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Edited Transcript of BELFA earnings conference call or presentation 3-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Bel Fuse Inc Earnings Call

Jersey City Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Bel Fuse Inc earnings conference call or presentation Wednesday, May 3, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Colin Dunn

Bel Fuse Inc. - Former CAO, VP of Finance, Treasurer and Secretary

* Craig Brosious

Insilco Technologies (UK) Ltd. - Director and Company Secretary

* Daniel Bernstein

Bel Fuse Inc. - CEO, President, Director and MD of Macau

* Lynn Hutkin

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Conference Call Participants

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* Harsh V. Kumar

Stephens Inc., Research Division - MD

* Hendi Susanto

G. Research, LLC - Research Analyst

* Sean Kilian Flanagan Hannan

Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Manufacturing Services, IT Components and Electronic Components

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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 2017 Results Conference. Please note that today's conference is being recorded.

At this time, I would like to turn it over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [2]

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Thank you, Emilia. Thank you for joining us today. On the call is Colin Dunn, our Vice President of Finance; Craig Brosious, our Director of Finance, who, on May 23, will be taking over for Colin Dunn; and Lynn Hutkin, our Manager of External Reporting.

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

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Lynn Hutkin, [3]

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Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following safe harbor statements.

Except for historical information contained on this call, the matters discussed on this call, such as statements regarding sales growth in the eMobility and circuit protection segments of the market, the potential impact of the Avnet agreement and future sales through broadline distributors, are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Actual results could differ materially from those 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; 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 also may discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results 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. - CEO, President, Director and MD of Macau [4]

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Thank you, Lynn. Before going through the financials, I would like to provide a brief update on how the businesses did from an operational standpoint for this quarter and what we see going forward.

Overall, despite the downward trend in sales that continued into the first quarter, our gross margin dollars were up slightly from the fourth quarter of 2016. The decline in sales from the fourth quarter was expected as the first quarter is typically our lowest sales quarter of the year due to fewer production days in the month of February, coupled with the Chinese New Year holiday. We did see improvement in March sales versus the first 2 months of the quarter. Last quarter, we mentioned that we saw an uptick in our backlog, and that trend has continued in the first quarter of 2017.

Our Power Solutions group and Cinch Connectivity business each had the strongest backlog since 2014. We have used it as an indication of our efforts on the sales side, both in restructuring or global sales teams, and the work we've done on the global distribution agreements is beginning to pay off.

Our Connectivity Solutions group, while still down year-over-year, had a 7.7% increase in sales since the fourth quarter of 2016. The primary part of this group, the Cinch Connectivity business, was also slightly up on a year-over-year basis. The part where we saw a decline from the first quarter of 2016 was in our Stewart Connector business due to a customer consolidation and general weakness in the structured cabling sales, which is obviously tied to construction spend. There have been signs of general market improvement within the Connectivity group during the first quarter of 2017, particularly with our military and distribution customers.

On the aerospace side, we anticipate increased orders beginning the second quarter as our largest customer in this space is scheduled to increase their bill rates. While the cost savings related to the restructuring efforts implemented early in 2016 were fully realized for the first quarter of 2017, the $400,000 to $500,000 of quarterly core savings related to our recent Shanghai factory closing will be more fully realized between the second and third quarter of 2017. For the remainder of 2017, we expect to see continued revenue growth in this group. We are particularly pleased with the level of bookings in the first quarter for our Connectivity products, which show a 33% increase from the fourth quarter of 2016.

On the Power side, we continue to get design wins in the area of data centers, which will contribute to our sales in the short term, as well as eMobility segment of the market, which is expected to contribute in sales in 2018 and '19. We also saw one of our key storage customers coming in with a 24% increase in sales during the first quarter as compared to the fourth quarter of 2016. As mentioned last quarter, growth in these areas will be largely offset by the phaseout of sales of our network power solution product lines that was sold to Unipower in 2015.

We had been working on a 2-year manufacturing agreement, and the sales of this product will continue to taper off during the second and third quarter. The drop in sales at Unipower accounted for $2.7 million or 40% of [recorded] power sales as compared to the first quarter of 2016. We expect to see similar year-over-year declines attributed to MPS product lines for the remainder of 2017.

