Richardson Electronics, Ltd.

Good day, and thank you for standing by. Welcome to the Richardson's Electronics Earnings Conference Call for the first quarter of fiscal year 2025. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. 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. Please go ahead.

Good morning and thank you all for joining Richardson Electronics Conference Call for the first quarter of fiscal 2025. Joining me today are Bob Benn, Chief Financial Officer, Wendy Dedell, Chief Operating Officer and General Manager for Richardson Healthcare, Greg Peliquin, General Manager of our Power and Microwave Technologies Group, which includes Green Energy Solutions, and Jens Rupert, General Manager of Canvas. 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. They're 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 report that we had a solid start to the fiscal year with net sales exceeding both our internal projections and exceeding our performance from the prior year. Q1 sales were 53.7 million, slightly ahead of the 52.6 million we achieved in Q1 last year. As a note, Q1 last year benefited from an extra week of sales, making the year-over-year growth rate even more encouraging. Sales expanded in our green energy and health care businesses, reflecting continued success of our long-term growth strategies. We were particularly pleased to see revenue growth in green energy with sales nearly double what they were in Q1 last year. Our gross margin was below the prior year, mainly resulting from the product mix and underabsorption in our factory. We remain committed to retaining our production resources in anticipation of ongoing recovery in the semiconductor fab equipment market. While our Q1 sales in this segment remained low, we were up 16 percent compared with the first quarter last year, and backlog is increasing. We expect growth in demand throughout the balance of the calendar year 2024 and into calendar year 2025. We also anticipate the launch of several new products in our green energy business and in the first half of the calendar year 2025. These activities are expected to drive higher manufacturing demand and improve gross margin. As you can see, we expect demand in key parts of our business to improve over the coming quarters despite global economic uncertainty. This is a direct result of the value we provide our global customers as well as the multi-year growth strategies we're pursuing to diversify our business. In addition, we believe our strong balance sheet, customer base, and growing engineered solutions will provide the company with flexibility to navigate the current environment and invest in our long-term growth objectives. So with this introduction, I'll now turn the call over to Bob Benn, our Chief Financial Officer, to discuss our first quarter financial results and capital position. Then Greg, Wendy, and Jens will provide more detail on our business unit performance. including an update on our growth strategies, new product development, program wins, and expanding customer relationships.

Thank you, Ed, and good morning. I will review our financial results for our first quarter of fiscal year 2025, followed by a review of our cash position. In addition, please note that I will be discussing EBITDA, a non-GAAP financial measure, a reconciliation of the non-GAAP item to the comparable GAAP measure is available in our first quarter fiscal year 2025 press release that was issued yesterday. Consolidated net sales for the first quarter of fiscal 2025 were $53.7 million compared to net sales of $52.6 million in the prior year's first quarter, which was a 2.2% increase. It is also important to note that the first quarter of fiscal 2025 comprised 13 weeks compared to 14 weeks for the first quarter of fiscal 2024. This was our first quarterly year-over-year increase in sales since the third quarter of fiscal 2023. This growth in net sales for the first quarter of fiscal 2025 was due to an 84% increase in sales for GES and a 48.7% increase for healthcare. Sales growth for the first quarter fiscal 2025 was partially offset by a 4.3% decrease in PMT sales and a 22.8% decline in Canvas sales. Consolidated gross margin for the first quarter was 30.6% in sales compared to 32.8% during the first quarter of fiscal 2024. The largest component of the 220 basis point decline in consolidated gross margin was due to our PMT business. PMT's gross margin declined to 29.8 percent from 32.2 percent as a result of product mix and higher manufacturing underabsorption as the company maintains much of its workforce in anticipation of increasing demand for its manufacturing resources. Partially offsetting this decline was higher gross margin at Richardson Healthcare and Canvas compared to the prior year's first quarter. Operating expenses as a percentage in net sales were 30% for the first quarter of fiscal 2025 and remain unchanged compared to the first quarter of fiscal 2024. Operating income was $0.3 million for the first quarter of fiscal 2025 versus operating income of $1.5 million in the first quarter of last year. Income tax provision was $0.1 million, or an effective tax rate of approximately 9%, versus an income tax provision of $0.4 million, or an effective tax rate of 23.7% in the prior year's first quarter. Net income for the first quarter of fiscal 2025 was $0.6 million, or $0.04 per diluted share, compared to net income of $1.2 million, or $0.09 per diluted share, in the first quarter of fiscal 2024. EBITDA for the first quarter of fiscal 2025 was $1.7 million, or 3.1% of net sales. versus $2.6 million or 5.0% of net sales in the prior year's first quarter. Moving to a review of our cash position, cash and cash equivalents at the end of the first quarter of fiscal 2025 were $23.0 million compared to $24.3 million at the end of the fourth quarter of fiscal 2024. Operating cash flow. was $0.4 million compared to $1.0 million in the prior year's first quarter. This was the second consecutive quarter of positive operating cash flow. Capital expenditures of $0.9 million in the first quarter of fiscal 2025 were primarily related to our facilities and IT systems versus $1.1 million in the first quarter of fiscal year 2024. We paid $0.9 million in cash dividends in the first 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 second quarter of fiscal 2025. As of the end of the first 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 discuss the results for our PMT and GES business groups.

