Richardson Electronics, Ltd. (RELL) Q2 2023 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Richardson Electronics Earnings Call for the Second Quarter Fiscal Year 2023 Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Ed Richardson, CEO. Please go ahead.

Good morning, and Happy New Year. Welcome to Richardson Electronics conference call for the second quarter of fiscal year 2023. Joining me today are Robert Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer and General Manager for Richardson Healthcare; Greg Peloquin, General Manager of our Power & Microwave Technologies Group and our newest business unit, Green Energy Solutions; and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we'll be making forward-looking statements. 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. We're extremely pleased with our strong financial performance in the second quarter. Despite global economic challenges, rising interest rates, supply chain delays, and recession fears, sales in the second quarter of fiscal 2023 exceeded our expectations and were up 22.1% over Q2 of last year. There were times we had teams working six and sometimes seven days a week to ensure we met customer demands. Sales growth was particularly strong in Green Energy Solutions. Sales of our patented ULTRA3000 capacitor modules increased for the microwave tubes used in synthetic diamond manufacturing and Power Management Solutions for electric cars and locomotives. Sales were also strong for the semiconductor wafer fab market in Canvys displays. There are many programs in the works to adapt to changing market conditions and continue this growth. Bob Ben, Chief Financial Officer, will first review our second quarter financial performance in more detail. Then Greg, Wendy, and Jens will provide more detail on the quarter and key growth initiatives.

