Bel Fuse Inc (BELFA) 2003 Q4 法說會逐字稿

Ladies and gentlemen welcome to the Bel Fuse Incorporation fourth quarter and year-end results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Bernstein, President of Bel Fuse Incorporation. Please go ahead, sir.

Thank you, operator and welcome to our conference quarter review Bel's preliminary and unaudited fourth quarter 2003 results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance.

Good morning, everybody. Thanks, Dan. I'll start with our regular safe harbor statement. Except for the historical information contained in this news release in this conference call this morning, the matters discuss the forward-looking statements that involve risks and uncertainties.

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 the sectors that rely on our products, the effect of business and economic conditions, the difficulties inherent in integrating remote businesses that may have following business practices that differ from the company's business practices, capacity, and supply constraints or difficulties, product development, commercializing for technological difficulties, the possibilities to changes are incurred in the company's financial statements between the company's announcements of preliminary results and the company's release of audited results. The regulatory and trade environment, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and the 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.

Having said that, I'd like to start and go briefly through the results that were put out this morning prior to the market. Thank you for attending. As we discuss Bel's fourth quarter results and our progress for the March 2003 acquisition of Insilco Technologies, Inc., passive components group. Bel ended the quarter with net after tax earnings of 5,597,000 or 49 cents per fully diluted share. This is a significant increase from the net loss of 639,000 for the fourth quarter in 2002, and compared to a profit of 3,630,000 in the previous third quarter of 2003.

In the fourth quarter 2002, we had write off due to impairment of good will that was partially offset by a write back of an inventory reserve from June of 2001. For the quarter, our sales were 42,865,000, which was 59% above the 26,886,000 in the fourth quarter of 2002. And this was sequentially below the 45,864,000 in the preceding quarter ended September 2003. In the same period of 2002, we also saw a drop in sales from Q3 to Q4, i.e. Q3 in both years was below that of Q4. This may be a seasonal trend. However, we don't wish to imply that we believe that all the sales drop was seasonal. Pricing remains very tough particularly in the connector area and we continue to prune our sales customer list to maximize profitability.

I wish to point out that consistent with Bel's integration of the passive components group into Bel, after June 2003, we do not effectively break out revenues from the acquired patches group of Insilco. We continue to allocate production of some Bel legacy products in the passive components group facilities and vice versa. Our sales mix for the quarter remains largely unchanged. Magnetics, including connectors, accounted for approximately 78% of sales, plugs and cables 9%, fuses 9% and value added products 4%.

Turning to cost of sales, our GMs for the fourth quarter of 2003 was 29%, compared to a gross margin in the same period of 2002 of 25%. The 29% in the fourth quarter of 2003 was almost identical to the 29% gross profit margin for the third quarter of 2003. This was, despite the inclusion in 2004 of the passive components group, with slightly lower gross profit margins, some transitional cost, although most of these transitional costs have now been eliminated. Far east head count has remained steady from the third to the fourth quarter.

Turning to SG&A, it's decreasing in expense of 1,656,000 from the prior quarter, primarily reflects lower sales commissions, no bonus accrual or ARs provisions, lower shipping costs, and no one-time relocation expenses. The percentage of relationship of SG&A expenses to net sales decreased from 15.9% during the fourth quarter of 2002 to 13.9% during the fourth quarter of 2003. Taxes for this quarter, our taxes below are primarily due to a much higher ratio of sales in the Far East, where statutory tax rates are lower than the US and our ability to use the net operating loss carry-forward in the United States.

On the balance sheet side, turning to cash at the end of December, our cash and equipments and securities were 62 million. We had taken out $10 million of long-term debt in the USA in March 2003 in conjunction with the Insilco acquisition. However, we continue to pay this down at $500,000 per quarter. Our receivables net of allowances at December were 30 million. This was up 13.5 million from the prior Insilco days. Insilco companies which had much more liberal terms in place when we acquired them have now started to pull in line with the Bel credit practices. Our accounts payable for the same period is 7.5 million, as you can imagine, many former suppliers in the Insilco companies withdrew credit facilities, when Insilco declare chapter 11 bankruptcy. We've been quite successful in working diligently with these vendors to restore their confidence in the emerged companies and most of them now have increased and given us improved credit terms. For the prior quarter, our payables showed no change.

