Bel Fuse Inc (BELFA) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bel Fuse Incorporated First Quarter Results 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 Wednesday, April 27, 2005. I would now like to turn the conference over to Dan Bernstein, President and CEO of Bel Fuse Incorporated. Please go ahead, sir.

Thank you, Lynn and welcome to our conference call to review Bel's first quarter 2005 results. Before we start, I would like to hand over to Colin Dunn, our Vice President, Finance.

Good morning everybody. Thanks, Dan. I want to read our Safe Harbor statement. Except for historical information contained in today's news release and in this conference call, the matters discussed including the statements regarding expected savings from the Galaxy acquisition 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 sectors that rely on our products; the effect of business and economic conditions; the difficulties inherent in integrating remote businesses that may have followed business practices that differ from the Company's business practices; capacity and supply constraints or difficulties; product development, commercializing or technological difficulties; the regulatory and trade environment; 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. Having finished with those comments, I now like to move on and discuss our financial results.

From the profit side of the quarter, our GAAP basis with net after-tax earnings was 4.313 million or 37 cents per fully diluted share. This is more than net earnings of 4,654,000 for the first quarter of 2004. Also below 6,27,000 in the previous fourth quarter of 2004 where we had sales of 8% higher. For the quarter, our sales grew 45.438 million, which was 7% above the 42.357 million in the third quarter of 2004. This is well below the 49.289 million as the preceding quarter ended December 2004. Sales gains above those of the first quarter 2004 remained in the magnetics group plus the module segment. Within the module segment, we had improvements in the power group with the that begin our Analog and custom modules. On March 23, we completed the acquisition of Galaxy Power, Westborough, Massachusetts. For the one week there Galaxy contributed 520,000 of sales but negligible profits to purchase accounting roles. Going to the cost of sales. Our gross margins for the first quarter was 28% and below the 30% gross profit margins for the same period in 2004. The results are below the 29.4% gross margin for the fourth quarter of 2004. The lower margin was primarily due to less favorable sales mix for traditional obsolescence reserve for raw materials. In addition, in Q1 2004, we had the benefit from the reversal of some December 2003 year-end reserve for those raw material obsolescence and accounts receivable. SG&A. This increase of 314,000 from the same quarter in 2004 reflects cost due to a higher sales level, a reverse over the bonus accrual, which we have booked in the first quarter of 2004. With the relationship of SG&A expenses, the net sales was 16% during this first quarter. Tax is obviously an issue, was resolved this quarter.

Our taxes for the current quarter was significantly high due to an accrual for far east access. Recent developments in Hong Kong suggest that the authorities there are applying different standards in the treatment of offshore income. Balance sheet, cash and equivalents. At the end of December, our cash and equivalents and securities were 89 million which was below the December 31, 2004 levels by $5 million. We did borrow 8 million dollars in conjunction with the Galaxy acquisition, which had required a total of approximately 19 million. In addition to cash from profits for the quarter, we increased net inventories split roughly between 50/50 between raw materials and finished goods by a total of 1.8 million. We again borrowed $10 million of term debt in the USA during March 2003 in conjunction with the Insilco acquisition. We continue to pay this down at $500,000 per quarter in addition to quarterly cash dividend that consumes just over $500,000 per quarter.

Receivables and payables, receivables net of allowances was 33.9 million at March 31, compared to 33.2 million at December 31, 2004. This reflects somewhat increase in sales. Accounts payable for the same period was 14.5 million. Inventories for the March period, our inventories were 13.9 million, which is $1.8 million higher as I said before than December 31, 2004. Capital spending for the quarter was $800,000. In this quarter, we substantially improved 1 new manufacturing facility, acquired new testing equipment and moved forward with our new fire detection system at the major manufacturing facility. We are proceeding actively with the construction of a new building which we expect to have completed early 2006 or hopefully late 2005. Our book value at March 2005 was approximately $15.76 per share. Now, I'll turn it back to Dan.

Bel has been progressing with section 44 requirements of the Sarbanes-Oxley Act. On April 26, we filed our amended 10-K for 2004, which shows that management and I always believed that Sarbanes-Oxley material weaknesses at December 31, 2004. The market remains uncertain and we still have very limited visibility of the future customer problems. Backlog however is stable. Regarding Artesyn Technologies, we still hold our investment in Artesyn as you had read in today's press release by Bel, we again requested Artesyn management to join us in discussions. We are getting quite frustrated by the lack of response from this to us. I'd like at this time Lynn to open up for questions, please.

