Welcome to the RF Industries' Third Quarter Fiscal 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded today, Thursday, September 12, 2019. At this time, I would like to turn the conference over to Todd Kehrli of MKR Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to RF Industries' third quarter fiscal 2019 financial results conference call. With me on today's call are RF Industries' President and CEO, Rob Dawson; and Chief Financial Officer, Mark Turfler. Before I turn the call over to Rob and Mark, I'd like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its third quarter fiscal 2019 financial results. That release is available on the company's website at rfindustries.com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website. I'd like to remind everyone that on today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on this call today may constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. When used, the words anticipates, beliefs, expects, intend, future and other similar expressions, identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the company’s periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements. I’ll now turn the call over to Rob Dawson, President and Chief Executive Officer. Rob?

Thanks Todd. Good afternoon, everyone. Welcome to our third quarter fiscal 2019 earnings conference call. We're pleased to report another strong quarter with solid revenue growth both sequentially and year-over-year. This top line increase was driven by both organic growth as well as inorganic growth from our recent acquisition of C Enterprises. Organically, we continue to generate solid sales in a wireless carrier ecosystem in addition to growing our distribution business. Inorganically, we benefited from a full quarter of sales from C Enterprises and saw their sales improved significantly during the first quarter as the team performed very well. The C Enterprises acquisition is a great example of our ability to bolt-on a complementary business and then enhance their growth by making targeted investments and including them as part of our organization and culture. It’s this combination of healthy organic and inorganic growth that gives me confidence in our long-term goal of achieving $100 million in sales in the next couple of years. I'll talk more about that later in the call. Through the first three quarters this year, we're almost flat to last year through three quarters, even with last year's huge Q2, if I were to summarize simply how we're performing this year is that our core business has experienced nice organic growth, our acquisition has performed well and our concentrated Tier-1 wireless carrier business is still delivering nice results, though as expected, they’re at a lower pace so far compared to last year and the timing of sales can be inconsistent. We feel good about our potential to continue organic growth in our core business, and accept the carrier related spending can cause wild swings for us. But we love that business and the opportunities that it presents us. Our strategy of getting to the end user…

Thank you, Rob and good afternoon, everyone. Our net sales in the third quarter were $15.5 million an increase of $1.9 million or 14% compared to the preceding second quarter an increase of $3.7 million or 31% compared to the third quarter year-ago. The increase in net sales reflects a full quarter of sales contribution from C Enterprises as well as growth in both our traditional run rate business and our project work in the OEM and wireless carrier markets. Gross profit for the third quarter was $4.3 million, an increase of 4% compared to the preceding second quarter and up 6% compared to the third quarter of fiscal 2018. Gross margins were 28% of net sales declined when compared to 34% of net sales in the fiscal 2018 quarter primarily due to product mix as the product set our Tier-1 wireless carrier customer bought this past quarter happened to have a lower margin. In addition, we increased wages at all of our sites in order to reward and retain our protection workforce and in some cases to meet state mandated minimum wage requirements. Selling and general expenses were $2.6 million, or 17% of sales, compared to $1.8 million or 15% of sales in the third quarter last year. The $8.8 million increase was primarily due to absorption of the additional selling and general expenses of the newly acquired C Enterprises business as well as increased compensation due to the timing of bonus accruals. In addition the most recent quarter also included cost related to marketing programs geared to increased sales with our distribution partners. We also incurred cost related to the evaluation of ongoing strategic acquisition transaction. Income from continuing operations for the third quarter was $1 million, or $0.11 per diluted share compared to $1.1 million or $0.11…

Thank you, Mark. As our financial results illustrate, we continue to execute well in our long-term growth plan. We generated solid sales growth both sequentially and year-over-year in the third quarter. This increase reflects healthy growth both organically and through our recent acquisition. We remain very focused on our key initiatives to leverage our strong customer relationships and channel partnerships to further expand our footprint in the marketplace, as well as to bring more complementary companies into the fold as we march towards our goal of reaching $100 million in sales over the next few years. We appreciate the partnerships with our customers, distributors and suppliers, the hard work of our employees and the support of our shareholders. With that, I would like to open the floor to questions. Dory, we're ready to take our first question.