Thank you, Ed, and good morning. I will review our financial results for our second quarter and first six months of fiscal year 2023, followed by a review of our cash position. Net sales for the second quarter of fiscal 2023 increased 22.1% to $65.9 million compared to net sales of $54.0 million in the prior year second quarter due to higher net sales in our Power & Microwave Technologies, or PMT, Green Energy Solutions, or GES, and Canvys business units, partially offset by slightly lower sales in our healthcare business unit. PMT sales increased by $3.8 million or 10.2% from last year's second quarter, driven by growth from our manufactured products for our semiconductor wafer fabrication equipment customers and distributed products for RF and microwave applications. Net sales for GES increased $7.4 million or 150.3% from last year's second quarter; GES combines our key technology partners and engineered solutions capabilities to design and manufacture products for the fast-growing green energy market and power management applications. Canvys sales increased by $0.9 million or 10.2% due to strong customer demand in North America. Richardson Healthcare sales decreased $0.2 million or 4.7% due to a decrease in parts sales, partially offset by increased equipment and CT tube sales. Total company backlog was $192.6 million in the second quarter of fiscal 2023, up from $146.9 million at the end of the second quarter of fiscal 2022. Gross margin for the second quarter was 33.2% of net sales compared to 32.7% of net sales in last year's second quarter. PMT's margin increased to 34.5% from 33.7%, and GES margin increased to 33.9% from 32.3% primarily due to product mix. Canvys' gross margin decreased to 29.7% from 31.8% because of product mix and foreign exchange effects. Healthcare's gross margin was 23.2% in the second quarter of fiscal 2023 compared to 24.5% in the prior year second quarter due to product mix. Operating expenses were $14.7 million for the second quarter of fiscal 2023 compared to $13.1 million in the second quarter of fiscal 2022. The increase in operating expenses resulted from higher employee compensation, including incentive expenses from significantly higher operating income and higher travel costs. Operating expenses as a percentage of net sales decreased to 22.3% during the second quarter of fiscal 2023 compared to 24.3% during the second quarter of fiscal 2022. The company reported operating income of $7.2 million or 10.9% of net sales for the second quarter of fiscal 2023 versus operating income of $4.5 million or 8.4% of net sales in the second quarter of last year. Other expenses for the second quarter of fiscal 2023, including foreign exchange, partially offset by interest income, were $0.1 million compared to other income of $0.2 million in the second quarter of fiscal 2022. Income tax expense was $1.5 million for the second quarter of fiscal 2023 or a 21.5% effective tax rate versus $0.6 million in the prior year second quarter due to the use of federal NOLs in fiscal 2022. Net income was $5.5 million or 8.4% of net sales for the second quarter of fiscal 2023 as compared to a net income of $4.1 million or 7.6% of net sales in the second quarter of fiscal 2022. Earnings per common share on a diluted basis in the second quarter of fiscal 2023 were $0.39 compared to $0.30 per common share on a diluted basis in the prior year's second quarter. Turning to a review of the results for the first six months of fiscal year 2023. Net sales for the first six months of fiscal year 2023 were $133.5 million, an increase of 23.9% from $107.7 million in the first six months of fiscal year 2022. Net sales increased by $8.7 million or 11.2% for PMT, $13.3 million or 177.9% for GES, $2.9 million or 16.5% for Canvys, and $0.9 million or 16.5% for Richardson Healthcare. Gross margin increased to 33.6% from 31.5%, primarily reflecting a favorable product mix in PMT and GES, decreased component scrap expenses, and improved manufacturing absorption in healthcare, partially offset by unfavorable product mix and foreign currency effects for Canvys. Operating expenses were $28.9 million for the first six months of the fiscal year, which represented an increase of $2.3 million from the first six months of the last fiscal year. The increase was due to higher employee compensation and travel expenses. Operating income for the first six months of fiscal year 2023 was $16.0 million or 12.0% of net sales as compared to an operating income of $7.3 million or 6.8% of net sales for the first six months of fiscal year 2022. Other expenses for the first six months of fiscal 2023, including interest income and foreign exchange, were $0.5 million as compared to other income of $0.1 million for the first six months of fiscal 2022. The income tax provision was $3.6 million during the first six months of fiscal 2023 or a 23.4% effective tax rate versus $0.7 million in the prior year's first six months due to the use of federal NOLs in fiscal 2022. The company reported net income of $11.9 million or 8.9% of net sales for the first six months of fiscal year 2023 versus $6.8 million or 6.3% for the first six months of fiscal year 2022. Earnings per common share on a diluted basis in the first six months of fiscal 2023 were $0.83 compared to $0.50 per common share on a diluted basis in the prior year's first six months. Moving to a review of our cash position. Cash and investments at the end of the second quarter of fiscal 2023 were $31.1 million compared to $35.6 million at the end of the first quarter of fiscal 2023 and $40.5 million at the end of fiscal 2022. The company continued to invest in working capital to support its growth initiatives. Inventory grew to $97.4 million from $89.1 million at the end of the first quarter of fiscal 2023 to support continued increases in sales. Accounts receivable increased to $34.9 million from $32.6 million at the end of the first quarter of fiscal 2023 due to the high sales growth. Our DSO was 38 days versus 39 days in the first quarter of fiscal 2023. The company is working with its suppliers to better align payment terms with both our suppliers and customers. Capital expenditures were $1.3 million in the second quarter of fiscal 2023 versus $0.8 million in the second quarter of fiscal year 2022, approximately $0.5 million related to investments in manufacturing, $0.3 million for our facilities, $0.3 million for our IT system, and $0.2 million was for our healthcare business. We expect a higher level of capital expenditures in fiscal 2023 as we make additional investments in our manufacturing capabilities and facilities. We paid $0.8 million in cash dividends in the second quarter. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the third quarter of fiscal 2023. 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. Both of our strategic business units, Power & Microwave Technologies, or PMT, and Green Energy Solutions, or GES, drove strong growth in our second quarter. Our GES Group had exceptional growth as the demand for green energy applications such as wind energy, electric vehicles, and energy storage continues to grow. We continue to apply and focus on resources to this extremely important strategic business unit and growth opportunity for Richardson Electronics. GES sales were up 150.3% in Q2 of FY '23 at $12.3 million versus $4.9 million last fiscal year, and our current backlog is $52.5 million. Gross margin also increased to 33.9% versus 32.3% in the same period last fiscal year. As mentioned previously, this group houses numerous successful products such as the ULTRA3000, electric locomotive battery modules, the ULTRAGEN3000, and products using synthetic diamond manufacturing. In addition, we've had numerous products in design, prototype, and beta testing. This strategy, developing niche products and technologies, is key to our long-term success. The growth of customers and products in GES continues as several major OEMs are in weekly discussions with our engineering team in the development of energy storage products and other green energy applications. We plan to announce several new products in the first half of calendar 2023. Sales for the Power & Microwave Technologies Group in the second quarter of fiscal 2023 increased 10.2% to $40.6 million versus $36.8 million in Q2 last fiscal year. Our gross margin also increased in the quarter to 34.5% versus 33.7% in Q2 last fiscal year, which was mainly due to continued success in our RF and wireless infrastructure business and a very strong quarter for our semiconductor wafer fabrication equipment business. Our Engineered Solutions strategy is led by our global technology partners such as Qorvo, MACOM, Anokiwave, LS Materials, Amogreentech, and Fuji Semiconductor. Key tube manufacturers and partners include CPI, Thales, the Nisshinbo Micro Devices, previously known as NJRC, and Photonis. Each of our global partners helps us meet and manage customer requirements. Our team has done an excellent job identifying and cultivating these relationships. We will continue to review and add partners that fill technology gaps in our offering and support our growth. Often through these partnerships, we're able to identify opportunities for new products that we design and manufacture in-house, increasing the value we provide to customers and allowing us to capture more revenue. We continue to invest in our infrastructure to support our growth. We are bringing talented design engineers and field engineers, and making investments to enhance our manufacturing capabilities through our organization. Our growing in-house design, engineering, and manufacturing teams are doing a great job supporting the increased demand for current products and new product designs. The team also supported product designs for key growth markets, focusing on GES, such as the ULTRA3000, ULTRAGEN3000, and a power management module for electric locomotives. I am pleased with the progress we are making. We will continue to identify, develop, and introduce new products and technologies for green energy and other power management applications. Our growth strategy has proven to be highly successful over the years, and we will continue to develop new products as well as increase our customer base, revenue, and profits by capitalizing on our existing demand creation infrastructure. While we're excited about the future, we remain challenged by longer lead times and constraints on the overall supply chain. This affects both our component business and Engineered Solutions products. We are strategically investing in inventory that should position us to fill the pipeline and ensure we can meet our customers' needs while we collaborate closely with both our customers and suppliers. We are also experiencing some headwinds, and some markets are showing a slowdown from the highs we hit in 2022. However, we continue to grow both our top and bottom lines by gaining market share, introducing new products and technology partners, and expanding the value we provide our customers. I cannot stress enough the value of Richardson Electronics model to our customers and suppliers. Our unparalleled capability and global go-to-market strategy are unique to the power and RF microwave industries. We have developed a strong business model, including legacy products and new technology partners that fit well with our engineered solutions capability. Through our steadfast and creative focus on customers, we will continue to excel by taking advantage of opportunities when they arise. The combined backlog of PMT and GES is strong at $141.4 million, and the execution of our strategy has never been better. There is no question that our customers and technology partners need Richardson's products and capabilities and support more than ever. With that, I'll turn it over to Wendy Diddell to discuss Richardson Healthcare.

