Bel Fuse Inc. (NASDAQ:BELFB) Q3 2023 Earnings Call Transcript

Bel Fuse Inc. (NASDAQ:BELFB) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good morning and welcome to the Bel Fuse's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please proceed.

Jean Young: Thank you Latonia and good morning everyone. Before we begin, I'd like to remind everyone that during today's conference call we will make statements relating to our business that will be considered forward-looking statements under Federal Securities Laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2023. These statements are based on the company's current expectations and reflect the company's views only as of today, and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors.

An engineer examining a DC to DC integrated circuit board, looking for any flaws.

These material risks are summarized in the press release that we've issued after market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations, is discussed in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, for the fiscal year ended December, 31, 2022, and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website.

Joining me on the call today is Dan Bernstein, President and CEO; Farouq Tuweiq, CFO; and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that I'd like to turn the call over to Dan. Dan?

Dan Bernstein: Yes, thank you Jean, and thank you for joining us on our call today. We are pleased with our results for the quarter. We continue to execute on our plan for growth and strategic improvement of profitability. As discussed over the past several quarters, the team has taken a multipronged and balanced approach to the way we do business in terms of customers we serve, products we sell and markets we support and doing it all in the most cost efficient manner. Our third quarter sales continued to be healthy, driven by order patterns of our customers whereby we saw different growth profiles across our diverse product offerings. We saw growth in certain markets such as defense, aerospace, eMobility, and rail that was offset in general industrial premise by our consumer.

On the distribution side of business, we see some pockets of growth. So however, the distribution channel continues to have elevated levels of inventory that affected our new orders. As we looked at our top line trend, it's important to remember that we are an engineering driven company first. We've been successful in supporting tomorrow's technology for over 70 years and this is a testament to our ability to work closely with our customers and engineers. In developing the future products there is a value associated with that. A few years ago we were eager to support all customers at all costs, allowing us to engage in projects we felt a worthwhile pursuit, but which at times were less than great outcome for us. To be clear, our priority and focus to be aligned with customers will value the quality and technology of our price and are not solely focused on price.

We no longer have a problem walking away from these sales that fell below our gross margin requirements. It allows our engineers to work on more beautiful designs and open space in the factory floor to support our growing end markets such as eMobility, medical, industrial and rail. Our internal model in 2023 is building a better value and this touches all areas of our business, HR, finance, product development, business development, procurement and manufacturing. There isn't a single function or department within the organization that doesn't have improved initiative to take place. Our collective actions have evolved and improved profitability and increased cash generation. This gives us financial flexibility to continue to explore various growth and capital adaptation strategies, which could include a potential stock buyback subject to market conditions, evaluation of acquisitions and other strategic initiatives to support future growth of the company.

As we approach our 75th anniversary on January 11, 2024, it is exciting to see the recent mindset, cultural shifts that have taken place internally and the level of energy and dedication put forth by our global team as we deliver better value to our customers, shareholders and associates. But that said, I'd now like to turn the call over to Lynn to provide a financial update.

Lynn Hutkin: Thank you, Dan. From a financial perspective, sales were fairly stable for our Connectivity and Power segments as compared to the third quarter of 2022, with the largest impact felt within our Magnetic segment. While the Magnetic segment was down from Q3, 2022, we did see an almost 20% rebound from its low point in Q2 2023. Overall, third quarter 2023 sales were $159 million as compared to $178 million in the third quarter of 2022. Of the $19 million decline, $8.4 million was attributable to reduced expedite fee revenue in 2023 quarter versus Q3, 2022. Gross margin continued to increase on a year-over-year basis for eight consecutive quarters and reached 35% in the third quarter of 2023 as compared to 29% in last year's third quarter.

Margin improvement continued and was led by favorable product mix and the successful execution of a variety of cost reduction and efficiency program. By product group, Power Solutions and Protection sales for Q3 2023 were $74.9 million, down 2.1% from last year's third quarter. Within the Power group an $8 million decline and expedite fee revenue was largely offset by higher demand for our front end power products serving our networking end market. Sales of our eMobility products also remained strong and helped offset declines in Circuit Protection and distribution sales. Gross margin for our for our Power Group was 41.7% for the third quarter, a 930 basis point improvement from Q3 2022, primarily driven by a favorable shift in product mix, cost reduction effort and favorable FX.