Inventories for this period, our inventories were 25.6 million, which is 2.6 million below the September 2003 levels. Capital spending for the year was 3.5 million net of acquisitions. This is, of course, well below our depreciation amortization for the 12 months of $9 million. We continue to investigate several potential acquisition candidates. Our book value at December 31 was approximately $13.16 per share.

Bel has made significant progress consolidating Insilco companies into Bel's global operations. We've consolidated the San Diego operations and the Bel's existing San Diego facilities and we have consolidated our Monterey, Mexico operations in the Dominican Republic facilities. And have closed the Monterey facility in the third quarter. Bel is been aggressively progressing with section 404 requirements of the Sarbanes-Oxley Act and in 2003, we incurred approximately $0.5 million in one time special charges related to compliance. In addition, we will have an ongoing but as yet fully determined annual maintenance and additional order fees to maintain compliance. That's the end of the prepared remarks. We will now open it up to questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from the line of Todd Cooper with Stevens Inc. Please go ahead.

Yes, Dan and Colin, we've heard rumors of new competitor in the ICN market, can you comment on that and what is enterprising in and possibly the impact it had on your sales this quarter.

I don't think any new competitor we've seen affected us. You know, we have a majority of competitors from similar from pop-up from China to Taiwan; it is very difficult for them to come in and penetrate our customer base. However, they could put tremendous price pressure on us while they use our customers' use their pricing below our pricing. But with or without foreign competitors, we are in a very competitive situation.

So you think the sequential decline in revenue had more to do with seasonality or is there anything specific than that.

I think there's always competitive pressure, there's no question about that. And once again, you know, unit price is definitely going down. We are working on new ICM product and can hopefully offset the unit pricing decline that affects the overall revenue.

I think, Todd, you get to a certain point and you look at a sale and you say, you know, do I really want this sale at this price, and yeah, there's more volume out there, but Bel's strategy consistently over the years has been we're a bottom line focused company, and we make strategic decisions based on what we feel long-term is going to give us the best bottom line and if that's the at times means we're going to forego some very marginal sales, we're going to do that and we do that on a consistent basis.

That was apparent in your results with the higher than I had expected EPS, obviously. Looking at SG&A going forward, I guess we should model it at a higher rate than what occurred in the quarter given the bonus situations and the things you alluded to?

Yes. I think so. One thing that happened, you know, we've really hunkered down here because it's a very slight marketplace out there. What happened is during part of last year 2003, we had reviewed extensively the amount of money we may in commissions and how we handle those sorts of payments to third parties, and in some cases, to remain competitive, we had come into some new cap arrangements and things like that, and so we saw some of those benefits particularly in the fourth quarter, you know, to be a reasonably good year for sales and so some of those caps came into play, and that showed up there. You know, if we can be reasonably profitable, then we would expect to maybe put some money aside for specific bonuses, but we didn't do any of that in the fourth quarter. So yes, to answer your question, modeling probably should be a little higher than what we've got in the fourth quarter.

OK. Thank you and congratulations on a good quarter.

Thanks.

Our next question comes from the line of Lee Zeltser with Needham & Company. Please proceed with your question.

Hey, guys, I have a few questions. First off on the sales line, could you give us a little better sense on the driver behind the sequential decline? If you could just break out by-product segment how things trended in the distant quarter?

I think the two major; we have to break up the Bel and the exact information. And it looks like we were doing a lot of work in the automobile industry, and that work has cut down substantially. Also, the telecom magnetic proof that we did a lot of work with lucid, and Nortel (inaudible) telecom companies supplying just the magnetics. Those sales are down somewhat. So I think those are, you know, due to large areas where we saw a sales decline.

Overall, we just down 2% from the prior quarter and you know, as you may be aware, anywhere we can be on the sales curb with new products versus more mature products can move that pretty rapidly. From a unit point of view, the units were certainly there, and but we just weren't, we didn't have the mix to get us that sales increase we were really looking for.