[Operator Instructions] And our first question today comes from Josh Nichols with FBR. Please go ahead, sir.

Yes, thanks for taking my question. I want to ask looks like as far as how much of the Custom Cabling business, is that really direct to carriers at this point for the quarter?

Yes, we don't really break it down that way. But it's a pretty meaningful amount. And if you look at our growth over the last year in that segment other than you've got an acquisition thrown in there but the majority of our growth last year and it kind of continues quarter-to-quarter now has come out of that, that direct business or it's going to that same handful of customers, even if it did directly, we sort of we had it going both directly and indirectly, but it ends up in the same place to allow for the build.

And is that business subject to all like any of these long-term contracts or purchase orders, or is it just very quick term business with the formalized longer term agreements in place?

Yes, so we have master service agreements in place with all the key customers in that space. And in that process, we've been through kind of the traditional bidding that goes on in order to win and then retain that business. So we have -- we have long-term relationships in place. We the way that that's handled though is we take purchase orders spread out over the course of time, when needed. We work closely with the various carriers and integrators to understand their needs and try to project as best possible but as my comments kind of pointed out, it's starts and stops and kind of a holding fashion isn't necessarily consistent, but we're communicating directly with them daily and weekly to talk through those projections. So it's a it's a long-term agreement that they draw against when needed.

All right. And could you dive into a little bit about some of these key customers like which carriers you have these MSAs with specifically?

Yes, so we don't actually disclose that and that's a long standing approach that we've had, it’s the same customer we've been working with for a few years now. And then various folks within their services ecosystem that we do business with as well. But we've been asked to keep that to ourselves, let's say. So we don't disclose it that way. There's only so many potential customers out there though I recognize that.

And then I guess what's really the differentiator between you and some of the other competitors both large and small that enable you to win some of this cell tower cabling business specifically?

Yes, so I think there's a couple of things I mean, our engineering capabilities are really good especially on the hybrid fiber, power and fiber in one, in one cable, those designs are really great quality and the team has done a good job of putting those together and then I think our flexibility and then customer service and turnaround time, we're very customer friendly in the sense that we have a Custom Cable segment for reason, we call that for a reason, it doesn't have to be a standard off-the-shelf thing and while a lot of our larger competitors maybe would prefer to do a much larger run with hundreds or thousands of the same exact cable. When you get into the macro sites in particular that are being hybrid fiber fed for the remote Radiohead deployments. The links are inconsistent, the breakout of how many fibers and or pieces of copper or the sizes of copper that go into those change pretty consistently. So I think it fits right into our wheelhouse of, we can handle a significant volume, but we can tweak the designs and the production capabilities around that and still hit reasonable timelines where we allow our customers to do their network deployments. So I think generally in that business, that's the reason for it. I think that same concept sort of follows through across our entire business, we have enough scale, where I think we can outcompete some of the little localized competitors that we have, it's a pretty fragmented market at that level. And then when we get into more of the competition with the big multinational, in some cases multi-billion dollar companies out there were designed for great quality, flexibility and design and fast turn kinds of business.

And then just diving in since looks like things are going pretty well at C Enterprises you mentioned, could you kind of help make sense, I mean it seems like a pretty bargain basement purchase price, if I'm correct, it's like $600,000 but they're doing $7 million in revenue in just this quarter alone, they did over three like why was that such a bargain?

We talked some about that at the time of the deal. And I think the ownership and leadership team there, we had some good, some good conversations and recognize that in combination with a larger entity and sharing some of the strategies and go-to-market capabilities specifically from a distribution perspective, which is generally how they go-to-market, that together maybe we were stronger than separate. So I think we've invested in some additional resources there which allows them to perform, the sales team did a great job of dragging in some additional levels of business. And I just think generally that team has benefited from having some investment being a part of something bigger. Yes, I mean we, by all accounts, I think it was a -- it was a great deal. But I think there was a business that was roughly breakeven, when we acquired it, and we needed to do some investments. And we were happy to do that and thankful as the way that they're performing.