Since this was a low-margin arrangement, it will have a favorable impact from a gross margin percentage -- perspective. All factors considered, we continue to be confident that the second half of 2017 will show improvement in sales from the first half of this year, with future growth in 2018.

Our Magnetic group has a slight increase in sales in the first quarter of [2015] as compared to 2016. We have introduced new variants of ICM products, providing our customers with greater assortment of products to better meet their needs. The results are a more favorable mix of product sales, which led to some margin expansion in this area. There also had been a renewed focus in distribution that will result in higher sales to catalog distributors, which are the front end of designs and phases. The backlog for Magnetic products remained strong, and we currently expect this group to maintain the 2016 sales level through 2017.

Overall, our main focus will be on sales, and it has been over the past 12 months. Based on the historic trends of our business and recent updates from our product managers, the outlook is positive for the second and third quarter. We are pleased with the recent increase in bookings and the margin expansion that we've been able to achieve over the past year. At this point, I believe our cost structure is where it needs to be to support the sales growth that we anticipate in the second half of this year.

And with that, I'll let Colin run through the financial updates.

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Colin Dunn, Bel Fuse Inc. - Former CAO, VP of Finance, Treasurer and Secretary [5]

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Thank you, Dan. Good morning, everybody. Starting with sales. Our first quarter sales were $113.7 million, down 6.2% as compared with the first quarter of 2016.

On a product basis, sales of our Connectivity Solutions products were $41.8 million in the first quarter of 2017, a decrease of 3.7% as compared to the first quarter of 2016. Sales of our Power Solutions and Protection products were $36.2 million in the first quarter of 2017, a decrease of 14.4% as compared with the first quarter of 2016. And sales of our Magnetics Solutions products were $35.7 million in the first quarter of 2017, an increase of 0.5% as compared with the first quarter of 2016.

On a regional basis, sales in North America decreased $5.9 million or 8.9% in the first quarter of 2017 as compared with the same quarter of last year. Sales in Europe were down by $1.7 million or 8.9%, and sales in Asia were up by $50,000 or 0.1%.

Gross profit margin increased to 20.5% in the first quarter of 2017 as compared with 19% in the first quarter of 2016 due to several factors. The shift in product mix towards higher-margin connected products had a favorable impact on our margins during the first quarter of 2017. Operational enhancements and cost-reduction activity we completed in 2016 also contributed to our margin expansion, as did the strengthening of the U.S. dollar compared to the Mexican peso and the Chinese renminbi, which served to lower our labor and overhead costs paid in those local currencies.

Our selling, general and administrative expenses were $21.2 million or 18.6% of sales as compared to $17.7 million or 14.6% in the first quarter of 2016. In the first quarter of 2016, SG&A benefited from a reversal of certain value-added and business tax items recorded in connection with the acquisition of Power Solutions of $2.8 million. We did not had a repeat in the first quarter of 2017.

Other factors contributing to the increase in 2017 related to consulting fees in connection with the company's ERP implementation of $0.4 million and an increase of foreign exchange losses of $0.2 million. These increases in SG&A were partially offset by lower sales commissions from reduced sales and a decrease in fixed SG&A cost due to cost-saving measures implemented in 2016. We do expect the 2017 SG&A run rate to be slightly higher due to our new -- due to our ERP implementation project. Consultant fees will vary, but will run approximately $500,000 for the quarter for the near term.

As a result of these factors, we generated income from operations of $2.1 million in the first quarter of 2017, which compared with a loss from operations of $100.3 million (sic) [$103.4 million] in the first quarter of 2016. If you recall, the loss in 2016 was due to a noncash, pretax charge for impairment of goodwill and certain intangible assets of $108.6 million recorded during the first quarter due to the lower-than-anticipated growth rates from challenging macroeconomic conditions.

Interest expense was $1.4 million in the first quarter of 2017, down $800,000 from the same period last year, primarily due to a lower outstanding debt balance as compared to the prior year.

Our effective tax rate for the first quarter of 2017 was a benefit of 3.2% compared to a benefit of 4.6% during last year's first quarter. The tax benefit in the first quarter of 2017 primarily related to pretax losses in the U.S. and other tax credits, partially offset by taxes on our Asia earnings.

