Bel Fuse Inc (BELFA) 2004 Q2 法說會逐字稿

Thank you for standing by and welcome to the Bel Fuse Incorporated second-quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Monday, July 26, 2004. I would now like to turn the conference over to Mr. Dan Bernstein, President, Bel Fuse Inc.

Thank you, Dave, and we would like to welcome you to our conference call to review Bel's second quarter and six month year-to-date 2004 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance.

Good morning, everybody. I'll start with our Safe Harbor statement. Except for historical information contained in today's news release and this conference call, the matters discussed are 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 sensors (ph) who rely on our products; the effect of business and economic conditions; the difficulties inherent in integrating remote businesses that may have forward (ph) business practice that differ from the Company’s business practices; capacity supply constraints or difficulties; product development, commercializing or technological difficulties; the regulatory and trade environment; uncertainties associated with legal proceedings; the markets 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 risk 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 will run through our financial results. Turning to profits (indiscernible) of the quarter on a GAAP basis with net after-tax earnings of $7,145,000, or 62 cents per fully diluted share. This was well above the net earnings of 2,757,000 for the second quarter of 2003 and above the 4,655,000 in the previous quarter of 2004. In the second quarter of 2003, we had the benefit of earnings from the Insilco Passive Components Group acquisition for the full period. Included in our second quarter was the net after-tax income of approximately 12 cents resulting from proceeds of a lawsuit and the write-down of some fixed assets.

For the quarter, our sales were 48,390,000, and 8 percent above the 44,820,000 in the second quarter of 2003. This was sequentially 40 percent above the 42,357,000 (ph) of the preceding quarter ended March, 2004. I wish to remind everybody that consistent with Bel's integration of the 2003 acquisition into Bel, after June, 2003 we did not effectively break out revenues for the acquired group.

Turning to cost of sales, our gross margin for the second quarter was 31 percent, compared to a gross margin for the same period in 2003 of 27 percent. The 31 percent was slightly better than the 30 percent gross margin for the first quarter of 2004. During the quarter, we had efficiencies from higher manufacturing headcount offset by bonus provisions.

Far East (ph) headcount increased during the quarter as we added additional workers to manufacture more sophisticated gigabit connector products and increases in customer forecasts. In total through June 30, 2004, we have increased production workers since February (ph) by 3350, an increase of 60 percent.

SG&A, which decreased to 203,000 from the same quarter in 2003, reflects additional savings from the Insilico acquisition plus significant efficiencies from consolidation of facilities that we closed in Dallas and Indianapolis. This was despite additional professional fees, employee bonus accruals and additional commission accruals due to an increase in sales. The percentage relationship of SG&A expenses to net sales decreased from 18.6 percent during the second quarter of 2003 to 16.8 percent during the first quarter of 2004. On the tax front, for this quarter, our taxes were higher due to a provision for income from the settlement of the lawsuit and generally higher income.

Balance sheet cash and equivalents at the end of June, our cash equivalents and securities were 76 million, which is an increase of 6 million for the quarter. In addition to cash from profits, for the quarter we increased inventories, primarily raw materials, by 4.4 million. And in line with increased sales, we increased accounts receivable by almost $5 million.

We've taken down 10 million of term debt in the USA during March, 2003 in conjunction with the Insilico acquisition. We continue to pay this down at 500,000 per quarter in addition to quarterly cash dividends, which consumes just over 500,000 per quarter. Receivables and payables, receivables net of allowances at 34.5 million at June 30. We are generally seeing an improvement in payment by most customers, which (indiscernible) contribute to their desire not to have bad payment records hinder their ability to obtain products during a tight supply situation. We did have a significant sales pick-up in the second half of the quarter, which has added to the total accounts receivable.

Our accounts payable for the same period is 11.2 million. For this quarter, our payables increased by 2.7 million, largely in line with increased raw material purchases. Inventories for this June period, our inventories were 34.5 million, which is 4 million above the December 2003 levels.

Other balance sheet comments. Capital spending for the quarter was 1.3 million. This, of course, is well below our depreciation and amortization for the three months of 2.2 million. Moving forward, we expect some increase in capital spending as we continue with two projects to add additional manufacturing capacity to facilities in China, plus the addition of a dedicated, high-speed SMT line, primarily for power and value-added products.