Thank you, Bob, and good morning, everyone. We mentioned in our last call that even though our Q4 FY24 results were challenging, we remain very optimistic about the future, both over the short and long term. Coming out of Q4 FY24, we had a strong backlog, numerous new product introductions, an expanded customer base, and development programs transitioning from beta testing to pre-production. Based on this positive momentum going into FY25, we are pleased to report strong growth in our GES segment and our RF and microwave components business, also quarter over quarter and year over year growth in our wafer fab equipment manufacturing business in our Q1 FY25 results. Starting with our GES business, GES grew 84% to $8.1 million. Looking at these results in more detail, Even our margin was down a little bit based on product mix, our first quarter sales growth benefited from numerous new programs, products, and customers. Many of these have been in development since FY23 and FY24, and it's good to see them come to fruition. We had strong sales in our electric locomotive battery modules and new products for EV and diesel locomotives, such as our starter modules. In addition, we had a strong growth in our pitch energy modules as we added numerous new customers, for our growing portfolio of products. We now serve dozens of wind turbine owners and operators, including exclusive partnerships with the top four owner-operators of GE wind turbines, such as RWE, InverEnergy, Enel, and Nextera. To date, we have sold over 57,000 units in North America. And as I mentioned on the last call, in Q2 FY25, we're expanding into Europe with GE and other turbine platforms such as Suzlan, Senvion, Nordics, and SSB. Our GES growth strategy is still in its early stages, and as our new products mature, we expect to see sales and bookings fluctuate from quarter to quarter. However, I am pleased with the progress we are making, getting GES to scale as we continuously add new customers, products, and technology partners. We expect this trend to continue and contribute to growth throughout FY25 and beyond. The team continues to excel in identifying customer requirements, establishing design and manufacturing capabilities, and launching beta site testing. In a short amount of time, we have designed numerous products, received several patents, and developed a growing large customer base of global industry-leading customers. The progress will help create more predictable quarterly revenue and booking streams as our GES business gets to scale. Our customers repeatedly tell us that we have maintained our market share for the core GES power management applications, suggesting the slowdown in shipments in FY24 was primarily a timing issue. In fact, our customer pipeline and opportunities continues to increase as we capitalize on significant energy transformation projects globally, including wind turbine repowering. Turning to Power and Microwave Technologies, or PMT, which includes Electron Device Group, EDG, our legacy tube and semiconductor wafer fab equipment business, and the RF and microwave group, or PMG. Sales were $34.2 million, down 4.3% compared to the prior year. However, this decline was offset by growth in our RF and microwave components business, as well as our semiconductor wafer fab equipment business. PMT margin was down in Q1 due to mainly product mix. Our combined GES and PMT backlog remained strong at over $97 million. Given our inventory position, we will continue to ship many incoming orders from stock, as we did in the past fiscal year. We remain focused on managing our business to support our customers' needs when they are ready. Having inventory on hand allows us to capture market share and expedite the MPI process or new product introduction process. We collaborate with our customers and suppliers and use our customers' forecasts to help us strategically invest in inventory and ensure we meet their needs. The inventory was up slightly in Q1 FY25, many due to a large purchase of electron device tubes to support long-term demand and availability. A key component of our growth strategy is selectively expanding our global technology partners. We continue adding new partners who fill technology gaps in our offering and support our growth strategy. Through these partnerships, we often identify opportunities for new products that we design and manufacture in-house. This increases the value we provide customers and allows us to capture more revenue while expanding and diversifying our customer base. These long-term supplier relationships are extremely strong, and when appropriate, we work with them on strategic purchases to maintain proper levels of supply. We negotiate special payment terms, stock adjustment privileges, and shipping schedules to help improve cash flow. In addition, we are a key component of their new product development and new product introduction programs. We also continue to invest in our infrastructure to support our growth. We are bringing on talented design and field engineers and making investments to enhance our design and manufacturing capabilities. Our growing in-house design and engineering teams are doing a great job supporting the increased demand in our current products and new product designs. Our field engineering team continues to identify new customers and opportunities. With this team, we will continue to identify, develop, and introduce new products and technologies for green energy, power management, and RF and microwave applications. Going into Q2 FY25, we remain excited about the opportunities within our P&T and GES businesses. Q1 FY25 bookings exceeded Q1 FY24 by 35%. We did not lose market share in FY24. In fact, with the positive outlook in the semi-fab market Key customers are forecasting growth in FY25, and our technology partners are continuing to support our unique global business model and drive our business forward. As a result, we have many reasons to be optimistic about our growth strategies and the future of our business. I cannot stress enough the value of Rich in Electronics' unique model to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power management, RF and microwave technologies, and green energy markets. We have developed a strong business model combining legacy products and new technology partners and capabilities that align with our growth strategy to provide global customers with our engineered solutions and capabilities. This model is unique to the industry and differentiates us from our competition. Through our steadfast and creative focus on customers, we continue to excel by capitalizing on opportunities as they arise. The execution of our strategy has never been stronger, and it is clear Our customers and technology partners need Richardson Electronics products and support more than ever. With that, I'll turn it over to Wendy Liddell to discuss Richardson Healthcare.