Yeah. Colin I was hoping to get a brief breakdown by-product, if you do have that?

There is really no change from the prior. They were what I pretty much what I said before. 78% for magnetics, including connectors, 9% plugs and cables, fuses 9% and value added products, that is 4%.

OK. Great. And if you can give us an update on new product development and also how the DC-to-DC business is trending.

The DC-to-DC business, at this point we put in value added. Once again, we are making substantial inroads into this, substantial inroads into sampling, but when are the sales coming? Once again, we have spent a lot of money in that group over the acquisitions. We hope, but then again we hoped last year was going to be a breakout year, and we hope this year could be a breakout year, and I think we're shooting at roughly, hopefully this year, over 5 million as a minimum, and then by next year hopefully we can double that. The ICM, you know, we're just supporting all the new technology, adding more value, and once again, we don't know when that is going to take off or not.

In terms of lead price, can you talk about any changes you've seen and kind of compensation rates, where that's trending right now?

We're seeing some of the components you know, stretch of the lead time, some of the ICs, especially for power, being stretched out, definitely we are beyond the surplus realm now that lead times are getting stretched we are looking at stalking orders, making more commitments to our vendors. So the market is starting to firm up for electronic components, and hopefully it affects us, certainly our customers will hopefully stretch their orders to us, and give us more of a lead time and we'll give them more of a lead time so we get a better understanding of what's going on in the marketplace. So we are seeing some tightness for components.

OK. Great. Thanks very much.

Our next question comes from the line of Stephen McBoy with Lord Abbott. Please proceed with your question.

Yes. Good morning. First on the ICM product line, can you just give us a sense as to the maturity of that product? It seems to me that 2003 was a fairly innovative product cycle year, and obviously you're seeing some meaningful pricing pressure there. Can you just talk to that and then what your outlook maybe in terms of 2004 you've alluded to do a new ICM product type? I presume that's incorporating the power side of it. Is that -?

You know, with the ICM, we're putting magnetic in the connectors. Once again, I think the growth, as you said was over the last previous two years where basically people were redesigning their boards that where they were using discrete magnetics and street connectors. The industry is very much accepted the fact that the connector and the magnetics should be in the same housing, and that makes a lot of sense. So it's big initial switch over. Now what we have to determine, which type of technology are going to take over in the industry, is it going to be home P&A, is it going to be VDSL? is it going to be gigabit? Is it going to be power leads in it?

So what we do is really work with the IC companies and with our customers supporting their new technology, new products. The problem that we don't understand very well is which products will be successful. You know, we spent a tremendous amount of time on home P&A and that hasn't bear as much fruit as we thought it would be. On the other hand VDSL has been very strong for us. And right now, everybody the buzz is the power, the hot buzz today is power on the Internet, and we're working very closely with a lot of the companies develop product for this. The questions we don't know when the buzz becomes reality or not.

And so how would you characterize the environment that was in today for ICMs? Is this a scenario where you're in a double-digit unit fast environment, but you give more than that up in price?

Do you want to touch on that one, Colin?

No, I think we're bordering on the double digit, but, Steve, you know, we still have this product cycle situation that goes on. The products come out, they ramp up very quickly you know Bel's particularly being one of the technology leaders, if not the technology leader, tends to get a lot of volume at decent prices up front, and then when the second and third suppliers come in, the prices tend to drop very rapidly. And so on it goes. So if we get off that cycle, then profitability becomes much tougher, but as long as we can continue to cycle these products pretty rapidly, which I think we can -- we've still got some chance to do that, then I think we're going to have reasonable margins.

Do you anticipate ICMs to grow through 2004?

In the unit sales, yes.

In dollar sales?

Yes.

And is there a way to look at both on a full year and fourth quarter basis what I'm going to refer to as the core basis pre-Insilco sales growth may have been?

No, because we've really, as I said in the prepared comments, we've really moved product between both companies.