Thanks, Greg. Good morning, everyone. Second quarter sales for healthcare were $2.9 million, a slight decrease of 4.7% versus Q2 of FY '22. In the final week of the quarter, two ALTA tubes were held up due to a canceled flight, and we were not able to recognize the revenue. On the bright side, these sales are a nice start to Q3. Had these shifts occurred as planned, Q2 revenue would have been above the prior year period, and we would be discussing a record sales quarter for the number of CT tube units sold. CT tube sales were helped by strong demand in China for the ALTA750 D&G as well as Straton Z tubes sold as betas in the Americas. Sales in the quarter were also higher for CT systems compared to Q2 last year. Gross margin in the second quarter declined to 23.2% versus 24.5% in Q2 last year, primarily reflecting a lower percentage of higher-margin part sales. While CT tubes remained in production throughout the quarter, we did experience a significant equipment issue, which prevented us from making our CT tube production goals. This resulted in a small negative manufacturing variance. We've resolved the issue and are back in full production. We are making steady progress on the Siemens repaired tube program. This is a series of four tube types, including the Straton Z, MX, MXP, and MXP46. The Siemens installed base is considerably larger than Canon's, and there are no third-party replacement options for these tube types. The Straton is currently in beta site testing, and we remain on track to fully release the repaired tube pending submission of FDA paperwork. We anticipate the Siemens MX series will follow in the first half of calendar year 2023. As noted in prior calls, the Siemens program is a critical element for our healthcare business unit to reach its goal of providing a positive operating contribution to the company by Q4 of FY '24. In addition to our Siemens program, we are evaluating several new programs that will further improve CT tube sales and factory utilization. These programs include reloading tubes in Brazil, a market where we currently have no tube sales, and partnering with an international company to reload and sell several other tube types in the Americas. These programs may have a positive impact on our revenue in FY '24, depending on how quickly we can validate and achieve regulatory approvals. We remain cautiously optimistic about our ability to break even or provide a positive operating contribution by the fourth quarter of FY '24. We continue to monitor our progress, and we will make the necessary adjustments to achieve this goal. I will now turn the call over to Jens Ruppert to discuss the results for Canvys.

Thanks, Wendy, and good morning, everyone. Canvys engineers, manufactures, and sells custom displays to original equipment manufacturers in industrial and medical markets throughout the world. Canvys delivered an outstanding performance with sales of $10.1 million for the second quarter of fiscal 2023. Strong customer demand, primarily in North America, drove the 10.2% increase in sales over the same period last year. Gross margin as a percentage of net sales was 29.7% during the second quarter of fiscal 2023 compared to 31.8% during the second quarter of fiscal 2022. The decrease in gross margin was primarily related to the product mix and foreign currency effects. Our backlog remains very healthy, which we expect to support strong sales throughout fiscal 2023 and into fiscal 2024. Given the number of projects currently in the engineering stage, we are well positioned for continued growth. Our expectations assume no impact from current supply chain obstacles, and demand is not negatively impacted by recessionary pressure. We continue to deal with extended lead times for selected components from our Asian suppliers. To compensate for this, our inventory on hand increased during the quarter. It is important to note that all our monitors are customer-specific, and our inventory is allocated for specific customer orders. So we believe there is minimal risk in carrying slightly higher inventory levels. During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these applications include cell analyzers, cardiac pulsed field ablation, super pulse laser systems used in lithotripsy, robotic-assisted surgery, medical device control, monitors for dental treatment chairs, prostate biopsy systems, surgical navigation to track instruments throughout the procedure, laser systems that treat corneal arterial disease, and monitors used in radiation therapy. In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes control room monitors for public transportation, human-machine interfaces for packaging machines in the food industry, radiation measurement systems, and process automation. I am very proud of our teams around the world, and I'm extremely pleased with the exceptional operating performance. Our strong and growing customer relationships, along with the backlog position us for future growth. From the variety of customers and applications as well as the value of orders from existing and new customers, it is clear we offer our global customers outstanding products and localized service. While our sales organization stays focused on new opportunities, I stay focused on improving the operating performance of the division. Maximizing cash flow and improving Canvys' profitability is an ongoing priority. We continue to work closely with our partners to meet the demands of our customers, particularly with the challenges brought on by industry-wide supply chain delays. I will now turn the call back over to Ed.