Thank you, Greg, and good morning, everyone. In the first quarter of fiscal year 2025, the Healthcare Division reported sales of 3.8 million, representing a 48.8% improvement compared to the same quarter last year. This marks a $300,000 or 8.4% increase over the fourth quarter. All product lines showed growth over the prior year's first quarter with a standout 50.6% increase in our CT tube business. This growth was primarily driven by the repaired Siemens Stratton Z tubes and our proprietary Alta tubes. The growth margin for the quarter improved to 32.3%. up from 31.6% in the same period last year. This improvement was primarily driven by a favorable product mix, which included higher margin part sales and lower scrap charges. During the quarter, we maintained steady production of the repaired Stratton Z tubes. We fulfilled the backlog carried into the first quarter and sold every tube repaired during this period. Progress continued with our repair program for the Stratton MX, MXP, and MXP46. We remain on track to launch this program later in the fiscal year. As a result of higher sales and gross margin, we were close to breaking even for the quarter. We have significantly reduced our loss compared to the prior year. While our first quarter performance is encouraging and we remain focused on efforts to improve sales and profitability, the company continues to evaluate strategic options for the healthcare business. I will now turn the call over to Jens Rupert to discuss the results for Canvas.

Thanks, Wendy, and good morning, everyone. Canvas engineers, manufacturers, and sales custom displays to original equipment manufacturers across global industrial and medical markets. Canvas net sales decreased 22.8% to $7.6 million during the first quarter of fiscal 2025 from $9.9 million for the prior year period. due to lower sales in North American and European markets. We ended the quarter with 38.1 million in backlog, providing a strong base of business for the future. Cross-margin as a percentage of net sales increased to 34.3% during the first quarter of fiscal 2025 from 34.0% for the prior year period, primarily due to an improved product mix. During the quarter, Canvas received orders from both repeat and first time medical OEM customers. Some of these applications include optical coherence tomography, OCT, intravascular imaging, pulsed field ablation, computer radiography, lithotripsy, cataract surgery, medical device control, radiotherapy, microwave ablation, and robotic assisted surgery. Recent design successes illustrate our commitment to providing solutions that meet the evolving needs of our medical clientele. Furthermore, they highlight our ability to cultivate and sustain long-term partnerships with both existing and potential customers who require high standards, supporting our continuous growth in this vital sector. We also provide solutions for numerous commercial and industrial purposes. Our products are used for passengers' safety in control rooms, directly within trains and buses. Other applications include human machine interface, HMI, for printing, vending, and packaging machines. Given the considerable market uncertainties, such as economic difficulties, regulatory shifts, and other near-term trends, we understand that many of our customers have opted for a more cautious approach toward new product development and inventory management. We are cautiously optimistic that customer demand will see an upturn by early next calendar year. We see positive indicators and anticipate a steady recovery as the market stabilizes, supported by customers' feedback. An important sign is the rise in projects our teams are handling, highlighting growth in our markets and acknowledgement of our offerings. Our sales team continues to explore new opportunities while I concentrate on implementing our strategic plan to ensure sustainable growth. to create long-term value for our shareholders. I will now turn the call back over to Ed.

