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Edited Transcript of BELFA earnings conference call or presentation 2-May-19 3:00pm GMT

Q1 2019 Bel Fuse Inc Earnings Call

Jersey City May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Bel Fuse Inc earnings conference call or presentation Thursday, May 2, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Brosious

Bel Fuse Inc. - VP of Finance, Treasurer & Secretary

* Daniel Bernstein

Bel Fuse Inc. - President, CEO & Director

* Lynn Hutkin

Bel Fuse Inc. - Director of Financial Reporting

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Conference Call Participants

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* Hendi Susanto

G. Research, LLC - Research Analyst

* Michael Morales

Walthausen & Co., LLC - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Bel Fuse Inc. First Quarter 2019 Results Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [2]

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Thank you, Mary. Joining me on the call today is Craig Brosious, our Vice President of Finance; Lynn Hutkin, our Director of Financial Reporting.

Before we begin the call, I'd like to ask Lynn to go over the safe harbor statement. Lynn?

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Lynn Hutkin, Bel Fuse Inc. - Director of Financial Reporting [3]

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Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following safe harbor statement. Except for historical information contained on this call, the matters discussed on this call such as statements regarding sales projections, customer demand, the impact of product releases and anticipated cost savings are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involves risks and uncertainties. Actual results could differ materially from Bel's projections.

Among the factors that could cause actual results to differ materially from such statements are: the market concerns facing our customers; the continuing viability of sectors that rely on our products; the effects of business and economic conditions; difficulties associated with integrating recently acquired companies; capacity and supply constraints or difficulties; product development, commercialization or technological difficulties; the regulatory and trade environment; risks associated with foreign currencies; uncertainties associated with legal proceedings; the market's acceptance of the company's new products and competitive responses to those new products; the impact of changes to U.S. trade and tariff policies; and the risk factors detailed from time to time in the company's SEC reports.

In light of the risks and uncertainties, there can be no assurance that any forward-looking statement will, in fact, prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

We may also discuss non-GAAP results during this call and reconciliations of all GAAP results to non-GAAP reserves have been included in our release.

I would now like to turn the call back to Dan for a general business update.

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [4]

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Thank you, Lynn. Before going through the financials, I would like to provide a brief update on how the business did from an operations standpoint this quarter and what we see going forward. Overall, we are pleased with the continued year-over-year sales growth during the first quarter with sales coming in at $125.4 million, up 6% from the first quarter of 2018.

Our Power Solutions and Protection group continued their trend of year-over-year sales growth with increase of $5.7 million compared to the first quarter of 2018, driven by continued demand for our power supplies and our array of datacenter applications. Sales of our DC-DC products also saw growth in 2019. This was offset by a decline in demand for our custom module products.

Our Connectivity Solutions group had year-over-year sales growth of $1.4 million. Our Cinch business increased revenue by $1.3 million compared to the first quarter of 2018, led by strong demand for our Connector products in commercial aerospace applications, both direct to customers and through aftermarket sales.

Our Magnetic Solutions sales were generally same as last year for the first quarter. The sales of our Signal Transformer products were strong during the first quarter of 2019 related to medical and industrial applications. This increase was offset by lower demand during the quarter from MagJack products and discrete magnetic components.

Following the record bookings in 2018, we did see some slowing in bookings during the first quarter attributed to customers working down on high inventory levels, which has been built up in response to new product launches and potential rises in tariffs. These factors led to a backlog of $166.8 million at March 31, 2019, a reduction of $4.4 million or 3% from 2018 year-end. By product groups, the backlog of orders for our connectivity products grew by $6.4 million from year-end, offset by declines of $5.8 million for our Magnetic Solution products and $5 million for our Power Solution and Protection products.

From a profitability standpoint, we benefited more from a favorable exchange rate environment during the first quarter 2019 compared to the same quarter of 2018. And improved stock marketing conditions led to a $1.1 million increase in cash surrender value of our COLI policies. These factors were offset by continued challenges with higher labor costs due to minimum wage increases in the People's Republic of China and Mexico and higher material costs as compared to the first quarter of 2018.