Congratulations again, Jens, on another great quarter. As you've heard from the business unit managers, there are many programs fueling our growth. This product market and geographic diversity provides a natural hedge against economic challenges and global political tensions. Many of you are aware of the recent CHIPS Act and its impact on the semiconductor industry. This act prevents U.S. semiconductor wafer fab equipment manufacturers from shipping certain advanced technology equipment to China. While we know this will have an impact on our business in calendar 2023, we're confident that our financial performance will remain strong for the balance of our fiscal year. All our manufacturing employees are cross-trained and can be moved to different areas to meet significant growth and demand for our green energy solutions. By reallocating resources, we can meet demand while maintaining our core competencies in the semiconductor market and cost controls. We remain firmly committed to our employees who have helped shape our path to success and to our partners and our shareholders. With our focus on customer-driven solutions that help improve the environment, we expect strong year-over-year revenue and earnings growth throughout the remainder of fiscal 2023. At this time, we'll be happy to answer your questions.

And our first question comes from Karthik Rajajay from Bloomberg. Your line is open.

Hello.

Yes. Go ahead. Your line is open. Our next question comes from Anja Soderstrom with Sidoti. Your line is open.

Hi, Wendy and Richard and everyone else. Congratulations on the great quarter again. I'm just curious, I mean, you touched on the semiconductor. What kind of visibility do you have there for the rest of the year? And sort of when do you think you will have visibility into next year in terms of the demand for semiconductors?

So we have good visibility for the rest of our fiscal year. So Q3 and Q4, we feel very strong about, including opportunities with the semiconductor market, but that's about as far as we're able to see right now.

I understand that there is very strong demand in the GES that may compensate for any weakness in the semiconductor sector. Can you discuss some opportunities in the GES that are further out and may not have received as much attention?

The GES program has introduced several products that are gaining significant traction. We also have more products in development, and when we consider their introduction, the market potential for these products, and the timeline for completing beta site testing and moving to production orders, we are very confident that any decrease in gross margin dollars from Lam or the semiconductor wafer fab market will be more than compensated by our current products gaining traction with other customers, as well as new products we are launching in Q3.

Okay. Thank you. And I think in your remarks, you talked about some slowdowns from highs. Was that related to semiconductor or was that related to something else? Or can you sort of elaborate on that?

Yes, mainly in reference to the semiconductor wafer fab market. As you know, we had record quarters for the past four quarters within our semiconductor wafer fab market. So we're looking at, based on information from them, that there could be a slowdown in FY '24.

Okay. Thank you. And in terms of Canvys, I don't think you mentioned what the backlog stands at for Canvys right now at the end of the quarter?

Jens, do you want to answer that?

Yes. Yes, sure. Absolutely. So the backlog is actually up very much. It's the second highest backlog level we have ever, at $49.4 million. So I'm pretty happy with that.

And that's up from about $40 million last quarter, right?

Yes.

Nice increase.

Sorry, it was $47.1 million last quarter, sorry, I guess.

Okay. I'm sorry. Still a good increase. Wendy, regarding the healthcare, it seems like your flights were delayed this quarter, but there were also some production issues. How much did that set you back?

Yes, that's a good question. During the quarter, we faced some issues with the equipment in the last month. Overall, it impacted our margin by about 1%, which was not significant. We performed well in producing tubes during the first part of the quarter. It was just a minor setback, resulting in roughly a percentage point reduction in the gross margin.

And then one last question, if I may. So the OEM that you work with, are they single sourcing with you? Or are they also working with other partners?

Regarding what business?

The OEMs, in general, are they single sourcing with you? Or are they also working with other partners?

On the GES side, on the products we have today, for example, the ULTRA3000, we're exclusive with the four top owner operators of GE wind turbines in North America. So almost all of our products, since we are unique, it's a unique technology. We do have competitors, but the business we have today, we are a sole source.

Our next question comes from Denis Amato, a Shareholder. Your line is open.

Hi, can you hear me now?

Yes, here we go perfect.

Yes. No, I just wanted to congratulate you on the quarter as well. I'm sure you're disappointed as all of us are by the less-than-enthusiastic response that the market has given you. But my question is for Bob Ben. I noticed of the $30 million in cash, $5 million shows up as being invested in short term. Given the recent uptick in short-term rates around the world. Is there any additional opportunities to invest some of the cash to provide return?