Thanks, Jens. While we know Q2 will be challenging, we remain optimistic that Canvas will return to growth given the expanding list of Blue Chip customers Canvas serves. Despite uncertain economic conditions, we maintain our excitement and commitment to our long-term growth strategies. The list of opportunities within our green energy solutions business unit continues to expand. Even though product deployment and our customer approvals are taking longer than we'd like, our growing list of global customers for our wind energy transportation and power management sectors support our multi-year growth plan. Demand for energy is only increasing, and a recent McKinsey report forecast demand to increase at an annual rate of 11 to 18 percent through 2050. While fossil fuels will continue to play an important role in meeting energy demand, renewable energy sources, particularly solar and wind, will grow at a much faster rate. These trends are aligned with our strategy to support global energy transformation initiatives and we intend to leverage our engineered solutions to deliver substantial revenue streams over the coming years. As mentioned earlier, backlog from our semiconductor wafer fabrication assemblies is growing. Growth is being driven by rising semiconductor demand associated with A1. The need for more data centers, 5G deployment, and other factors including ongoing efforts to localize semiconductor manufacturing. We anticipate the growth in semiconductor wafer fab equipment market will continue over the next several years, giving us time and resources to continue investing and growing our green energy solutions business. We continue to take a conservative approach to expenses as we remain focused on managing inventory levels and are committed to maintaining a healthy balance sheet. We believe these initiatives will help generate operating leverage as sales expand. Our focus for the remainder of the fiscal year is to continue the positive momentum We remain optimistic about the opportunities in our pipeline, and we are committed to delivering continued value to our shareholders. On behalf of everyone at Richardson Electronics, we look forward to updating you on the progress we're making. We'll be happy to answer any of your questions.

Thank you. As a reminder, to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. Ladies and gentlemen, due to the time constraints, we do ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and one follow-up until we have answered all questions, after which we will answer additional questions if time permits. One moment for our first question. And our first question is going to come from the line of Bobby Brooks with Northland. Your line is open. Please go ahead.

Hey, good morning, guys. Thank you for taking my question. So in the press release, you specifically call out new program wins and improving demand trends for legacy programs that drove the $3.7 million year-over-year increase in GEF sales. So I was just curious, what were those new program wins, and then what were those legacy program wins? And just any more color you could provide on that would be appreciated.

Well, the biggest new program is what's going on throughout North America and in Europe is this large repowering of sites and wind turbines for all manufacturers of wind turbines. And so in the quarter, we booked and shipped a number of large orders for our Ultra 3000, which are being used in this repower program for the wind turbines. In addition to that, We shipped a number of products to 19 other customers specific to replacing their lead-acid batteries in their turbines, and also the electric locomotive modules and our starter modules had good shipments in the quarter.

Got it. Fair enough. And then kind of following up on that is I think last month, where the team did its first trade show in Europe to introduce the Ultra 3000 family of solutions. So I just wanted to hear how that went. Breaking into Europe would obviously be a major needle mover for Richardson and maybe if you could then touch on any key differences between the dynamics for selling to wind turbine operators in the Americas versus Europe.