We continue to investigate several potential acquisition candidates, although we were recently advised that we were unsuccessful bidders for two other recent companies we looked at. Our book value at June 30, 2004 was approximately $14.22 (ph) per share.

Some general comments. The market remains strong, but we still have limited visibility as to future customer requirements. Backlogs have remained stable (indiscernible) over the quarter despite increased production capability and higher sales levels. (indiscernible) aggressively progressing (ph) the Section 404 requirements of the Sarbanes-Oxley Act, in 2004 we expect to incur approximately $800,000 in charges related to compliance and orders. In addition, we will have ongoing, but as yet undetermined, annual maintenance and additional order fees to maintain compliance. This area is quite an open-ended cost area, because many areas of the law are not fully defined, the total order method and cost is still undetermined. I will now hand it back to Dan.

I will now open up the call for any questions you might have.

(OPERATOR INSTRUCTIONS) Lee Zeltser with Needham & Company.

To start with, if you can give us a revenue breakdown by vertical market and then by geography for the quarter.

I don't have that with me, Lee. There has been really no change over the last, actually, nine months. It has remained very, very stable. Approximately -- this is just off the top of my head -- 35 percent of our sales in North America and the rest go out through the Far East.

Okay.

But there has been very, very little change. And as far as the product categories are concerned, the Magnetics still is by far the largest segment. We're not seeing any change within any of those, either the vertical or the geographic.

Okay, Colin, if you can comment specifically on -- I don't know if there's been any changes, how much of the end market exposure is in the communications infrastructure area?

Well, we don't have specific information, but if you take, obviously the signal byproducts (ph) are not really in that area -- the transformer line. We don't really have the fuses (ph) -- the fuses tend to be more general, although some of the fuse products do go into telecommunications applications. The bulk of the magnetics and MagJack products are obviously in the telecommunications, but we are looking between the LAN (ph) telecommunications in the -- I'd have to say in the 70 plus range -- 70 percent plus range.

For the Company overall?

Yes.

Just given that exposure, and it's hard to say -- although we're seeing a recovery in telecom, it's hard to say that it's been a strong recovery at this point. Can you talk about what drove your revenue growth in addition to just improving demand in the end markets? Because it was pretty strong in the quarter. I'm wondering what kind of share gains you were seeing in addition to end market growth.

I think you -- once again, as our (ph) major customers -- we have two major customers that are really taking a lot of market share out there in the industry. So I don't know if we're gaining from our competitors overall, but I know that our two major customers are gaining their market shares. And I think everybody knows one is Dell and one is Cisco. And so as they grow, we grow along with them.

Turning to the cost structure, the SG&A, you talked a little bit more about it -- it increased a little bit in the quarter as a percentage of revenues, also on an absolute basis. Can you just repeat for me what the drivers were there.

In the SG&A, we have had quite an uptick in Sarbanes-related expenses, both domestically in the U.S. and the Far East. And we haven't even gotten to the order part of that yet. It has mainly been related to the documentation side of it, and that keeps changing almost daily as they continue to sort out the rules. That is a big hit.

Because we have been doing somewhat better than we had expected and we have not had any significant salary increases to employees for quite some time, what we have been doing is we've being tying more compensation to performance of the Company. And as we have been doing better so far this year, we did approve some bonuses in the second quarter, and that applied to both -- came up as a cost in both the G&A folks (ph) and also in cost of sales. Commissions go up -- as sales go up, commissions go up, and so we had somewhat of a runup there in commissions tied to sales. They are the bigger issues.

Understood. Given the variability in that line item for costs, and I understand some of the drivers are difficult to predict, what do you feel is a good run rate as a percentage of sales for SG&A going forward?

If we ever got it down to 15 percent on a steady basis, I would be very happy.

Okay. But do you feel that is achievable in the near-term? It would probably be a little bit higher than that, I would think.

It's going to be little higher than that, but I think we can work our way towards that. There are some other things we're working on to get that in place. I think that would be very competitive. Now remember, in our G&A, we do not include R&D expenses. Some companies do. We put our R&D in cost of sales.

Understood. If you can just give me the tax rate X some of the usual items in the quarter?

Our tax rate is running around -- from ongoing operations, it typically runs about 22 percent.