Hi Denis, that's a good question. We have an investment committee that reviews this each quarter. As you mentioned, we have seen an increase in interest rates, and we were able to obtain a higher rate. However, the market's overall movement in rates hasn't been substantial. We're continually evaluating the situation. As you pointed out, we have $5 million invested. Additionally, being a global company, our cash is distributed across various countries. Although most of it is in the U.S., where we have the $5 million invested, we also have some invested in China, while the remainder is utilized for business operations.

So I mean, what prevents you from buying real short-term bills or whatever? I mean, you could still keep it basically accessible and still earn something on it. Even the European money market rates are up to a couple percent. I mean...

Sure. And as I noted, we're consistently looking at that. But again, we have many locations around the world, approximately 25 in many different countries so we need the cash on hand to operate and run the business. But when we can, we do invest it, but we can only do that for so long.

Okay. Well, I mean, I understood a while ago when the rates were so low, but as they've come up quite a bit, and I think you need to sharpen the pencil a little.

One moment. Our next question comes from an unidentified analyst. Your line is open.

I have a few questions. What is being done with electric trains? For example, if I took a train to Manhattan, there are electric lines above the train and no one is shoveling coal or burning wood for power. Can you explain the electrification efforts and your role in them? I also have a couple of other questions.

Currently, we are collaborating with our partner, Progress Rail, to develop and manufacture electric vehicles for North American operators and their location in Brazil for international markets. Our contributions include building battery modules for the trains, as well as creating the superstructure that incorporates controlling circuitry and fire suppression systems. The target for this market is to decarbonize by 2030, and while I don’t have the exact percentage of diesel locomotives at hand, we are also working on products like starter modules for diesel locomotives in support of this transition. For the electric locomotive segment, we are focused on designing and producing battery modules to replace diesel engines. To date, we have secured four prototype train contracts with Progress Rail and are actively engaging with them weekly for design and implementation. The current value of these prototype orders exceeds $25 million, highlighting the potential for transitioning diesel locomotives to electric. Additionally, we are involved with VinSmart, an electric car manufacturer in Vietnam, and we have successful programs with Triton, the largest North American manufacturer of charging stations. This is a multi-billion-dollar market, and Richardson has effectively identified niche products and applications through our suppliers and internal engineering skills, providing real value as this market evolves. We are excited about FY '23 and the future of these products, especially as we explore their application in other areas as our technology develops.

Yes. It's interesting when people think of moving aside from trains, when people think of automotive electrification, your name doesn't come up. So I think my guess is over the next few quarters sequentially, hopefully, you can discuss more of what you're doing in that area.

Yes, it's interesting. We're not actually in the ultracapacitor battery business; we focus on power management. This presents a significant opportunity, but we are also exploring other power management products for forklifts and similar applications. As industries move towards greener solutions, the entire power management sector, including locomotives, needs to evolve. We have a unique advantage due to our extensive experience with battery technology, having worked with ultracapacitors for almost 20 years. Our team includes knowledgeable individuals in this field. Therefore, we are not primarily looking for standard products, but rather niche solutions tailored to our customers' needs to help them gain market share. In this instance, Progress Rail is on that trajectory.

Okay. About a month ago, the company announced that it would become a global distributor for a firm focused on gallium-based circuitry. Can you elaborate on what this could mean for the company?

Yes, over the past six years, we've announced several partnerships with technology companies. As mentioned, we operate as a true global entity. These smaller firms possess unique technologies and require a partner to help bring those products to market. Our approach is more focused on engineering sales rather than traditional distribution, as we integrate the components into our clients' systems. A prime example would be our collaboration on an ultracapacitor component with a customer, which led to the development of an ultracapacitor module. We have a robust selection of technology partners, including Gallium, a startup comprised of experienced engineers who have been in the power RF sector for over 35 years. Their expertise in gallium nitride technology positions them as a leader in both 5G and power management applications. Recently, we've been noticing a trend: the products we've discussed over the past three years are increasingly requiring remote monitoring capabilities. This represents an evolution in our product line. We collaborate with the top RF and wireless component suppliers globally to develop essential products that broaden our offerings. These products, whether positioned 300 feet up on a wind turbine, 20 miles out on a solar farm, or located on a locomotive traversing Wyoming, will enable remote monitoring of battery systems and overall power management. This is simply an advancement of our model. By leading with technology partners and leveraging our unique expertise in RF power and power management, we are able to create niche products that address specific applications.

Okay. Well, I think it was, at least three quarters ago during one of your conference calls, the stock was $11 and a fraction, and I said someone was not happy with where the stock was, and I said that people like the stock more at $17 than $11. So I guess I'll do it again. I think people will like the stock more at $29.97 than $19.97. I'm willing to wait for that, no problem.

Our next question comes from Brett Davidson with Investletter. Your line is open.