The restructuring efforts implemented in late 2018 and early 2019 will help mitigate the rising cost and preserve our margins beginning in the second quarter.

Overall, while we expect some downward pressure on second quarter sales compared to last year's second quarter, we are generally optimistic for future sales growth and improved profitability in the second half of this year. As our customers work through their inventory on hand, we expect there will be an upswing in bookings. There are several positive drivers we look to the second half of the year, particularly related to key military, aerospace platforms in which we participate in, continued momentum for our power products within the HEV market, and we also are investing time and resources on developing and launching products to support the upcoming 5G markets and believe that we're well positioned to capture future growth as this new technology emerges.

And with that, I turn the call over to Craig to run through the financial updates.

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Craig Brosious, Bel Fuse Inc. - VP of Finance, Treasurer & Secretary [5]

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Thank you, Dan. To provide a quick recap on sales, sales during the first quarter were $125.4 million. North America sales were $64.6 million, up 8.6% from last year's first quarter. European sales were $23.5 million, up 16.6% and Asian sales were $37.3 million, down 3.5%.

By product group, Power Solutions and Protection sales were $42.8 million, up 15.3% from last year's first quarter. Connectivity Solutions sales were $44.4 million, up 3.4%. And Magnetic Solutions sales were $38.3 million, essentially the same as last year.

Gross profit margin increased to 18.8% in the first quarter of 2019 as compared with 17.9% in the first quarter of 2018 as incremental sales in 2019 led to improved fixed cost absorption, partially offset by higher labor and material costs during 2019.

Our selling, general and administrative expenses were $19.8 million or 15.8% of sales as compared with $20.7 million or 17.5% of sales in the first quarter of 2018. The decrease in SG&A expenses during the 2019 period primarily related to a $659,000 increase in cash surrender value of our company-owned life insurance policies as a result of the stock market rebounding during the first quarter of 2019. In addition, foreign exchange losses were $428,000 lower in 2019 versus the 2018 first quarter. These factors were offset by an increase in ERP implementation costs of $661,000 during the first quarter of 2019 as the first phase of our implementation went live in January.

On a go-forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near term barring any significant fluctuations in foreign currencies. As a result of these factors, we generated income from operations of $2.8 million in the first quarter of 2019 as compared to $437,000 in the first quarter of 2018.

Interest expense was $1.4 million in the first quarter of 2019, up $263,000 from the same period last year due to the higher interest rate in effect during the 2019 period.

Our provision for income taxes was $39,000 for the first quarter of 2019 compared to $325,000 during last year's first quarter. The provision for income taxes during the first quarter of 2019 benefited from a decrease in taxes related to uncertain tax positions and the impact from permanent tax differences on U.S. tax-exempt activities.

Earnings per share for the Class A common shares was $0.08 per share in the first quarter of 2019 as compared with a loss of $0.11 per share in the first quarter of 2018. Earnings per share for the Class B common shares was $0.09 per share in the first quarter of 2019 as compared with a loss of $0.11 per share in the first quarter of 2018.

On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares was $0.20 per share in the first quarter of 2019 as compared with a loss of $0.09 per share in the first quarter of 2018. On a non-GAAP basis, EPS for Class B shares was $0.22 per share in the first quarter of 2019 as compared with a loss of $0.09 per share in the first quarter of 2018.

And now, I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at March 31, 2019, was $43.2 million, a decrease of $10.7 million from December 31, 2018. During the first quarter of 2019, we made net payments of $744,000 towards our outstanding debt balance. We also used cash for capital expenditures of $2.4 million, dividend payments of $800,000 and interest payments of $1.2 million. Accounts receivables were $94.2 million at March 31, 2019, as compared with $91.9 million at December 31, 2018.

Day sales outstanding were 68 days at March 31, 2019, compared to 59 days at December 31, 2018. The increase in our accounts receivable balance was largely due to the higher sales volume in the month of March 2019 as compared to the month of December in 2018. Our DSO during the first quarter was unfavorably impacted by the pause in shipping product to our customers' consignment hubs, while we worked down their inventory levels.