Excellent, that provides some clarity. And then aside from the scale, could you talk a little bit about from a strategic perspective, what C Enterprises brings to the company regarding your new customers or product offerings?

Yes, it’s a great question. So I think on the customer side, we've done business for a very long time with a lot of different distributors, we've beefed up our distribution approach even before doing the acquisition, two of their largest customers or two distributors that we've done business with for years and have just recently in the last couple of years started to really grow. So I think that the relationships that they had with those two largest distributors are very helpful for us. It gave us spread us out a little bit from a customer perspective into some additional big relationships. And on the product side, it gave us more of a fast turn fiber offer than what we've traditionally done. Our Cables Unlimited Group that came in through an acquisition several years ago, eight or nine years ago is great at fiber Corning Gold House just like C Enterprises is. But I think most of their work is on the custom side, higher ticket items that require more engineering. C Enterprises gives us that fast turn book and ship kind of business that goes into some more traditional applications, data centers, traditional telco, those kinds of things, as well as the capability to do fast turn small cell fiber offerings, which is something that we believe will give us a nice opportunity going forward as the spend increases there.

And good to see the backlog numbers here at $10 million, just historically like, what's the company's time to deliver right on that fast turns typically, I would think?

Well, it depends. I think if you go back to two years ago, when I started here, our backlog was traditionally $2.5 million, we just didn't disclosed it because it was not a material number. And if you took that and put it out over the course of the year, magically, that ended up being about a monthly kind of turn or a little more than that. I think now we see ours is built both with things that are going to go out in the next quarter. And if you go back four or five quarters, you kind of see the trend where we generally ship out our backlog. And then some because we have the book and ship business. But the backlog never goes fully away, we have some of that, some portion of that, that is long standing and gets drawn against over the course of several months or a few quarters. Generally though, whatever is in our backlog will go out within the fiscal year. So that's why I'm pleased to see that we're, we're booking new business and sort of backfilling that backlog every quarter at least for the last six or eight quarters.

And then, just because you mentioned it for small cell been a big longer term growth opportunity like where's that now as far as today but the piece of business and where do you think that's going to be with the 5G rollout and transition over the next like 24 months or so?

Yes, I think it's a small piece of our business today. We shipped some of our traditional coaxial offer into it. We're working on some fiber fed small cell opportunities today. I think the spend there is interesting because the local legislation comes into play. I think if you were to ask any carrier trying to deploy small cells, the design different location to location both because there may be different technical requirements, but also because local municipalities and local legislation isn't making it particularly easy to deploy those in a fast way. So I expect that to accelerate. I think certain cities and counties have found ways to streamline that process but I don't expect that the real spend there to start freeing up until next year is the hope, although we see opportunities here and there for different designs, and I think it still seems to be hung up and a lot of the political conversation around wireless and it look okay, is it safe? Some of those conversations that have proven out many times that it's safe, but that still drives a lot of the local conversation which delays it.

Great, thanks. That's it for me. I’ll hop back in the queue.

Thanks Josh.

Our next question today comes from Aaron Martin with AIGH Investment Partners. Please go ahead.

Hi, it’s Aaron Martin from AIGH. Congrats on another good quarter. Can you give us little more quantify about the gross margin at C Enterprises, is it and the improvements you're making there? What kind of improvements can we expect or talking about one or two percentage points can (inaudible) long-term will get to three to five. What kind of the scale of what we're talking about here?

Aaron, specifically related to the C Enterprises is that the question?

Well, let’s start there and then we’ll move on.