Good morning. I'm enjoying the ride here. I've got a couple of questions. The change in the backlog, I'm wondering if you can just give me an idea of what that represents. Are you guys better able to keep up with the order flow, or are there customers holding back until the end of the calendar year? What does that small drop in the backlog represent?

I'll add to it from a PMT and GES point of view. Most of our business, specifically on the green energy side, is project-based. So we'll get large bookings one quarter, and then three quarters from them, when we get the components in, we'll have huge shipments. That's just kind of the ride. If you just look at FY '22, the four quarters, we went from an $84 million backlog to a $152 million backlog. Well, to get to 150% growth, we finally got the components we needed because I think I mentioned already that the lead times and supply chain issues we've been looking at have not improved much. It's really a project-based cyclical type thing. We're going to have huge bookings. For example, in the fourth quarter of May of last year, we had $1.68 million, and this time around, we're a little over $1 million. It's just kind of cyclical in terms of what we're able to get out of the factory to the customer in the quarter and based on their timing of bookings of the next session. For example, we were awarded about $15 million of new business for electric locomotives in Q2. However, it does not show up in our bookings because we do not book that until we have scheduled delivery of the product. So if that was in there, our book-to-bill would be way over our backlog, we'd actually be up quite a bit in the quarter. So just the nature of the business.

So let me rephrase then. Things are just going to be kind of lumpy, and you really can't read anything into it?

I wouldn't read a lot into it. A fluctuation of 5% to 10% in our backlog, I wouldn't read anything into that based on the forecast that we're seeing and the traction we're getting. It's just the way it's ordered. Our backlog will fluctuate, yes.

Got it. The green energy sales were up about 150% from the prior quarter. Is that something we can expect to continue throughout most of this year? I mean, is that the type of growth we're looking at here? Or that's kind of an anomaly, and things are going to slow up a bit?

Yes. One thing I know about forecasts is they're going to be wrong; they're going to be high or low. But I can tell you in Q3 based on the backlog and scheduled shipments and the forecast builds, we'll see something very similar to that in Q3. That's about my visibility that I can give you right now.

All right. And then I got one more, and it goes back to the press release and my favorite line here: 'We believe sales and profits will continue to significantly increase in fiscal 2023.' I'm just looking for a little clarity on that. Is that significantly increased quarter-over-quarter from the comparable quarter last year? And what is significant?

Yes. So I'll take that one first. Over prior year, yes, we believe we will see increases. For us, I think we usually say in the 10% to 15% range of increases. Q3 and Q4 are solid, and that's about as far as we're taking our forward-looking forecast right now, but it looks good.

Our next question comes from Eric Crown with Richie Capital. Your line is open.

Congratulations on another successful quarter. My first question is if you could provide any updates on the near-term innovations and opportunities within the ultracapacitors. Specifically, I'm interested in the collaboration with Siemens and the applications related to cell towers. Any updates on those?

Sure. Let's start with the ultracapacitors and some of the major programs, including lithium-ion phosphate, as they are linked. We are getting our 2023 forecast from customers regarding the ULTRA3000, and it looks like this business is expected to grow by about 20% to 25% this year. To date, we have shipped over 30,000 ULTRA3000 units and they are currently in use. Regarding the ULTRAGEN3000, it is being utilized in three different applications. For instance, T-Mobile is still in the testing phase, requiring more data before we can implement it. We are also submitting a proposal for a significant project in Illinois involving the ULTRAGEN3000. A major focus is on applying the ULTRAGEN technology in generators, and we are collaborating with two of the largest electric vehicle manufacturers to create starter modules. They both received prototype products in December. Additionally, we have commenced beta site testing with Siemens on the Siemens ULTRA3000 modules, and that program is progressing well. The overall program continues to gain momentum. Most of our business involves owner-operators without contracts with GE for services, and we have received approval to have our product included in GE's portfolio for all GE Wind projects starting at the end of January. This is promising, but as we develop the program, it remains to be seen how it will progress. The ULTRA3000 is performing well as customers move through the various phases of rollout. Our ULTRAGEN3000 technology, which is patent pending, is also gaining traction with beta sites and additional applications. We plan to introduce the UPS and multi-brand in Q3. Lastly, our program with GE is quite exciting for the future. This is a summary of the current products we are focusing on for 2023, particularly in relation to revenue.

Fantastic. A lot of exciting things in motion. I guess the other question, as you guys mentioned, really kind of still full throttle in terms of production getting orders out, employees working six to seven days a week. Prior quarter, you mentioned you made a lot of progress in bringing in more people and bringing more labor. I guess is that something you continue to focus on? And how are you thinking about that going into the year?

So on the HR side, yes, we have continued to hire. But what we're doing now is making sure we've mentioned there's going to be some slowdown in the semiconductor market. So we've made sure everybody we've hired is cross-trained, and they can now be moved from, for example, semi production into green energy productions and even into healthcare production. We'll continue to hire strategically, which is primarily engineering positions with all of the programs Greg has mentioned. We're constantly looking for different types of engineers to supplement the team. But from a production standpoint, we'll work within the confines of who we have right now.

