Bel Fuse Inc (BELFA) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bel Fuse fourth quarter and year end results conference call. [OPERATOR INSTRUCTIONS]. I'd now like to turn the conference over to Dan Bernstein, President. Please go ahead, sir.

Thank you, Barbara, and we'd like to welcome you to our conference call to review the Bel's fourth quarter 2005 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance.

Good morning, everybody. Thanks Dan. I'd like to start with the safe harbor statement.

Except for historical information contained in today's news release and this conference call, the matters discussed, including the statements regarding the company's' positioning for the future and long-term growth strategy, 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 statements will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

Also, I would like to make another note about non-GAAP financial measures. The presentation of earnings per diluted share, including the impact of taxes associated with the repatriation of funds, may constitute a non-GAAP financial measure. The company believes that such information is useful in demonstrating the consequences of such repatriation.

Having finished with the boiler plate, I'd like to now start and discuss Bel's fourth quarter results. Profits fell into the quarter on a GAAP basis with net after-tax earnings of 3.265 million or $0.28 per fully diluted share. This is below the net earnings of 6.028 million for the fourth quarter of 2004, and below the 5.986 million in the previous -- that's the third quarter of 2005. The major impact to our earnings was our second repatriation of a cash dividend from our Far East subsidiary and the provision of the American Jobs Creation Act of 2004. This incurred a tax impact of 2.1 million or $0.18 per share.

Turning to sales. For the quarter, our sales were 56.684 million and 15% above the 49.289 million in the fourth quarter of 2004, and this was below the 56 -- actually slightly above the 56.248 million of the preceding quarter ended September 2005. Sales gains above Q2 2004 were made in the magnetics group and the module segments. Within the module segment, we had improvements in the power group with a drop in the analog and custom modules, and also with a drop in the automotive area where we are phasing out operations. Gains were also made in the interconnect group.

On March 23rd, we completed the acquisition of Galaxy Power in Westborough, Massachusetts. For the quarter -- period, Galaxy contributed 2.921 million of sales, but negative earnings, as this sales number was not adequate to sustain operations. On July 1st, we completed the acquisition of Netwatch s.r.o.. For the three month it had sales of 724,000. Excluding 2005 acquisitions, Bel had an organic sales increase of 7.6% for the quarter and 7.3% for the year.

Cost of sales. Our gross margin for the fourth quarter was 26.1%, and this is below the 29.4% gross margin for the same period in 2004, and also below the 28.1% gross margin for the third quarter of 2005. The lower margin was primarily due to a less favorable sales mix, operating losses from the newly acquired Galaxy Power, and increased prices, particularly for copper and steel and petroleum-based commodities. Also included in the cost of sales for the quarter was a pre-tax [goodwill] charge of 230,000 for Galaxy and 180,000 net of taxes for some restricted stock awards.

The Company has also started to pay marginally higher wage rates and benefits to our production workers in China. The DC-to-DC product is strategic to Bel's growth and important to total earnings. However they return normal gross profit percentage margins as a larger percentage of their build to materials and purchased components. As these sales continue to increase, our average gross profit margin -- percentage margin will decrease. The increasing sales also will have an impact on the accelerated write-off of goodwill related to the acquisition of E-Power and Current Concepts.

SG&A. There was an increase of 727,000 for the same quarter in 2004 when we did not own both Galaxy and Netwatch. SG&A was 15.6% of sales in the quarter compared to 16.7% in the same quarter of 2004. Total dollar increases were primarily for retention bonuses of Galaxy and additional selling expenses and commissions due to the 15% increase in sales. And these were offset by lower costs [typically] for professional fees.

Taxes. Our taxes for the current Q4 2005 were significantly higher due to the repatriation of 45 million in cash -- as a cash dividend from our Hong Kong subsidiary under the provisions of the American Jobs Creation Act of 2004, plus an accrual for Far East taxes. Recent developments in Hong Kong suggest that the authorities are applying different standards in treatment of offshore income. In addition to the $0.18 in Q4 for the cash dividend repatriation, there was another $0.11 in Q2 for a total of $0.29 for cash repatriation in 2005.

In Q4 2005, Bel received a license from the Macau government to commence operating a commercial offshore company. This company began formal operations in Q1 2006 with the intent to handle all Bel sales to third-party customers in Asia. We expect that when this company is fully operational, that more stability and predictability will be brought to the quarterly Bell tax rate.

Balance sheet. Cash and equivalents at the end of September -- at the end of December, our cash equivalents and securities were 92.5 million, which were just below the December 31, 2004 level of 94 million. We had paid back, in July of 2005, the $8 million of the approximately required $19 million borrowed to complete the Galaxy acquisition.