Okay. Got it. Yes, so I think as we disclose when we made the acquisition and again in our comments today, margins generally, they're a little lower than our blended margins. Some of their product lines are more commoditized maybe than some of the other ones that we've traditionally had. We knew that going in and I think the team there has done a great job of finding the better opportunities that you know, we get paid for the value that I think we deserve, and the fast turn business and the work that that team does. So we're expecting it to come up a little bit. I don't think we expect an overnight massive change and they're not terribly low, Martin. They're not horrible, but when that -- when the performance there is as strong as it was, it's going to have an impact on obviously the average overall. So we've seen it come up a little bit, I think we're expecting it to continue coming up a few percentage points is kind of our goal at this point to really test and see what's possible both on the existing products but also as we move into some additional applications.

Okay. And on the overall company obviously besides to the C Enterprises, it seems sounds like in the legacy business, there was reduction to gross margins quarter based on investments in capacity. Longer term putting this aside, we've talked about $100 million revenue run rate of goal. Can we talk about a long-term gross margin operating margin goal?

Well, so yes on the gross line, it’s little easier to talk about on that. And I think it's not unlike what we've talked about previously, that 30% or low 30s is a good spot for us with the product mix that we have today. I think as I said on the prior call, when asked kind of a long-term question, How high can the number go? Look, I think getting it up into the low 30s is a solid place with the product mix that we have today, as that mix changes, because our goal is to bring in additional higher margin product lines and drive opportunities in those spaces both organically as well as on the acquisition side. I think we can keep those margins back up there, 30% and above in the short term, long-term, I don't definitively know this quarter was a great example of when we performed really, really well in a couple of key customer accounts and or product lines, the customer happen to order some things that have that had a lower margin, if the mix has been a little different, those margins could have been up at that 30% number. So it's harder to put a long-term number in place. But I think our goal remains to stay 30% or above. And this quarter was an example of we did some investments on the production side, assuming that we're going to keep driving growth, not just short term, but going long-term. And we're going to have to have the right kind of people in place on the production teams to do that. Some of that was state mandated as well. We happen to be in locations where wage pressure is being mandated, which that's fine. It's built in there. And I think I'm appreciative of the fact that we can bounce around a little bit there though, our goal is to stay back at that 30% or above.

Got it. And we talked about still looking out for Q4 that expect to grow year-over-year, sequential quarter and on the whole year, can we grow year-over-year even excluding the C Enterprises revenue?

There's an outside chance we could, I think it’s hard to know exactly. And we've got some meaningful things in our pipeline, it's got come down to timing really, my expectation and I think what we’ve seen with C Enterprises is I'm having a harder time calling that inorganic growth, the more days that go by and then being a part of the company where we're doing a good job of sharing business between the various locations and kind of traditional different sales models. They've done a nice job of working together both with the other West Coast business as well as the East Coast operations. So again, it's tougher to call that inorganic but I think your question is a fair one, which it would take some work from a carrier spend perspective in particular to get us to achieve that organic growth year-over-year not including anything from C Enterprises.

Okay, thank you very much.

Thanks Aaron.

And our next question comes from Hal Granger, a Private Investor. Please go ahead.

Hi guys, thanks for taking my call, my question. Congratulations on forward in increasing your revenues. That's great.

Thank you.

Mark, I wonder if you could address the accounts receivable, the sales were up year-over-year of 31% in the quarter, cash receivables were up 69%. Was is that something you'd expect because of C Enterprises mix or can you talk about what's going on there?

Sure. Part of that is to the timing, a lot of it is timing, when the sales actually occur. But in addition, as a result of getting some new businesses sometimes we change the terms to accommodate what may work well for our customer and us as it relates to receivables and their payments. So sometimes it comes down to timing as to when they're going to make payments and when we receive the cash, so if you would also notice, we have I think $2,000 of bad debt over the first nine months, so the collections not an issue, we’ve not had that in the past. So again when it comes down to, it's just simply a timing issue.

Okay, thank you. Regarding C Enterprises, would you consider that the integration is pretty much, well how is that going? Is that pretty much done now? And now it's part of your ongoing operations or there's still more to go in integration?