Yeah, the need and want for our Ultra 3000-type product is as high in Europe as it is in North America. The difference, for the most part, is the GE number of GE turbines in Europe is much, much smaller than North America. So as we've talked about for the past year, we've been able to pretty much dominate the GE wind turbine owner-operators with our product. So the four major platforms in Europe are Sousillon, Senvion, Nordex, and SSVA. We already have customers testing three of those that came from the show. But our booth was pretty full with people like Bestas, et cetera. Again, going back to this repowering, their comment to me was, we do not want to put any more lead-acid batteries in our turbines. So when they do this repower, at that point in time, they're looking to replace all the lead-acid batteries with our now five platforms of Ultra 3000. So we're really excited about the opportunity. We kind of have a lead on the competition with patents and exclusive design. So the show really just confirmed what we've been being told, and we've come back and we've gotten together here, and we're going to put together an even increased launch of the product to get these customers to know that this product is available. Because it seems once they know it's available, we're already in discussions and doing beta testing with them. So it was a great show. It confirmed a lot of things that we thought, and it looks like we're in a great position to take advantage of this global repower.

That's terrific to hear. And just to confirm, you guys already have the products to place in these Nordex and the other three guys that you mentioned. You're not having to come up with a new solution. It's just kind of a plug-and-play, right?

Yeah, right now in all five platforms and products, we're at our booth. There might be little things. I'll give you an example with Suzelon. With that large program we have going with Suzelon India, in the end, they ask for a couple of tweaks, put the handles in a different spot, move over the positive connector, which our engineering team is so talented to support the customer. We do these small tweaks. So there might be some small mechanical tweaks, but in terms of electrical performance, They're ready to go, and like I said before, they're being tested. I just want to add, Bobby, that this is a launch because of Europe, but there's also a number of farms in North America that have Senvion, Nordex, SSB, and Suzlan. We are also selling that there. In fact, we shipped some of those products, about 200 units of the SSB in North America. So it's kind of a launch of new platforms, but the major launch would be obviously to get us into Europe where we're not today.

Awesome. Thanks for the call, guys, and congrats on the solid first quarter. Thanks, Bobby.

Thank you, and one moment for our next question. And our next question is going to come from the line up, Anya Soderstorm with Sedoti. Your line is open. Please go ahead.

Hi. Thank you for taking my question. Good morning, Anya. Good morning. Congrats on the nice progress here. I'm just curious, how is the system in India progressing?

The program in India? Oh, yeah. Just fantastic. In fact, we had a long meeting with them also in Europe. So the first phase will be for them to replace all those acid batteries, other wind turbines that are in the field. In India, there's 9,000 today. We are in the final sign-off. We fully expect production orders this quarter. probably starting at the end of the month with the nice shipments between now and December, but the majority of it will be the rollout will be 2025. But in addition, we also have partnered with Kiba, who's the largest producer of pitch controls. That's the type of pitch control that Suzan uses in their OEM product, and that design is complete, and they're forecasting about 1,000 new turbines a year starting in 2025, and our product will be in that new turbine. So, All the stuff we're doing now is obviously replacing lead-acid batteries and existing turbines in the field. Our first OEM order and program will be with Suzalon, and every new turbine they build will have our product in it, giving them a jump on the competition.

Okay, thank you. And what other sort of – what other projects do you have in a prototype or beta testing where you see some near-term maybe – or is coming through potentially?

Yeah, you know, a number of things are beta and some are beta plus. You know, the starter modules, we have that program going on with two of the largest diesel and electric locomotive manufacturers. The one program, they were here. It's been signed off by their CEO, and we're going to start shipping that product in volume starting January. Also, we have our inverter program that we're doing with them and also the wind turbine manufacturers. Those have moved from alpha to beta to beta plus. Again, we expect bookings this quarter or next. We have the other stuff we talked about. We have the emergency lighting program going on with Metra. That's getting final signatures. We have the microwave generator program in Korea with that customer. That's being tested with great success. We have the ultra-fridge, which replaces the lead-acid batteries in refrigeration trucks. So, yeah, a lot of things in queue. But one thing, as I mentioned, last year was challenging, but at no time did any of these programs stop. We continue to work with them. They continue to do the beta testing. We continue to tweak the product to meet their needs and their specific specs. And now we're seeing, as you saw in the quarter, shipments. And Q2 will be a very strong booking quarter for us compared to the last few quarters. So, yeah, a lot of things moving. But the good news is they've never stopped. Everything's been going, not on schedule. Of course, we don't have a lot of patients, but the customer is very, very happy with our support.