Our Connectivity Solutions group had sales of $51.8 million in the third quarter of 2023, an increase of 3% from last year's third quarter with continued strength seen in defense and aerospace. Gross margin for this group came in at 35.8% for the third quarter of 2023, up from 26.1% in the third quarter of 2022. Lastly, our Magnetic Solutions group had Q3 sales of $32 million, down 37.2% from last year's third quarter. Gross margin for this group was 22% in the third quarter of 2023 as compared to 30.4% during last year's third quarter. We are happy to report that $6.9 million shipped from the new BTX site in China during the third quarter of 2023. At the consolidated level, our backlog of orders totaled $408 million at September 30. Historically, our backlog typically represented approximately one quarter's worth of sales when we times for 8 to 12 weeks.

Our current backlog levels continued to represent about 2.5 quarters worth of sales and we view this as still being high. We expect our level of backlog to come down further in future quarters as lead times continue to normalize. Our consolidated book to bill ratio improved sequentially from 0.6 in Q2, 2023 to 0.8 for Q3, 2023. Of note, our Q3 bookings within our commercial air end market were $15.7 million, a new quarterly record high for us in this end market. Our selling, general and administrative expenses for the third quarter of 2023 were $23.7 million or 14.9% of sales, up from $22.2 million or 12.5% of sales in the third quarter of last year? This increase was largely related to higher salaries and fringe benefits in the 2023 quarter, partially offset by lower sales commissions.

Turning to the balance sheet and cash flow item, we ended the quarter with a cash balance of $100.2 million as compared to $70.3 million at year end. We generated $81.4 million in cash flow from operating activities during the first nine months of 2023. The capital expenditures of $9.7 million, this resulted in free cash flow generation of $71.7 million for the first nine months of 2023, an improvement of $53.3 million versus the same period of 2022. Our inventory levels decreased by $29.3 million from year end, resulting in improved inventory turns of 2.9 times during Q3, 2023, at 2.6 times from year end. While progress has been made on bringing inventory levels down, which remains a company-wide initiative to restore our inventory turns to better align with industry norms.

Looking at the third quarter of 2023, we generated $40.8 million in cash flow from operating activities. This translated into free cash flow of $38.2 million during the third quarter. From a debt perspective, our outstanding balance remains at $60 million and is effectively subject to a fixed interest rate of 2.5% through our swap agreements that are in place through 2026. I'll now turn the call over to Farouq for additional commentary. Farouq?

Farouq Tuweiq: Thank you, Lynn. Over the past months, I've spent quite a bit of time visiting Bel facilities in Europe and in the Dominican Republic and what a big change I've seen from just one year ago. As I look at the mindset shift that has resulted in improved productivity and cost containment at the factory level it has been nothing short of stellar. We continue though to challenge our facilities to improve globally and expect big things from there. We also have been devoting a good amount of time on our material spend to ensure we are aligned with vendors appropriately matched for our size that we believe will ultimately result in a higher level of savings. Dan and I also attended our European sales meeting a few weeks back and believe it's in great hands as Charles it's passed forward to further penetrate Europe.

On a side note, Europe has been a strong performer for us this year despite some of the challenges there and we think there is more to be done in this region. Looking out to the fourth quarter, based on currently available information, we provided sales guidance in the range of $146 million to $154 million with gross margins roughly in line with Q3, 2023 levels. In addition to some voluntary trimming on the top line, as Dan mentioned, the channel continues to be over inventoried, especially with our distributor customers. We expect this situation will continue for another two quarters or so before it returns to normalcy, though there are certain pockets of growth in the channel which is good to see. From a supply chain perspective, there has been easing and availability of passive components, but we are still seeing longer lead times for others, mainly on the IC side.

In summary, it's been a busy year on all fronts, the progress made in many areas of the organization. I'll reiterate my sentiment from prior quarters and that is that we are on this journey of continuous growth and improvements. Change is rarely linear or immediate. We do know we are building a healthier organization that's more focused on pursuit of growth and demanding operational excellence. These are all things that excite all of us. With that, I'll turn the call back over to Dan.

Dan Bernstein: And I thank you Farouq and at this time, I'd like to open up the call to any questions you might ask.

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