Yes, so I think we've done well there and they've been great at joining the team and performing well against the set of goals. As we get ready to go into a new fiscal year here and another month and a half or so, we're kind of putting some more operational things in place. I mentioned sales structure, we're going to get a little further down the path of getting our distribution sales teams operating more closely together. Because traditionally, while we may have called on some of the same customers, talking to completely different groups in some cases, so I think getting those relationships more centralized and getting us set up in a way that it makes it easier for our customers who do business with us. That's a big step for us, getting the distribution model in place and the direct OEM model in place as two distinct things with a distinct operating organization and sets goals. So that’s a piece of what we need to do. In the short term, slightly longer term, I think we've done a decent job on getting shared business moving between the locations, but there's probably some operational opportunities but just with similar kinds of production capabilities on both coasts that we can likely leverage out of that as well.

Okay, thank you, Rob. So drilling down on the C Enterprises, margins again. You're talking about gross profit margins are a bit less than then the rest of RF Industries. If you looked at net income profit margins, which maybe you don't even breakout or take by yourself, but regarding C Enterprises, is that also a little bit below or is that or is C Enterprises indeed showing at net loss?

Yes, we don't necessarily break it out that way. But I'll give you a general answer, which is that that business is profitable for us at this point. And when we did the acquisition, we said we expected it to be immediately accretive through some things that we put in place to allow that and just allocation of the right people. And that continues to be the case. So that's a money making operation for us in this quarter, but it's been great for us through the roughly four and a half months that we've had them on board.

Okay, thank you. That's great. If I can make a comment, I saw your Q came out 20 minutes before the call along with of course your press release. It would be fantastic that if we had more time to review the Q before the call, but overall, I think your level of communication and transparency is fantastic, so that’s all.

I appreciate that, Hal. Yes, we've tried a few different timings on when we put something out and when we have the call. And this is the one that we've kind of settled on for now. But I appreciate the feedback.

Thank you.

[Operator Instructions] Our next question today comes from (inaudible) another Private Investor. Please go ahead, sir.

Hello, congratulations on great results.

Thank you.

So I guess my first question is about salaries, it seems that it has a bit of a negative leverage here because we had great, great revenues, but since salaries seems to have gone up in the revenues, and that's both in the cost of goods sold and in the various operating expenses. So is it, I mean, I understand San Diego is kind of an expensive place to live. But is that kind of like a one-time step function due to certain legal changes? Or is that something to continue, would we be able to get positive leverage in the future?

Yes, so fair question and versus it being salary changes, most of the increases that we experienced show up on a gross margin line, because it's our production folks. So primarily hourly workers and in some cases, there have not been increases there in a few years, frankly. And so I think what you've seen is we've gone through increases that all locations to try to get people at the right market level, in many cases well above the mandatory minimum wage that exists in that location. There are further mandates over the course of the next few years in multiple places where we do have operations. But I think we've done a decent job of investing correctly in the people to allow us to grow the revenue line and keep up and these are the folks that are doing the actual production work on cable assemblies in particular, whether that's fiber or coax, or a combination thereof. So I think you did see a step change function in this quarter is now built into our gross margin line. And it's incumbent upon us to perform well, price things right and reclaim that margin level that we believe we deserve.

All right. Is there opportunities to use automation to kind of the decrease the percentage of like human labor costs?

Yes, so we've done a decent amount of that, I think it depends on the business, the word Custom showing up in any kind of our operation, sort of lends itself to there's a certain level of automation, but not everything can be automated. So I think we've done a decent job of automating what we can, when I first got here, that was something I was on a quest to go find who has an automated completely, and the issue pops up that, you can automate it for a million of the exact same thing, when you do 100 of the same thing and then change to something else, the ROI on that upfront investment becomes pretty tough to pull off. So there may come a scale level where we find an opportunity to do that again, but I think today we're generally kind of looking at the automation that we can do is already built into the bulk of the business.

All right, and so in general, would you say that the trend in the industry is for going in your favor for more different, more customized solutions? Or is it, is it the case that sort of customized solutions have been tried out now? And then in the near future, they'll become like, kind of a large scale homogenous deployment?