Okay. Do you have an updated number on the number of engineers?

That we need or that we have?

That we have.

Well, we have probably close to 100 all in now when you consider our field engineers and our application engineers and our development engineering.

That we've added. I mean, total is 500.

He needs the number of engineers.

And I guess the last question, and you guys got us a lot, but just maybe a little bit different angle or a little bit of different aspects to it as within the semi-wafer business. What are you kind of seeing from your customers? I mean, I know you said you have clarity through Q3, Q4 for your fiscal year, but what are you kind of hearing from your customers and from their business? Are there insights you are getting from that?

Yes. They look at the overall market, and they're doing cash provides again a nice product to that market. It's hard for them to extrapolate how that affects our business with them. So right now, the visibility we have is that we're going to be fine and strong for the balance of the fiscal year. But going forward, they're seeing their end customers and the China issue, Ed mentioned; there could be a slowdown, but they haven't been able to pass that exactly how that affects our numbers, and that's what Wendy was talking about in terms of visibility and the forecast for FY.

Our next question comes from Porter Taylor with ARS Investment Partners. Your line is open.

How are you guys doing?

That's very great numbers.

The market doesn't want to give you respect. You guys have the Rodney Dangerfield of successful investments. I want to couple things real quick. One, wind power last year was a tough year. Wind power in Europe, winds changed direction, and they didn't deliver a lot of projects that actually ended up not getting done or getting pushed out. Are you seeing an improvement in the market this year in Europe with everything that's been going on and clean the winds returning to their normal courses?

Yes. So right now 95% of our business is North America. The products I mentioned for Nordex, Senvion, and Suvion, they're two of the three largest manufacturers of wind turbines in Europe, and they're pushing us very, very hard for this product. This product is, in essence, a replacement product that they need to get done to get those lead acid batteries out. Our market share is small enough that we feel that the market growth will be very strong for us, but the market itself is all based, to me, on subsidies. There is a lot of push to get certain things done so they can collect their subsidies for 2022 at the end of the year, which was part of our large shipments and work in three shifts because we need to get those products to them in this fiscal year. Rollouts of new wind turbines, I don't think it’s accelerating much, but the upgrading or refurbishing, they call it, using our products, whether it be the ULTRA3000, UPS, or our shunt, which is a product we've developed for GE specifically, that seems to be continuing based on their forecast; 2023 is going to be another strong year for us.

Okay. There seems to be a lot of misunderstanding. In fact, when you started to talk about the semi-cap equipment space and the idea that there was uncertainty beyond the next two quarters, the market immediately sold your stock off pretty aggressively. Can you give people a better understanding of kind of the role that plays? And as you said, everyone is cross-trained. Do you actually think the issues in semi-cap equipment, if they do show up in the next fiscal year, will do anything to really slow your overall growth? Or will they simply allow you to take those people who aren't being utilized in semi-cap equipment or might not be utilized and push them over to these other faster-growing areas?

Yes. I don't think it's going to slow our goals of 10% to 15% growth going forward, our internal numbers. The semiconductor wafer fab market historically, and I'm talking about the last 20 years that I've been involved in and also in this company, has always been cyclical. It runs for about a year to 18 months of the upside and then slows down quite a bit for like nine months to a year. This last run has been close to 2.5 years. I think the slowdown is going to go back to not 2.5 years, but it will be nine months to a year. If we look at just internal projections about what it could be and then what we have on the books with a strong backlog and new products, I don't think it's going to have much effect at all. In fact, we'll overcome it based on the numbers we're talking about so far in this call.

Yes, the call has a very positive outlook, but the stock market response seems uncertain. It would be beneficial for investors if there were someone to guide their thoughts. Having sell-side coverage would be helpful because many in my industry rely on others to interpret results. I want to discuss the battery and electric vehicle market, particularly from a car perspective, which is quite intriguing. How significant do you believe this opportunity could become? How distinctive is your offering? Additionally, do you foresee your offering gaining broader appeal beyond your current clients?

Yes. numerous electric transformations, whether it be locomotives or forklifts, I think our niche is going to be these larger products. The electric vehicle power market is so saturated; everybody's going after it. Obviously, it's a multibillion-dollar market, which is why everyone is going after it. Our current capabilities are similar to wind turbines or electric locomotives; we have a niche product, it's a charger module that we sell to VinSmart along with some other controlling circuitry. Today, this is probably a $3 million to $4 million opportunity for us, and we have about $2.5 million backlog. The charging stations are a little bit higher opportunity for us because we can develop unique products for charging stations specifically. But the electric car market, that's just saturated and lower margins, and everybody wants at it. We don't have a ton of value today in the electric car market other than our component designing capabilities, working with these customers to help them build systems. Our size is going to be on solar, wind, and power management applications that are a little more high power and a little more niche.

And with the charging stations, what do you think the economic value you could have per charging station? I mean, that's going to be a huge growth market going forward.