[OPERATOR INSTRUCTIONS] Todd Cooper, Stephens, Inc.

Dan, you said your backlog was roughly equivalent with what it was last quarter?

Not including the Galaxy acquisition. Yes, it has been pretty stable.

Okay and any idea -- can you give some idea of book to bill during the quarter?

.

So, does that imply your guidance is basically on the top line to be flat in the second quarter?

We expect to see some improvements. We are seeing a little better second quarter than we did with the first quarter. I think we are actually quite upbeat at the moment. I think we expect that our second quarter would be more in line with our second quarter last year. The problem is, Todd, that we just don't get the wrong lead-time on the orders. So, book to bill really doesn't mean much, you know, going to call up today and want delivery in about next week. So, although I said 1 to 1, it's sort of doesn't mean that much any more.

Colin, can you discuss your various end markets and what was weak or what was strong and what's changing, how that has changed today versus last quarter?

You know, personally, I think once again with the tax structure and other structures in reserves and things like that have probably affected a little bit more. We are going to see some price pressure out there in the market. As everybody knows, our fastest growing product line is the MagJack product line, integrated connector with magnetics and then a lot of times we have been single source and now as time moves on when we are starting to see a lot more expectancy, more -- some of our partners are getting we have, but we are seeing a little bit more price pressure but our customers remain pretty much the same as before.

The markets are pretty much the same.

Okay, and SG&A was lower than the last quarter and what has been running is that a reflection of the life is spinning for Sarbanes-Oxley?

Yes, frankly we are kind of -- turned the corner on that. Obviously we do have some projects for this year. Not only do we have that remediation issues to deal with. Obviously we have to put in our to handle this year. Also we have to put in procedures of Galaxy, the acquisition we had, plus a couple of smaller operations that we didn't do last year. So we are very hopeful that we'll in 3 to 4 cents per share range, will have the reduction of spending on Sarbanes-Oxley related expenses in 2005.

Okay and one last question from me. Colin, regarding your comments on the tax, should we take that to main as they are going to stay at this level or is that kind of a one time --

It may go for another quarter Todd. We are hopeful that we are putting -- we are looking at some other arrangements that will instillate us from this uncertainty. As I said it's purely an accrual. We will hope that nothing will happen, but anyhow we have to somewhat prove beyond the way we approached this. We don't feel that -- one of this revolved around a court case about a year and half ago in Hong Kong. That would accompany within the different style of business, but certainly most folks in Hong Kong are very cautious at the moment. So we have been very, very cautious ourselves. So I said wait another quarter and then we will see what happens from there.

[OPERATOR INSTRUCTIONS] Todd Cooper, Stephens Inc.

Todd, let me just clarify something. When Colin mentioned to you that you know we had seen May 2 as the second quarter. I don't think we put in Galaxy, Colin didn't add galaxy into the mix. And once again you know Galaxy last had a run rate about 80 million and we are hoping that they can maintain that as we bring in new customers. We had had, I myself personally visited the key customers and they are very much looking forward to the Bel acquisition. So we can have the resources and support they need from an inventory standpoint and from a production standpoint. So we are hoping that we should grow the business by using roughly 80 million net share. Probably it may not be a safe number, as we go forward with.

So ex-Galaxy though, you still expect revenues to be mostly up slightly?

Slightly, but not much. With Galaxy in the 80 million.

And any idea of the 80 million. The possibility of that 80 million in revenue?

We will keep our fingers crossed. No we are not going to put a figure outside. There are a number of initiatives, we have going forward. We have as we said already we do some cost down of the operation. We are also moving forward with some material saving. You know one of the things we are already done, is to move the Galaxy operation from -- you know which is a small operation where they were having to buy a lot of the materials, had a distribution so that we can move them across to the OEM sources and get our costs down. And they do also have a couple of projects that we feel that more suited for large scale manufacturing in the Far East and it takes us a little while to get our approvals in place that we would like to think we can move it a couple of those projects very rapidly to the Far East that might point out that currently whole Galaxy production, that the total sales is in Massachusetts manufacturing facility. Operating, we do feel that there are a lot of opportunities to rationalize what gets in my grip.