For example, we do a lot of work with Cisco and Stewart does a lot of work with Cisco. Cisco is building an array of product to compete against our product, where they would have been strong price competitors against Bel. Once we acquired them, we ended all that development work that we had existing product. So it's very unfair to say, oh, you have Stewart sales are down, in reality, we stole may be 15 to 20% of their sales by eliminating certain product groups. And what we have tried to do with Stewart is, you know, with the abundance -- not abundance, but with the extra engineering talent we now have, we're putting a lot of more resources in premise wiring and more in the passive components sides of connectors, and I think that's what they've been focusing on more, even though have helped us from a mechanical side on the ICM product line, we have tried to refocus and looking at different product groups so we don't step on each others foot.

OK. Having said that, when you acquired the business, I guess it was around a $70 million revenue run rate, and I do know that there were portions of the business that you had to reduce the emphasis on. Is it fair to say that that business has grown for you through the year?

No, I wouldn't say that. I think it's been -- what we took out of it bias cutting back on certain product parts; I think it's been stable.

You made the point that Lucent and Nortel Magnetics were down in the quarter, yet obviously their quarters were quite strong. Is there new competition into that customer accounts for you?

I think, yeah. We were very -- with Lucent, which was one of our largest customers four years ago, because we bought their division, I think, you know, because we had the company for four years, now yes, there's been more competition, there's been more product development, and we're trying to get back to bid up our relationship with Lucent.

And just to shift to SG&A, I just want to first clarify, there are no Insilco synergies incorporated in this quarter's numbers; is that correct?

Nothing versus the prior quarter.

Correct. OK. Well, you've obviously done a very nice job there on operating margins and getting to a 15% plus rate earlier than I had anticipated. How much more upside is there going forward?

Well, I think that the SG&A, obviously we continue to work all these issues. Our emphasis is really on, we think that we can always pull out a little bit more costs. But the biggest area that we've got continuing is our rationalization of operations in the Far East. We do continue to move more operations out of Hong Kong, where we used to have a rather large facility, and put those functions into China. And as that continues to progress through this year, we expect to get some more costs out of that area. But I think that's the biggest area we've got to look at the moment for G&A savings.

OK. And on the taxes, what's the appropriate rate, Colin just looking forward 12 months? We've had a few ups and downs there.

I think, you know, it's something in the -- I have to give you the range here you need, the 22% range is probably where we should be.

22?

Yeah, 18 to 22.

18 to 22. Thank you very much.

OK, thanks Steven.

[OPERATOR INSTRUCTIONS]. Our next question comes from the line of Joe Dostall with National Securities. Please proceed with your question.

There's been a lot of activity, and I assume growth in the voiceover Internet protocol, the OIT market, I presume that's a growing area for you, and do you plan to expand that? Where does that potential fit in?

It's one of our major segments in our IMC group that that we support it from ICM integrating connector module group, also from a passive magnetic group. So it's something that we've been watching very carefully and we think that we have a broad array of products that can support that new technology. So I think, we're pretty well set with a product mix for that type of technology.

OK. That would probably be a good area for an acquisition. Are there any thoughts along those lines?

No. To be honest with you, we have all the products we need to support it, so we don't see, once again, what we build is connectors and magnetics, and we have the product that our customer needs, the ability, the end products. We don't see anything out there for that type of acquisition.

Considering the competitive nature of the business, could you kind of summarize how you will, going forward you can keep the revenue, the profits growing but get the revenues moving back again?

You sound like my board here. You know, our philosophy I think is been the same for 50 years, and I hate to sound too simplistic but I think it's always been a two prong approach. One is always keep a watchful, watchful, watchful eye on our (inaudible) structure, making sure that we really have our costs in line, never get satisfied, even though we felt we had tremendous profits this year, once again, Colin stated that we are making substantial moves and moving our back end operation into China, that will help us substantially with our overhead costs.

And the other key thing that we've always been very successful at, is working with the key engineering communities, and really understanding what their products they need, what they want, and develop products to satisfy them. And once again, we always say, 50 years ago we were a fuse company, 20 years ago, we were a delay line company, 10 years ago, we were a pulse transformer company, 5 years ago, we were a land telecom magnetic company and today we're a connector company.