Inventories were $124.8 million at March 31, 2019, up $4.7 million from December 31, 2018. The increase was primarily in work-in-progress and finished goods due to the slowdown of incoming orders and the shipments to the consignment hubs during the quarter.

Accounts payable were $48.1 million at March 31, 2019, down $8 million from its level at December 31, 2018, primarily due to lower raw material purchases during the quarter.

Bel's outstanding debt was reduced by $744,000 during the first quarter, bringing the balance down to $115.2 million as of March 31, 2019, excluding deferred financing costs.

You will see that our balance sheet has a few new line items this quarter related to the adoption of the new lease standard, which requires us to report a right-of-use asset and associated lease liability in connection with assets utilized under an operating lease, which were previously off balance sheet items. On January 1, 2019, as an option day, we recorded right-of-use assets in the amount of $20.7 million and associated lease liability in the amount of $21 million.

Book value per share, which is calculated at stockholders' equity divided by our combined A and B classes of common stock outstanding, was $14.53 per share at March 31, 2019, as compared to $14.39 per share at December 31, 2018.

And now I'd like to turn the call back to Dan and open the call for questions. Dan?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [6]

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Mary, can we open up the call for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Mike Morales with Walthausen & Co.

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Michael Morales, Walthausen & Co., LLC - Research Analyst [2]

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I want to dig into a little bit on to the slower bookings that you commented on. I know last call that you said that January was running pretty strong, but there was some concerns about inventory levels out there. Can you just give more color on when and in what vertical we started to see the slower bookings in the first quarter?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [3]

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I think -- across the board, I think there's 2 major things that we're facing. One, with the shortages that were out in the market, driven by ICs and capacitors that people were being cautious on double booking and making sure they had orders come in. So that was one concern that we thought that was out there. The other concern was if the government moves from a 10% tariff to a 25% tariff, people wanted to get those products in before then. And also I think some 2 of our major distributors that are both private companies, one is Digi-Key, one is Mouser, I think really took a very aggressive stance and bringing in substantial inventory. So we see both those distributors just holding back on their order process at this time. And so we're projecting that by this quarter, hopefully, a lot of that inventory would be flushed out.

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Michael Morales, Walthausen & Co., LLC - Research Analyst [4]

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Got you. So just to make sure that I'm interpreting this correctly. You said you expect downward pressure in the second quarter. Is that a slight top line contraction? Are you subjecting a little bit of growth in the second quarter? How are you thinking about from where you sit today?

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Lynn Hutkin, Bel Fuse Inc. - Director of Financial Reporting [5]

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I think for the second quarter as we indicated, we are expecting top line sales to go down compared to last year's second quarter. And at this point, we're estimating high single-digit decline. As we look at the second half of the year, it's still a little too early to tell at this point. We do see some positive growth drivers further out in the year, particularly related to some military programs that we're on and also HEV projects that are picking up. But we typically only have about 12 weeks of visibility in our business. So it's hard to predict at this point how the second half will look, but we do see positive indicators as we look to the second half.

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Michael Morales, Walthausen & Co., LLC - Research Analyst [6]

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Great. That's very helpful. And then Dan, one of the things that you mentioned was some concern about the component shortage that are out there. I've heard over the past couple of months, people kind of pointed June 2019 as when this starts to fully work itself out. We've seen some release -- some relief recently. From where you guys are sitting, what are you seeing on the component side? Is there any areas of tightness? Has it worked itself out? How is that right now?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [7]

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I think at this point, we see a substantial easing of the lead times. We were facing some situation where lead times were stretched out past year, 18 months. I think that's come down to substantially more reasonable levels. The big curveball that we have out there, I think, is electric cars and the uses that they have with capacitors and ICs. So for example, if you look at, we do a lot with fuses and circuit protection, a standard nonelectric car will maybe use 40 or 50 fuses. On a new car -- electric car, you could add 500 fuses. So we don't know how that's going to progress and how that's going to change the market. If you look back at the shortages we were facing last year, I think it was largely dependent on the auto industry.