Okay, so that stayed flat in the quarter.

It stayed pretty flat, yes.

And then just lastly, I know you commented a little bit about the outlook with regard to visibility still being somewhat limited, but what would your expectation be going through the summer time frame, in terms of demand and things of that nature?

I think it's going to remain fairly flat from here out.

It's our problem that we read the information that you hear from Intel and you hear from Microsoft, and it is difficult for us to say that they are wrong. Our backlog has been inconsistent. And even though we hired a lot more workers, we are generating a lot more revenue. But still, I think everybody -- from what we hear in the industry, everybody has this wait-and-see mode. And I think a lot depends probably, as you understand, on what's going to happen with the elections and the uncertainty out there with Iraq, and I think there's just a lot of jitters out there with everybody.

What do you think inventory your customers, what do you think that is like out there?

I don't really think there is that much in the channel. Certainly, we don't -- based on the pushins and pullouts we see, I have to expect that they don't have a lot. If they got plenty (ph) in the channels, you don't get a lot of last-minute pushins and pullouts, and we're certainly getting plenty of those. So I have to somewhat assume that there is not an enormous amount in the channel.

Understood. Thanks very much.

Todd Cooper with Stephens Inc.

Are you comfortable with the headcount levels in China right now?

We've gone up about --

We are going up about 3500 from the quarter.

And since then, we've added another 700.

So I think at this point, we will probably be wait and see. We have enough (indiscernible) to keep us going.

Have you ever had to cut headcount in China, and if you have, how easy or difficult is that to do?

It's pretty easy to cut headcount from a severance standpoint, things like that. It's difficult from a psychological standpoint, being the fact that if you cut people and people find out about it in the area, it's difficult to attract people back. They don't want to work for a company that cuts people, hires people, cuts people. So you lose faith in the province, so it does make it somewhat more difficult. When the downturn did come, we probably had to lay off more than half our staff. So now, because we are in south China, it is a little bit more difficult to hire people, because mainly they come from the north and there's more factories migrating to the north. So it takes a little longer for us to attract people we like.

Thanks. That's helpful. Can you discuss the linearity of orders throughout the quarter? Did you see any slowdown in June?

We have not seen any -- things looked pretty consistent over the last 8 to 12 weeks.

So your unofficial revenue guidance for the third quarter is flat?

Yes, we tend to be conservative.

Thanks.

(OPERATOR INSTRUCTIONS) Larry Goldstein (ph) with Santa Monica Partners.

I would like to say good morning and hi, and continue the conversation we had earlier, if I may, later. May I?

Sure.

Thank you.

A follow-up from the line of Lee Zeltser.

A question with regard to stock buybacks. Is there one in place at this point, and maybe you can talk a little about your appetite for stock buyback at this point.

One of our major conversations at our meetings, our Board meetings (indiscernible) is to increase the dividend or a stock repurchase. We are concerned that we do have a buyback in place. I don't think we've bought the stock back for four years, three or four years. I think at this point, the Board believes very strongly that there are still a lot of companies out there that we are looking at for possible acquisition; that cash is king. So I think they would really like to look at growing the Company through acquisition.

In addition to that, the Board has concern regarding our float issue -- that we only have 11 million shares, and by having a buyback, it will make the stock a lot less liquid. So I really think if we get to a point where we have 100 million in cash, 110 million in cash, I think the Board would seriously consider increasing the dividend. I think they would look at increasing the dividend probably more before they do the buyback from (indiscernible), but I can't say -- be positive.

Got you. With regard to the DC-to-DC converter business, can you just give us an update on traction you're gaining there?

Two few steps forward, one step back. Our sales are increasing substantially, but that's such a low target now. We thought we would be at a run rate this year of about 12 to 13 million, and it looks more realistic that it will probably be around 5 million. But we have made some good inroads in key customers. We do see there is a lot of consolidation going on in the industry. As this consolidation occurs, we are hoping there would be more opportunity for this group. I think it's still a wait-and-see for us.

Understood. Okay, thanks again.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time. I will now turn the call back to you for closing remarks.

Once again, I would like to thank you all for joining us and we will see you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. Thank you very much for your participation and we ask that you please disconnect your lines. Have a nice day.