Okay, thank you. That was helpful. And just one quick one more on the inventory. Do you expect that to go down in dollar terms in the coming quarters?

Hi, Anya. This is Bob Ben. If you're asking about the impact excluding foreign exchange, yes, it was a slight drop pickup of about $124,000, I think, if you look at our cash flow statement.

Okay, but go forward, do you expect the inventory to decline or are you expected to increase? Because it's sitting on a lot of inventory, right?

Right, we still have a lot of inventory. You know, we would expect that the efforts that we're putting into control inventory, we're going to continue to do that. As we've discussed before, we have one large vendor that the inventory will continue to grow, and that will happen through calendar year 2025, and as Greg mentioned in his script, that's in support of our long-term demand for our legacy products. That particular location, the factory, is ceasing production at the end of calendar year 2025, so we are adding inventory, and that will continue to grow. So the other area that we anticipate will continue to show some growth is in green energy. As Greg just mentioned, we have a number of programs, and we don't think it's necessarily going to grow substantially, but we are willing to invest in that area as he brings these new products to market. We have plenty of the Ultra 3000s already built in stock. We have plenty of Ultra capacitors to build more in stock. but there could still be some increases for some of the other programs. So, we don't want to rule that out per se. On the other hand, you know, we continue to monitor. Greg's group is doing a phenomenal job of going through every order, every requirement for inventory, making sure it's going to ship when it comes in, and that's where we're seeing some of the offsets.

Okay, thank you. That was helpful. I'll get back in here.

Thanks, Sonia.

Thank you, and one moment for our next question. And our next question comes from the line of Chip Rui with Rui Asset Management. Your line is open. Please go ahead.

Good morning, Wendy, Ed, and everybody. Good quarter. It does seem like we're finally inflecting off the bottom and things look good. Can you give a little more detail on the inventory? How much of it is PMT for semis? How much would be green energy? And how much kind of everything else? And then maybe just assure us that the inventory is all still kind of state of the art and ready to ship. And because it's so large, there's no aging of product life cycle. on that side. So that's one question. And second, again, with positive cash, positive operating cash flow and kind of the good forward thoughts on continuing cash, seemingly now might be a good time to start repurchasing modest amount. I mean, not huge, but what do you think of that, Ed? All right. Thank you.

All right, let me start with the inventory question, and then I'll turn it over to either Bob or Ed, and they can talk about what to do with this cash. In terms of inventory, where it kind of breaks out, there was 100, and let's call it 111 million at the end of Q1, and about 21 and a half or so of that is related to green energy. We don't break TMT down by how much of that growth or how much of that inventory is related to the semiconductor market. So I can't tell you that off the top of our head here. What I can tell you is we feel very good about the inventory we have. We don't see any risk there. Again, as I mentioned, a lot of it is coming, a lot of the growth has come from one of our largest suppliers for tubes. And we've done this in the past where we've had to add extra inventory when we were stopping production. And we've sold through every single tube we have. So we also go through with BDO every quarter and every year, a very in-depth analysis of our inventory. They question everything we do. They look at every quote that's out there. And we're not seeing, again, any risk there. And then finally, with any of the growth that is associated with our other growth initiatives, including the PMG business, Greg and his team have negotiated inventory balancing, inventory stock returns, and all of those programs to make sure, again, that we always have the most current inventory that we need to serve the customer base. So with that, let me let the other guys answer the cash flow question.

Well, we're always asked, you know, at some point, are we going to start to rebuy the stock? One of the things that's occurring is the semiconductor wafer fab business is starting to increase. And that takes a lot of inventory and a lot of resources. And as you probably know, in a good year, our semi wafer fab business is over 40 million, and last year it was below 20. So if it turns around and that lamb research and applied materials and these companies that are in that business are telling us that 2025 is going to be larger than ever, it will take a substantial amount of our cash to fund that growth.

Bob, you want to talk about where the cash is located?