Earnings per share for the Class A common shares was $0.05 per share on the first quarter of 2017 as compared with a loss of $8.15 in the first quarter of 2016. Earnings per share for the Class B common shares was $0.06 per share in the first quarter of 2017 as compared with a loss of $8.55 per share in the first quarter of 2016.

On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, earnings per share for Class A shares was $0.07 per share on the first quarter of 2017 as compared with $0.04 per share on the first quarter of 2016.

On a non-GAAP basis, earnings per share for Class B shares was $0.09 per share in the first quarter of 2017 as compared with $0.05 per share in the first quarter of 2016.

And now I'd like to pass the call over to Craig Brosious to go through some of the balance sheet and cash flow items. Craig?

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Craig Brosious, Insilco Technologies (UK) Ltd. - Director and Company Secretary [6]

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Thanks, Colin. Our cash and cash equivalents balance at March 31, 2017, was $72.3 million, a decrease of $1.1 million from December 31, 2016. During the quarter, we used cash for capital expenditures of $1 million, dividend payments of $800,000 and interest payments of $1.1 million. This was partially offset by net debt borrowings of $1.5 million during the first quarter of 2017.

Accounts receivable was $72.7 million at March 31, 2017, as compared with $74.4 million at December 31, 2016. Day sales outstanding increased to 58 days at March 31, 2017.

Inventories were $101.7 million at March 31, 2017, up $2.8 million from December 31, 2016. The increase was seen mostly in raw materials and work in progress to accommodate the recent increase in bookings in anticipation of higher sales in the second quarter and the latter half of this year.

Accounts payable was $46.6 million at March 31, 2017, down $600,000 from December 31, 2016, due to timing of payments. Bel's outstanding debt as of March 31, 2017, was $145.3 million, excluding deferred financing costs. This represents a net increase of $1.5 million from our year-end debt level.

Book value per share, which is calculated as stockholder's equity divided by our combined A and B classes of common stock outstanding, was $13.39 per share at March 31, 2017, up slightly from $13.17 per share at December 31, 2016.

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. - CEO, President, Director and MD of Macau [7]

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Thank you. Emilia, can you open up the call for questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Harsh Kumar from Stephens.

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Harsh V. Kumar, Stephens Inc., Research Division - MD [2]

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Dan, I had a quick question. You mentioned that your backlog is going up. I was wondering, you talked a little bit about drivers, and I was wondering what specifically you're seeing? Is there any class of customers or type of customers that's driving it or is broad-based? And also, what is your visibility typically like into that sort of a backlog? Is it 60-day visibility or beyond or anything like that? Then I had a quick question on cost.

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [3]

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Okay. I think what we're seeing now, I think, is a general lag from the IC people and the memory people. So generally, we're seeing lead times being stretched in those products up to 16 to 20 weeks. And we see it in an array of different products. The only thing that we're concerned about with this stretched-out lead time is our backlog is going up, that we have 1 or 2 customers that are pushing back orders a little bit because they can't get the memory in time quick enough. So there's no point bringing our component. If we're working on a 12 week-to-week lead time, and the memory they're looking for is out to 24 weeks. So you see some pushback on that. But overall, we see -- and even now, capacitors and some resistors are getting pushed out, and I just think it's for the phones, to HEV vehicles, very broad-based of what the components are out there in the marketplace.

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Harsh V. Kumar, Stephens Inc., Research Division - MD [4]

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Got it. And then, Dan, can I ask you on China factory? You mentioned that you're doing some stuff, and you have been doing some stuff there to cut cost. Do you see the benefit later? What specifically is involved and what are we talking about here? Is it material or nonmaterial?

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [5]

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Okay. So again, as we mentioned in the press release, when we acquired Emerson, they had a group in Shanghai, which just tends to be a high-cost area for manufacturing. What we've done is consolidate into one of our own factories in Southern China and just maintain a small group of engineers and key people in Shanghai. And we're projecting -- Lynn, what's our projection on cost savings on that?

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Lynn Hutkin, [6]

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The cost savings on an annual basis is about $2 million once it's all fully realized, and about half of that will be in cost and the other half in SG&A.

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [7]

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Okay. Which will pay for our new software we're implementing over the next 2 years or 3 years.