Yes, I think the scale of custom deployments, I don't see people planning better. And I say that because that that points itself to the fast turn business as well, there’s a custom part, which is you need 50, or 100, or 200, or something, or maybe you need 10. That's one component. The other is, and I needed in three days, in seven days, in 10 days, whatever the time frame might be, those two things combined, I don't think you're going to go away anytime soon, as I was leaving our office earlier today, for example there was a gentleman picking up cable assemblies, because he's got a job that he has to do and install on for a carrier, that pickup business and the availability for a contractor to back a truck, load it up with what he needs and get out and do the work doesn't seem to be changing and what small cells, if anything, I feel like it's going to get that much more so into a fast turn place in order, needs to be ready in a few days, and then available at the right location. So I feel like at least a portion of the business is going to stay the way that it is now, I think if we're talking both deployments, somebody wants to buy a million feet of fiber optic cable, that's not a space that we play in. And those will continue to be a large scale deal that gets deployed over the course of several years versus site by site where 100 sites, there may be two that are the same. And the rest of them are varied in nature which fits very well into our skill set.

All right. That's good to hear. And, lastly book-to-bill ratio below one and I asked this question last quarter as well. I assume this is nothing to worry about just because your business is a lot of like short term models quickly fulfilled. So the kind of the book-to-bill ratio is not something that signifies what will happen the next quarter. Is that still correct?

That's correct. Yes, it points the nature of our business, it is going to be booked and shipped in a very short period of time, which will throw off those kinds of ratios, but the best way to look at kind of the health of the business, our backlog remains strong. And this was another example as this quarter ended, where if the motors had to come in two, three, five days earlier than our backlog would have been even higher at quarter end, instead it ended at eight and then subsequent, it's popped back up to 10 again. So keeping by us disclosing our level of bookings in a quarter and where that leaves us for a backlog, we feel like we're being really transparent on kind of the health of the business around those various metrics.

Okay, well, that is it for me. Good luck. And thanks for taking my questions.

Thank you.

And our next question comes from Charles Hilton, Private Investor. Please go ahead.

An interesting call, congratulations.

Thanks.

It’s clear the everybody's working very hard there, it’s apparent because I know a few people, and they're never available for lunch. But anyway, I wonder if the cash, the company has always been known for having a good cash position. I wonder how hard it has been working over this last quarter? And I wonder how it’s distributed, CDs with your favorite bank that you may be locked in but hopefully not. Anything else? Is there anything you can share with us? And what maybe the average yield was for the last three months or nine months, whatever you prefer?

Yes, Mark just stepped back into the room. So the question is around our deployment of cash, and what kind of return we're seeing on that cash, whether that's CDs or other things? And is there any kind of return we can disclose for the last three months, nine months putting that cash to work.

Good question. We have looked at opportunities right now, unfortunately, there aren't a lot. We kept him in a fairly safe investment. And quite frankly our earnings is much as we possibly can. But at the moment, we're just keeping it in, in a money market account until we see a better opportunity.

Okay, so you're not going -- of the ball. In other words, you can't boast of any younger bank eager for your business that might be giving you an advantage against probably your favorite bank that is maybe giving you average or maybe even a below average?

So yes, I don't think we have a favorite bank. I certainly don't. But I appreciate the question. I think the cash position we have. Our goal is to redeploy that cash, specifically in M&A. So I get it, we could probably do better on from an earning, putting that cash to work in earnings perspective. And if you've got a proposal, which I sent you might would love to hear about it.

I don't, but I know that. Thank you for your time.

Thank you, Charles. Appreciate it.

And it appears there are no further questions in the queue. At this time, I'd like to turn things back to management for any closing or additional remarks.

Thank you, Dory. Appreciate it. And thanks everyone for your interest in support of RF Industries. We look forward to reporting our fourth quarter and full fiscal 2019 results in December. Thanks for joining today’s call. Have a great day.

And this does conclude today’s call. Thank you so much for your participation. You may now disconnect.