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Michael Morales, Walthausen & Co., LLC - Research Analyst [8]

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Okay. And then I've also read that China is kind of pulling back some subsidies on the HEVs. Where would your HEV exposure be?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [9]

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Electric cars. Yes.

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Michael Morales, Walthausen & Co., LLC - Research Analyst [10]

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Electric cars. Where would your HEV exposure be? Is it more China-oriented? Is it U.S.?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [11]

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No, it's definitely more North American and European. I don't think we can be that cost-competitive for the electric market in China. So our focus has been more -- from the power side is more niche markets in Europe and North America and by that for example, buses, trailers -- not with...

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Craig Brosious, Bel Fuse Inc. - VP of Finance, Treasurer & Secretary [12]

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All for forward equipment.

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [13]

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All forward. Yes. Even we do -- we're working a lot with motor companies -- I'm sorry, boating companies now on battery chargers for them. Also we do a lot of work with Tesla on circuit protection.

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Operator [14]

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(Operator Instructions) Our next question is from Hendi Susanto with G. Research.

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Hendi Susanto, G. Research, LLC - Research Analyst [15]

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Dan, do you have estimate of 5G addressable market for Bel Fuse? And can you remind us your major products that will benefit from 5G?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [16]

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Okay. What we're doing is a lot of the wireless work, again, looking at telecommunication where that's going, looking at the auto industry, different areas that are moving, I mean if you look at 5G, basically, you have the whole world interconnects with itself from what's going to happen with the lighting systems outside, how cars inter-react with each other. So basically we're coming up with an array of products that can meet this new technology. We're really focused on the RF side and the wireless side of the business. I should say from the Cinch side, more on the high reliability side of the business than the commercial side.

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Hendi Susanto, G. Research, LLC - Research Analyst [17]

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And then, I think you cited like lower demand of MagJack and discrete magnetic component in Q1. How should we expect those 2 product groups to trend as we see the remainder of 2019? Should we expect like lower demand to continue?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [18]

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Well, I think both those products go heavily into the networking companies, like HP or Cisco or more of -- so I think -- then I think there'll be more of an over-inventory situation because of the concerns they had with the shortages that they brought in, of sanction of greater product than they need. So we're hoping that a lot of that product could be flushed out this quarter and hopefully, the beginning of next quarter. So it should start improving by the second half of this year.

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Hendi Susanto, G. Research, LLC - Research Analyst [19]

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Okay. And then Lynn mentioned Q2 expectation of high single-digit year-over-year. Can you elaborate, say, across different segments whether one would see higher decline versus, I guess, lower decline among your product groups, I mean?

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [20]

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Lynn, do you want to take that one?

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Lynn Hutkin, Bel Fuse Inc. - Director of Financial Reporting [21]

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Sure. So I think that on the Magnetic Solutions piece, we're probably going to see the highest decline in that group just related to what Dan was just referring to, one of our major customers had a new product launch. They have a lot of inventory on hand right now that they're working through. And under the new revenue recognition standard, we now record arriving as we ship it to their hubs. So to the extent that they are using inventory and we're not shipping as much, that does have a downward impact on our sales. So I think, that's the group where we see the most decline. The Connectivity Solutions group, some pressure there but could either be flat, slightly down. But no major concerns there. And then on the Power Solutions group, we are expecting that to be down a bit from last year's second quarter. We did have some shipments especially into blockchain customers that we don't anticipate repeating in this year's second quarter.

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Operator [22]

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And it appears there are no further questions at this time, Mr. Bernstein. I'd like to turn the conference back over to you for any additional comments or closing remarks.

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Daniel Bernstein, Bel Fuse Inc. - President, CEO & Director [23]

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Thank you, Mary. We appreciate everybody being on the call and look forward to speaking to you next quarter.

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Operator [24]

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And this concludes today's call. Thank you for your participation. You may now disconnect.