So I think, the key to our success is never get hung up on the product but really get hung up on looking for new products and what the customer needs and try to do anything we can to satisfy those needs and branch out of our, always looking for new products. And we think, if we can stay on top of our customers and we can sit on top of our (inaudible) structure, when these upsurges come, I think, we do a tremendous job of really imagining pretty well.

OK. From what I can determine, you have a lot of your product designed in with manufacturers and everything. It would seem there's quite a bit of potential here when things start picking up.

I think, things will pick up pretty well now. I guess, today we do a lot of work supporting broad com ICs, and I guess they're coming out with an announcement today they feel things are going to get strong. Once again, we are (inaudible) to get back to the year 2000? I don't think that's ever going to happen. But are we going to hope to get back to consistent growth? Hopefully, yes. And hopefully, we grow, we are going to grow, that the demand on pricing will be a little less and it will be more concerned about product delivery than pricing, and that definitely will help us. Once again, to say that's going to happen, we're not willing yet to say that's going to happen.

It's OK to say it's going to happen. It's your opinion.

We can't have opinions anymore.

OK. Thank you.

Thanks.

We have a follow-up question with Mr. Stephen McBoy of Lord Abbott. Please proceed with your question.

Yes. I just wondering if you could speak to the acquisition strategy through the year, specifically what new product or market categories you may be looking at and how far along you may be.

We are spending a tremendous amount of time on the acquisition front. And once again, you know, we feel I think our major theme is, once again, is, the product first is, of course, for us is the people. All the people can we assimilate the people to develop, and we tend to use more of an entrepreneurial approach to life, not many layers of management. So, first thing we look at the people. But the other major thing is the product. Can it be in our basket of products when we get to our customers? The big thing in our industry over the last three or four years is eliminating vendors, wanting if you've a vendor to the major customers, then you have to bring a portfolio of products, and that's what we really are attempting to do, to make our customers, make it easy for our customers to deal with us because we can offer them more products.

So every segment that we're in, if we feel there's a customer, I mean a competitor or a company out there that can add value to our customers, it is really a driving force to look at it. I would say throughout the year, we always have probably three or 4 MDA's that we have signed that we're doing due diligence on, and but once again, we tend to not pay over, we feel that we pay a fair value for a company, and we don't one of the things that we always say when we look at a company, we never look at forecast. We try to look at a company exactly the way it is day one and see what we can do to eliminate costs, make it profitable, if it's not profitable, and how it's going to help us from a bottom line standpoint and also it can help us with our existing customer base.

And is there a conscious effort on your part to go after a business model that's similar to signal, large volume, large number of customers, or are you trying --

We're looking at two companies and one company fits exactly the Bel model and one company fits exactly the signal model, and I hate to sound like my wife, but in the morning I like the signal model, by night I like the Bel model. I still can't figure out what I like.

That's because as you go through the day without your wife, right.

That's right. I can't make it. But I just we go back and forth. You know, signal has been very good to bell and we've learned a lot from them. But then we have a business that we've been doing well with for 50 years. So it's really been pretty confusing for us.

And what would be a reasonable size acquisition to think of?

I think we're beyond the ten; we really are beyond less than the $10 million acquisition. We might buy a small company may be for technology, but we really trying to focus our energy above the $50 million acquisition.

And these are currently profitable businesses?

No.

OK. And any new design wins that you can speak to in the quarter, and I guess specifically on the auto side but also otherwise?

On the auto side, once again, we're just doing a lot of work with one company and it's up and down. And the others are very numerous, but once again, getting sample approval, but we have never found a correlation between sample approval and when we're going to get the order and when it's going to get to the bottom line. So I don't want to say anything at that point.

OK. Thank you very much.

Our next question comes from the line of Lawrence Goldstein with Santa Monica Partners. Please proceed with your question.

Hello, Daniel.

I thought we'd sneak by --

Sneak by,

Yeah.