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Operator [8]

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(Operator Instructions) And we'll go next to Sean Hannan from Needham & Company.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Manufacturing Services, IT Components and Electronic Components [9]

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I wanted to see if I could follow up on some of the announcements you guys have made in recent months around some of the distribution partnerships that you formed or expanded. Can you elaborate at this point in time your strategy in leveraging the broadline distributors and how you see that really kind of playing into being able to drive growth and overall kind of -- your approach to the market in leveraging these relationships?

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [10]

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Okay. I think just to go back a little bit, I don't think distribution -- historically, before we had these recent acquisitions, we were generally a top 20 customers, 80% of our sales type of focus. With the addition of the Cinch line and mostly the Emerson line, a good portion of our sales are going through distribution, anywhere from 40% to 50%, depending on the product group. With that, when we dealt with the Arrows and Avnets, even though we did substantial dollars with them, they weren't that great compared to all the other suppliers they had. With the addition of the Emerson group and the Power-One group, our dollars were substantially greater than we ever had, almost, I would say, more than double than Arrow and Avnet, which has given us a tremendous amount of visibility at those distributors. So before, even though we had Arrow and Avnet for North America, they weren't too motivated to go any further with us because we really were not a primary supplier. Now that we are a primary supplier because of the dollars, and also I think what helped immensely, by appointing Vinnie Vellucci, who is the Senior Vice President of Arrow and knows everybody in the industry very well, we're much more attuned on what Arrow and Avnet are seeking in their agreements. So it allows us to sign these worldwide agreements. So now when we have our people go into Arrow in Japan, Korea, all these countries where we have regional distributors but not world distributors. And it's really given us entree into to a bunch of customers that we never had entrée into before. And also because of the dollars we're doing, it feeds off that great visibility. So that's really how that -- in addition to that, the relationship we have with Digi-Key and now with the catalog houses that are doing small prototype runs for the engineering community, which empties into the Arrows and Avnets, have helped us also. So we just think that, that business continues to grow. We continue to support it. We continue to add people to it. So it's really, over the last 18 months, I think the inroads we made there is 180-degree improvement, and the dollars were backing it up.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Manufacturing Services, IT Components and Electronic Components [11]

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That's very helpful. And then perhaps an SG&A question, going back to some of the commentary in the prepared remarks. The SG&A levels, should we interpret this as kind of a -- I think I got the impression that the level we had in March should be considered as a general run rate moving forward. Was that the right interpretation? How do I modify that or think about that?

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [12]

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Well, first, I'd rather have Colin to answer all these questions because he's not going to be on the next call. So we could blame him for anything he says. But I think he wants to offload to Lynn for this question.

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Lynn Hutkin, [13]

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So Sean, on the SG&A, I think that the Q1 run rate is fairly indicative. It might be a little bit on the high side because there is about $500,000 of FX loss built into that number. So depending on where the exchange rates go in future quarters, that will certainly be a factor. But it will be a higher run rate versus the 2016 normalized look, primarily due to the ERP implementation, which, as Colin mentioned, will run about $500,000 additional per quarter, at least through the remainder of 2017, and then it may start tapering off a little bit from there.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Manufacturing Services, IT Components and Electronic Components [14]

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Okay. The FX, was that $500,000 or $200,000?

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Lynn Hutkin, [15]

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It was $500,000 in the quarter, which represented a -- it was a $200,000 increase in FX loss versus last year's first quarter.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Manufacturing Services, IT Components and Electronic Components [16]

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I understand. Okay.

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Lynn Hutkin, [17]

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Yes. So Q1 of '16 had a $300,000 loss built in, and Q1 '17 had a $500,000 loss built in.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Manufacturing Services, IT Components and Electronic Components [18]

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Got you. Okay. All right. And then last question here, in terms of the Connectivity Solutions business, wanted to see if I can get a little bit more insight in terms of the nature of those customers. You've referenced orders for RF and Harsh Environment Optical products for military distribution customers here and over in Europe as well. Can we get a little bit more color on that and the nature of the cycles when we start to see those types of booking increases?