Yeah, in addition to that, of our $23 million in cash, at the end of the first quarter, approximately $3.5 million was in the U.S., and the rest is spread among 20 or so foreign subsidiaries that we need the cash to operate our foreign subsidiaries. As you know, over 55% of our sales are outside of the United States. You know, we're constantly managing cash flow, moving money around, but, you know, we need to manage it very carefully at this point.

Okay, great. All right, guys. Congrats again. Thank you.

Thank you. And as a reminder, if you would like to ask a question, please press star 1-1 on your touchtone telephone. And our next question is going to come from the line of Andrew Rim with O'Dinson Partners. Your line is open. Please go ahead.

Hi again, Andrew. I just want to follow up on the inventory question. Wendy, how much is related to the one vendor, or how much do you expect to increase it with the one vendor?

We have that part of the presentation in front of me, Andrew, but I would say that, go ahead. Go ahead, Bob.

Okay. We have about $30 million total with the one vendor, and we are forecasting over a $10 million increase this year, although, as Wendy said, this quarter and continuing through this year, we expect to make continued progress on reducing inventory in our other parts of the business.

And then also, Andrew, that inventory, again, will grow through the end of calendar year 2025, and at which point we will start burning it down.

Right. Okay.

And then I think you said on the MX series in healthcare, did you say you're planning to launch those later in calendar 25 or fiscal 25? Fiscal 25. So will any of those go towards the back end of calendar 24?

I don't think so. You know, we want to make sure we get through life test. And, you know, right now we're about maybe 20, 25% through life test. It's going well. But we need to get through that, and we need to file all of our work instructions with the FDA. So I think that's going to take us through the end of the year, and you'll see it in You know, our Q3 possibly, if there's any issues, it could be as late as our Q4. But right now, it looks good.

So, is the first quarter, which is not quite annualized and close to a 16 million, is that a reasonable run rate? And maybe you get a bump with the commercial launch of the MX series?

We would definitely get a bump with the commercial launch of the MX series. I can't tell you that that's a, you know, going to be our run rate going forward. A lot of it, again, is predicated on the market. And, you know, so right now, for example, we're seeing a slowdown in our system sales that go to Latin America, more difficulty getting money from our customers there to pay for the system. So I don't want to say that, you know, 3, 3.5 million is our run rate. We're not ready to say that. What we can say is that we're in more steady delivery, production and delivery of the repaired Stratton Z, and that's going to help, you know, move that needle up. But the MX series will definitely be a commercial bump.

And then for healthcare, is the operating expense running at about a $6.5 million annualized run rate? Is that roughly correct?

Let me see.

I think it's a long one.

That would be, you said six million, Andrew? Six and a half. Six and a half. That's probably real high. Less than that.

Okay.

So, it is, I mean, you said earlier that you're close to kind of break even. If you get either a little bit of a lift on the revenue or, Is there an opportunity with maybe some of the newer, the MX series, if you get some lift on gross margin and that kind of pushes it over the hump to kind of break even?

Yes, both of those factors will be in play. The Siemens series, all of them, the Z and the MX series are better margin for us. So we'll definitely provide some upside there.

All right. And then maybe one

For Greg, on the PMT and GES backlog, you said it was 97. So that was a sequential decline. Was all of the decline, was that all GES?

Most of it was. And most of the reduction in inventory was also GES. You know, sales were up 27%. So the book-to-bill was below 1%. Lowered our backlog a little bit, but it's still so strong at 97 million, and I think GES is up over 40. But we're seeing so far, and I think we're over the halfway point of Q2, looks to me like that backlog will be back. Very strong book to build right now, and very strong bookings this quarter.

And on the gross margins, I mean, you noted they were a little bit below, but if we think about kind of the historic 30, 32, Are you guys still kind of comfortable with that on a, you know, more of a training 12-month basis?

For the total company, Andrew?

No, just for those two segments, EMT and GPS.

Yeah, it's really quarter to quarter in terms of product mix. Obviously, we make more margin, strong margin on our engineered solutions products and lower margin on our components business when we're just designing in the components to a separate customer's design. versus when we use those components and then design and manufacture our own products here. So, you know, that'll be kind of moving around as the percent of our sales as components and the percent of our sales that's engineered solutions. But it'll be, you know, 30 plus margin overall.