OK. I'll be nice. I love you dearly still yet. Tell me something about balance sheet thinking, $60 odd million in cash. How much of that is in the US? Can you buy US Company with the offshore cash? If the dividend totals something over $2 million, did you ever think about paying a more significant one or buying in stock? You own money for the first time. You got something called long-term debt, I noticed. I did not have that in 50 years. Would you go and leverage the company up? Would you spend 50 million per acquisition or more and borrow money and have a leverage balance sheet? Tell me about these things.

All right. You never make it easy for me. First thing is, as you know, we increased the dividend last year by giving voting shareholders a dividend. The other thing is what are we going to do with the 60 million? There's no question that people are investing that I feel very strong is to grow the company and that let us collect interest at 1 and 1.5% or where we are collecting on it. So we are spending tremendous amount of time on resources on the acquisition front, and will we go out and borrow 20 million for an 80 million acquisition? I think we definitely would, but I also think that we don't like that. We've grown up, for 50 years I've been pounding on the two key people in the company, my father and my uncle, but that's not a good thing. I'm a true believer in that. I think we would possibly look at coming out with an offering, if need be, and keep maintaining the growth of the company. Regarding our cash position, I would say majority --

Larry, the cash is physically primarily in the United States. It's just a matter of which, the incorporated jurisdiction of the company that it resides in. Yes, the bulk of the cash resides in companies with jurisdiction, corporate jurisdiction outside the United States. Often when you look at an acquisition, however, even if it was a US company, a large portion of the assets of the company relate to manufacturing. Any manufacturing assets we would allocate to our manufacturing operations, which are offshore. The issue that we had with the Insilco acquisition was really that they owned quite a couple of properties in North America, buildings and the manufacturing facilities in North America, and that's why that acquisition was a little unusual and it did require us to use a lot more US residing cash in a US company than we would normally expect to happen.

Daniel, one thing I didn't understand, you said, would you borrow 20 million, you said yes. And then on the next breath, you said cash is inculcated and you mind to have on hand. So you mean, you would leverage up and then accumulate cash to pay down the debt and get into cash position? You would be willing to leverage the company -

We would do an offering.

An offering. Right. Did you say that? OK. Terrific. Thank you.

Thanks. Nice hearing from you.

Our next question comes from the line of Mike Fomuk with Hovering Capital. Please proceed with your question.

Hi, good morning. Could you speak more to the point about whether you're seeing an acceleration of the activity or just a gradual improvement, number 1? And number 2, back to more of a CAP structure type question, I just wondered if you're considering that the spread in the two classes stack, whether there's been any recent discussion on, in simplification of the structure?

Let's take the latter first. I think at every board meeting we discuss the A and B stock and we bring them together. I feel, once again, that the reason that we developed A and B stock was a lot of acquisitions that we looked at, they were privately owned companies or companies where if we bought them, in reality, they would end up owning us. I think, the reason we like to maintain the A and B stock until we get a lot more float out there is, so we do have an acquisition, management that Bel could really control the acquisition. And so, that's why we maintained the A and B stock. I think, that's going to go forward. And I think at a certain point in time, if the A stocks fall below 20% is it or 10%?

10% of the outstanding.

10% of the outstanding, if there's less than 10% of the outstanding stocks, they merge into one stock. And I think, still the way we're looking at acquisitions, we are all looking at certain companies. For example, we're looking today at a company that has, you know, a privately owned company has about $60 million in sales, and if we ended up acquiring part of that company for stock, it would basically run Bel Fuse. So I don't think that's going to change. Regarding the RFQ, I think when we turn to monitor more than RFQs, we can so much through distribution of smaller customers, it's really not reflective. It's really what we are doing from sending out samples of new products. And even during the downturn, we've been sending out a tremendous amount of samples for all our product groups. So I think, and the problem is, we just don't see the correlation yet between the number of samples we send out and the number of RFQs we send out. We can't map it to sales increases. But we do feel that the market is definitely firming up throughout the industry.

Thank you.

[OPERATOR INSTRUCTIONS]. Mr. Bernstein, there are no further questions at this time. I will now turn the call back to you.

I would like to thank everybody, myself and Colin for joining us today and hopefully things look bright for the future.

Good-bye.