And in region, and we had 2 factory void from I think 2 of the largest telecommunications companies in the world. And they both gave a green light to our factories in China.

What would prevent you from moving all of the manufacturing to China? And the 600,000 cost that you have eliminated, is that primarily headcount and if so, you know, what areas, management, engineering, selling?

Mostly all are for management, the upper management people.

The result headcount, you know, that does not include any of the manufacturing synergies and costs and material costs going forward.

Joe , National Securities.

It's so difficult to understand on this end. So, I wanted to clarify something. The backlog is approximately flat, did that or did that not include Galaxy?

That did not include Galaxy.

Did not, okay. And then you mentioned revenue for the quarter might be approximately equivalent to the second quarter of '04, which was about 48 million, did that include or not include Galaxy?

Did not include Galaxy.

Did not, okay. Obviously, the quarter hasn't . So, really, how are you going to get back on track? Are you doing much for new products from your own R&D, we don't hear much on press releases?

No, we have bench markets compared to any of our competitors, also bench markets of many companies have had opponents and power companies. From a track record of profitability standpoint, I don't think anybody else does as well as we have. So, from that standpoint, we are pretty confident, and have reasonably got this far with new product development. There is no question that we are the technology market driven leader for integrated connector modules of the MagJack's, where our product line that we took 5 years ago from 3 million and today we are probably up to 95 million. I mean we are always working on different variations on these markets, which separates us a lot from all of our competitors, who spend a lot more time working with the key customers out there. We are not afraid to go into distribution, but that's not where we really focus our attention on. Our focus -- our attention is really working with the key IT people and the key customers in coming up with solutions for their problem, and naturally spend a lot our energy into. As you know, we do have a design based out of San Jose, California, for all the leading companies we deal with, use our lab, and we work very closely with them. So, we always have a lot of products in the pipeline, but we have been in this business and we know there is lot of high in the sky and anytime we tell this product will be a home run, that product is going to be a home run. Sometimes, it backfires, and like you don't think it's going to be a home run, tend to be home runs, but we definitely are committed to R&D and that's one area we never skip on.

I think just to add to that the, you know, one of our -- the way we judge ourselves is not on design wins because design wins really don't that much. The only thing that really counts is when you're going to invoice the customer and that's obviously at sales, and that's just our total focus, anything that we can do so we can invoice the customer the goods and that's the only thing that counts.

You say here in your press release, additional investments in our power group, is that what you had already mentioned or was there more you can --?

We have a very good process now, for example every SMT line, we put in place, it costs us $2 million, also to develop the antistatic and the proper environmental conditions for that building, substantial dollars anywhere from 3 to 5 million. So, very quickly it can add up to 15 to 25 million. We are in a process now of completing, besides the dozen we just completed, we're completing a new building that will be done, the sale will be done in another two to three moths, which would add about 60,000 square feet. And of that 60,000 square feet, the concern is how much we want to dedicate to power. For example, if the acquisition did go through, very little of that space would be used for power. If the acquisition doesn't go through, probably 40,000 square feet, approximately 60,000 feet, would be used for power and once again we probably have to buy another 3 SMT lines.

VoIP is an area that's growing rapidly and has kind of intrigued me and I know that Bel Fuse sells into that area some, but I don't -- it doesn't seem like you are selling into that much. Do you have plans to increase that?

We are very -- once again what happens here is we work always in the background you never get to see us.

We work extremely -- tremendous amount of time with all the IT people. From Intel, Broadcom, the Level 1, all these people, we spend a lot of time working on the new ITs and how they support voice over internet. We are working on every key project that down with over voices over internet, we are on that product. From discrete magnetic to the connective with integrated magnetic whatever they need. In addition to that, we have account managers at and all these major telecom people addressing voice over internet and making sure that we -- our products are matching their products, and that we are working with the proper IC houses. Once again we just don't break that down.

[OPERATOR INSTRUCTIONS] It appears at this time that there are no further questions.

Thank you. And I like to thank everybody for joining us today, and we will speak to you next quarter.

Thank you ladies and gentlemen that does conclude the conference call for today. We thank you for you participation and ask that you please disconnect your lines. Thank you and have a good day.