The other thing to add to that, Andrew, is that as these new programs go into production and as the semiconductor market continues to improve and recover, we will see an improvement or let's call it a reduction in the underabsorption, which is a direct hit to the gross margin. And when you look at underabsorption for the total company for Q1, I think it was about a 1.5% reduction in our gross margin. So, again, as we see those programs go into full production, that's going to pick up the slack, and you're going to see a margin improvement from that.

All right. Thank you. That's a great call. I appreciate it, you guys.

Thanks, Andrew.

Thank you. One moment for our next question. And our next question is going to come from the line of Ross Taylor with ARS Investment Partners. Your line is open. Please go ahead.

Thank you, and congratulations on the continued improvement in the business trends. Real quick, you commented, and we've talked in the past about how you've been told by your semi-cap equipment customers that 25 was going to be effectively a record year question is that a calendar year and also a record year you indicate is basically somewhat north of 40 would be north of 40 million and it appears that from backing out numbers that this is far and away your most profitable business perhaps with an operating margin half again what we see in some other parts of the business um So I'm curious, when you're thinking about this, are you looking at a 25 calendar being a $40 million plus run rate potentially in revenues for my capital? Yes.

Yeah. In calendar 2025.

Yeah. Calendar.

And you're correct. That's probably our highest margin.

Yeah. Highest. Yeah. Cause I mean, to me, it backs out. It looks like it, as I said, about half again, perhaps what you're carrying and, you know, perhaps as a, some other parts of the business that we've just talked about. Also, you've commented that you have inventory. How much of the semi-cap equipment business you're expecting to do do you think you're going to be able to fill by drawing down inventories versus new builds?

Ross, we don't have that detail in front of us. You know, that might be something we can discuss offline.

Sure, that would be great. Because I would think, obviously, that will help in cash conversion and help in financing the growth in the space that you were indicating you will need to finance. Additionally, you were talking about battery starter packs. I'm like, what are we looking at on a dollar per unit basis for those? And what kind of unit volume are you thinking you're going to be able to do over the next 12, 15 months?

Yeah, I can't share. We have NDAs, and I'm not going to let my competition know what I sell for these. But right now we have an agreement for 1,000 trains, but that's only for one end customer. Right now the product's being featured at their trade show at McCormick Place, and they fully expect to get more train owner-operators to install this great product. So right now on the books, about 1,000 trains next year.

Okay, so it's going to be a meaningful driver on the revenue side in the next 12, 15 months than you would expect.

It'll be a strong part of it, absolutely.

Okay, great, because it just looks to me like, once again, we're setting up for having gone through a pretty sloppy last 12, 15 months. It looks like we're really setting up for... you know, a return to some really meaningful profitability, meaningful revenue growth, and setting the stage to really kind of launch you guys into 2025, 2026 and beyond on a strong foot. Is that where you guys see things?

Absolutely. Yes, absolutely.

Okay, great.

I'll leave it back. I would just say, obviously, as you free up cash flow, don't be afraid to put some of it. You can probably afford to have a small amount of leverage. I wouldn't argue putting a lot of leverage on the balance sheet. But perhaps if you do something strategic with the medical imaging business, you can put some of those proceeds towards reducing the share base outstanding. Because it strikes me as you're setting up, you did around $1.50. It has some one-time items in it. you know, in your peak earnings year recently. And I think that, you know, so if we look at a return anywhere close to that, you know, you're a pretty inexpensive stock here. In fact, a brutally inexpensive stock. And I think investors would be really happy to see even a minor commitment by the company to reducing the shares outstanding. But thank you for going. We always do. Thanks, Russ. Thank you. We'll talk to you soon. Take care. Bye-bye. Thank you, Russ. Thank you.

And I'm showing no further questions at this time, and I would like to hand the conference back over to Ed Richardson for his closing remarks.

Well, thank you again for joining us today. We appreciate your investment and interest in Richardson Electronics, and you're welcome to call us at any time. We're always free and happy to talk to you, and we look forward to our ongoing discussions and sharing our second quarter results with you in January. Thanks very much.

This concludes today's conference call. Thank you for participating and you may now disconnect.