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [19]

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The cycles is, again, so long in the military. I think historically, when it comes to military and aerospace, we can look at 3- to 5-year designing cycles. But we are working with all of the Raytheons, the Thales', the Honeywells, all the major people out there. And these programs come, they use network. So these programs come in and out all the time. And again, the way it was going on with the government, one day, we get 10% increase in military spending, we're running around, jumping up and down. In the next week, we don't know if it's going to be there or not. What we are very positive about is the Boeing and our presence on the 737. We do know that Boeing is going to go from 42 jets to 48 jets, and we know that backlog should increase to represent that. And as you know, Boeing is our second largest customer, so that should be very beneficial.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Manufacturing Services, IT Components and Electronic Components [20]

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Okay. All right, that was helpful. The military, I think you guys have called out, when we get into commercial aerospace, that's a really nice supportive market to be supplying, especially with booking uptrends.

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Operator [21]

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(Operator Instructions) And we'll go next to Hendi Susanto from Gabelli & Company.

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Hendi Susanto, G. Research, LLC - Research Analyst [22]

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Dan, there are some talks about market weaknesses in optical. How will that impact you?

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [23]

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The question...

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Colin Dunn, Bel Fuse Inc. - Former CAO, VP of Finance, Treasurer and Secretary [24]

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Market weaknesses in optical.

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [25]

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Did we say there's market weakness in optical?

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Colin Dunn, Bel Fuse Inc. - Former CAO, VP of Finance, Treasurer and Secretary [26]

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No, (inaudible) is talking about market. The general industry is talking about the market.

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Hendi Susanto, G. Research, LLC - Research Analyst [27]

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Yes, right.

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [28]

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(inaudible) we're such a small player in the markets where we participate, without like [JD] unit base, some of them control so much of the market. So even if there's ups and downs, we're getting a very specific custom jobs. So it's not like we have a broad catalog or portfolio of products we sell in optical. So there, we just work with very selective key customers on fiber optics opportunities. And to be honest, the company we acquired, Fibreco, we probably had our strongest quarter over the past 6 months in the past year with them, and it's probably been our strongest product group of all our product groups. The sales don't count for much, but the profits are definitely very strong, and the sales are growing very nicely.

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Hendi Susanto, G. Research, LLC - Research Analyst [29]

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Okay. And then, Dan, you mentioned about a short supply of memory. When do you see memory supply to improve?

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [30]

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I think that is beyond me, to be honest. The problem you have in our industry is, if you increase production by 20%, that means you probably have to cut your pricing by 50%. So generally, there's not much motivation for people to increase memory. What people say in the industry that they think it's going to clear up by the summertime, but I just -- I can't say, I don't know.

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Hendi Susanto, G. Research, LLC - Research Analyst [31]

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I see. And then looking at the revenue trend by geographies, our revenue was down in Europe and North America in Q1. When you said that you are somewhat optimistic about Q2, Q3 and Q4, do you imply that we may see positive growth in North America and Europe and Asia [as far as the Q2]?

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [32]

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The thing that's really killing our sales is the MPS business of power and the overall power business. And that's again is in Europe and in North America. And again, we're doing everything we can to turn the tide. And again, we're back to that total available market where we only represent $120 million in a $5 billion market, where we think we can participate very quickly in. So again, for us, but I've been saying this for, again, for 3 years now that power is really the growth engine of this company. And hopefully, at some point, when it does kick in, it should kick in consistently going forward. So again, I don't think -- we don't think the economy in Europe or the economy in America really affects the power business. What affects our power business is being out of the design cycles for 24 months based on the previous management and now getting into those design cycles and really are when they're going to place those orders.

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Operator [33]

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We have no further questions in the queue. I'd like to turn it back over to Dan Bernstein for any additional or closing remarks.

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [34]

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Again, as you know, Colin is stepping down. In behalf of Bel, we want to appreciate Colin and the job he's done for 26 years. And if you do speak to Colin, hopefully, you can give your wishes down the road. All right.

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Colin Dunn, Bel Fuse Inc. - Former CAO, VP of Finance, Treasurer and Secretary [35]

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Thank you, Dan, and thanks, everybody. It's been very good. I appreciate it, all the correspondence and efforts over the years.

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Daniel Bernstein, Bel Fuse Inc. - CEO, President, Director and MD of Macau [36]

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All right. And looking forward to speaking to you in July. Thank you.

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Operator [37]

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Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. You may now disconnect.