as looking for some potentially good M&A that will likely present itself over the next few quarters.

Can I ask you about Cables United, so when I'm looking at your financials, you talked about the $700,000 decline in expenses year-over-year. Some of that, I imagine has to be employees somewhere. And then you mentioned that unfortunately Cables United in Connecticut and New York was affected by Coronavirus, when I'm looking at that, I'm kind of reading in that that a lot of that $700,000 had to do with employee expenses at Cables United. And now after you got your PPP loan, you have you've hired back a lot of those employees. Is that a correct read or can you give us some color on what was going on there?

Yes, so you're partially right. I think that there's kind of two big things in there. One is, we kept our entire team employed with pay and benefits through this entire process. And that was something that I said to our leadership team going back to early March timeframe, when it was pretty clear, we were starting to see some weirdness. You got into the third week of March. And it was important to me that our team had some comfort that they were saying, if they were going to have benefits, and the last thing they needed was to worry about that changing. And we didn't really know what we were walking into. I mean, when we had our second, I mean our first quarter conference call back on March 12. That that night was the night we found out that schools were closing in California. The next Thursday is when California, New York sort of subsequently one after another shutdown. So we made some decisions at that point to keep our team in seats with pay, with benefits to keep them okay. Now, productivity wise, obviously, as I talked about, we had some tough times. But the majority of what you're seeing there, we obviously had lower commissions and a few less, a few less hours being worth less over time, you start adding all that up, and it can get to a pretty decent sized number, especially when you're comparing it to prior-year results that were significantly higher. So you've kind of got a mix of some people costs in there, as well as just some lower expense loads, but we purposely did not go in and take out a bunch of folks in that business.

I'm sure your employees appreciate that. And it pays off in the long run. Let me end my questions with the project base carrier spending. It seems to me that that's something that likely will happen. It's not as you mentioned, it's not clear when the timing is going to be. But is it reasonable, they'll be pretty confident that the bulk of that carrier spend which would have happened this calendar year will happen in the future at some point, hopefully next calendar year if it's not, hopefully this calendar year, but if not next?

Yes, so I think our expectation is that most of that should come back over time. The one uncomfortable part is, the more time that goes by with restrictions of travel and locally showing up in certain places. It makes it harder, I think to go through RFP or vendor selection processes and some of the things, it's carriers may be incentivized to be less creative about the number of providers that they use. We've been on a trajectory where we've been breaking into new things, sort of consistently over the course of the last few years and seeing some upside from that both in real time and then future looking. And the more time that goes by and the harder it is to keep those relationships, building and growing and getting your name into new places. That's my one concern around it from a positioning perspective, I think the spend is going to be there. It's definitely difficult to find those opportunities to displace the gigantic companies that might be in there now which we've seen some success on in the past. So I'm comfortable saying, I think the spend is coming back. I think we're still positioned very, very well. I'm hopeful that we keep getting the opportunities to play in that space the way we have even with some of the kind of logistical challenges that are being thrown at us.

, :

Hello, well, thanks for taking my question. And my questions was already answered. Good luck, thanks.

Okay, thanks Chris.

Thank you. [Operator Instructions] And at this time, we have no further questions, I would like to turn the conference back to your speakers for any additional or closing remarks.

Thank you. In closing, I'm incredibly proud of our team and on behalf of the board and management team, I would again like to thank our employees for their creativity, positive spirits and resilience during these very challenging times. Thanks everyone for your interest in support of RF Industries. I look forward to reporting our fiscal 2020 third quarter results in September. Hopefully, speaking with some of you at our Virtual Investor Conference presentations before then, thanks for joining our call. Please stay safe. Have a great day. And now you can take a breath. Thank you.

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation. You may now disconnect.