As we know, the car market significantly exceeds the existing infrastructure needed for charging across North America and Europe. I believe it will evolve similarly to the growth we’ve seen with other products, where customers will ask us to help with the design of components and to build the modules. At one point, when the market was just starting, we even constructed charging stations for clients, just as we do with companies like Lam, Caterpillar, and Progress Rail. Our value can range from designing components to creating and building modules, and eventually, we may take on larger projects in developing actual charging stations as more niche customers emerge to support that market.

Okay. So that's an evolving niche market that could potentially be another leg to the stool.

Yes.

Can we discuss Progress Rail? You mentioned that the rail industry is aiming for carbon neutrality. You're collaborating with Progress, which is part of Caterpillar and their established diesel electric locomotive sector. Do you have any insights on that?

I believe it's 25,000 in North America, 25,000 diesel locomotives. What portion of that is Progress Rail? Between them and Wabtec, I think it's probably going to be divided up 60-40. But right now, the number that we heard from Progress Rail is about 25,000 diesel locomotives in North America that could convert over the next number of years between now and 2030.

Okay. And that's obviously significant.

Their forecast indicated approximately 50 electric locomotives over the next three to five years as part of the conversion they discussed. Therefore, considering their projection of a 7- to 10-year ramp up towards achieving 25,000, one would expect to see around 50 locomotives in the coming years, followed by a significant increase thereafter. Yes, absolutely. In fact, as I mentioned earlier, the program we have with Progress Rail in Brazil is progressing well. When the locomotive is completed, which is in their forecast, we are currently shipping the components necessary for it. They will assemble the final train and present it to the customer in November of this year; it will be the largest electric vehicle in the world. Being involved in that program regularly will lead to a significant increase in interest. Over the next three to five years, we can expect strong growth as acceptance of the product, along with subsidies and other factors, take shape.

And so we're looking at, depending on the size and power of the locomotive and your role in it, $1 million to $3-plus million a copy?

Exactly. Like I mentioned before, we build either the module itself with the ultracapacitors or lithium-ion. We then build the structure, which is like putting them in racks, and then some controlling circuitry. The third thing is the superstructure, which is literally the guts: taking the diesel engine out and putting in a lithium-ion phosphate-based structure. Yes, depending on that, it's anywhere from $1 million to $3 million per train.

And so when we're looking at the math, I mean this is one of the issues why I think it would be great to get some people telling my peers how to think. You're looking at a market that literally, as we go in the next four or five years, you're going to get meaningfully more revenue out of the electric locomotive business than you get as a company today. You're not going to lose anything else. You're not going to lose the wind tower; you're not going to lose any other aspects of the business.

Yes, that is the opportunity we are exploring. This part of the business involves new products and disruptive technology moving forward. We need to engage a beta site, sponsor, or partner to evaluate this. I spoke with someone yesterday about this, and on Monday, I had three phone calls: one with Siemens, one with Caterpillar, and one with NextEra. They are key to our success. Not only do we have them as beta site partners to test this product, but we also have weekly calls. We are partners and are leveraging this opportunity. The potential benefits are significant. Consider all the additional applications that Caterpillar or Siemens might explore. We are gaining valuable insights from them regarding their needs. Our company is unique as we are publicly traded and valued at a couple of hundred million. The programs we are engaging with could potentially elevate our company to impressive financial heights; at one point, we were valued at around $600 million.

We think the electric locomotive business will be much larger than land in a very short period of time.

Well, it’s actually it’s not just larger than Lam, but from going larger than Lam. If I do my math right, if you assume it’s roughly a 50-50, 60-40 split, you’re talking about $10,000 to $15,000 progress rail diesel out there. They’re the incumbent. You would think they’re likely to have a chance to what we saw with Union Pacific and some of their work; they were Wabco and they went back to Wabco, it appears. You’re looking at $1 million to $3 million on something that’s $10 million to $15 million. If you’re going to fill it in four or five, let’s say six years, you’re talking about thousands of engines a year potentially.

Yes. Like I mentioned, we build either the module itself with the ultracapacitors or lithium-ion. We then build the structure, which is like putting them in racks, and some controlling circuitry in the superstructure, which would be the guts, the engine — taking the diesel engine out and putting in a lithium-ion phosphate-based structure. Depending on the model, it’s anywhere from $1 million to $3 million per train.

So we're looking at a market that, literally, as we go in the next four to five years, you're going to get meaningfully more revenue out of the electric locomotive business than you get as a company today. You're not going to lose any of the other business.

Yes. That’s the opportunity we’re looking at. Out of that, just think about all the other applications that a Caterpillar is going to look at or that Siemens is going to look at. We’re learning from them what they need. Again, we’re a company that is public. We’re a couple of $100 million.

I want to thank you guys for your time and interest today. We will continue to move our company forward in the upcoming quarters. We’re optimistic about our growth outlook and our diversified portfolio of products. Thank you.

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