Inventories for the period were just slightly below that of December 2005. Receivables net of allowances was 39.3 million at December 31st 2005 compared to 33.2 million at December 2004. Our cash repayable at the end of December was 14.6 million.

Inventories. For the December period, our inventories were 32.9 million, which was 3.8 million higher than December 31st 2004, when we did not own both Galaxy and NetWatch and had somewhat lower sales.

Other balance sheet comments. In the quarter, we made substantial construction progress with our new production facility in China, which we expect to have completed early in 2006. The ground floor of this building is already open. And for the year, capital spending was about $8 million, while D&A, depreciation and amortization, was 10 million. Our book value at December 31st 2005 was approximately $18.21 per share.

Having finished with the financial comments, I'd now like to turn the conference call back to Dan.

Yes. Thank you, Colin. The market we participate in, still remains uncertain. And we'll start to have continued, very limited visibility as our future customer requirements. Backlog is relatively stable. We'll be selling our holdings at Artesyn, if the sale to Emerson goes through. Bel was never given an opportunity and access to Artesyn and was never in a position to fully evaluate the true value of the company.

I would now like to open up the call for questions.

Thank you. [OPERATOR INSTUCTIONS] Our first question comes from the line of Todd Cooper from Stephens, Inc. Please proceed.

Dan and Colin, let me first start by going through my usually futile attempts to try to get some guidance out of you guys for, maybe, the first quarter and the year, thinking in terms of revenue for the gross margins -- stay suppressed -- that kind of thing?

Dan, me?

Always you, Colin.

Okay. Revenues -- we still continue, as Dan said, to struggle with visibility. Basically and obviously, we had an early New Year this year - we're in a new year. Sales are reasonably good. And so we don't know where we're going to end up for the quarter. But at this stage, there doesn't seem to be any softening from where we were in the third and fourth quarters. And we, sort of, tend to like where we are with those levels.

But I would tend to say, going forward, it does seem to us that the major growth opportunities Bel does have is in the Power area or possibly in the value-add --the module area -- value, because of our front-end analog devices.

Okay. What about the gross margin, Colin?

Well, the margin is still under a bit of pressure. One of the big things that's going to help us will be to get the labor back and get our hours up again. The good news is that we seem to have had a better return of labor after the New Year than we were fearful.

We've struggled with a shortage of labor, as most folks have, in the general area where we operate for -- actually for most of last year, we struggled to try to get enough labor. I think we're going to be off to a little better start this year. And we've had to increase wages a little bit.

So I haven't answered your question yet, but I think we should improve somewhat from where we were in the fourth quarter. Will we get back to where we were in the third quarter, I'm not certain of that yet, Todd.

The higher wages in China -- can you give us an idea of the magnitude?

No. We're only looking at, like 5 to 10% increase. It's not a huge increase. But when you've got 9,000 people, it adds up.

Okay. Dan, I know that the company's $93 million of cash is burning a hole in your pocket. Are you still looking to acquire another power supply company or are you open to other acquisition opportunities?

All right. Once again, I think we never limit ourselves to power. I think, once again, we're open to any acquisition in the connector or magnetic component arena or power.

Once again, our sweet spot is really looking at companies that can give us some critical mass -- with sales of 300 to 350 million. It's not that we won't do a deal less than that, but we are really focusing our entire efforts at looking at companies that have sales over 250 to 300 million.

Should we expect an acquisition of that size this year?

I would say you should expect that we have an equity position like we had with Artesyn in a company that size. I don't know how far -- I never know what's going to happen in the end.

You have that equity position now?

We're building it as we speak.

Okay. The new Macau subsidiary -- where was your Asian headquarters previous to that?

Hong Kong.

And is that much of a tax difference between Macau and Hong Kong?

I think there's taxes and also operating expenses. But yes, it's a substantial difference. Part of the problem is that the way we operated in Hong Kong, there had been -- it wasn't that - there had been some rulings years ago and everybody operated the same way. But -- so the laws didn't change per se.

It was just in the last year the Hong Kong Internal Revenue started to apply the rules a little differently. And there was one legal case that went down, and the facts didn't apply to us. However, everybody in the tax area in Hong Kong got real scared, and so it was time for us to get a little more certainty into our numbers.

Okay. Dan, I can't let it drop. I won't push you too hard. But where you're building the position in a potential acquisition target -- is it in the power area or the [passive] area or what?

I really wouldn't like to say at this time, Todd. Once again, I think one of the things that we learned from Artesyn is that it's a lot better to be able to [work] friendlier than a little too aggressive. So in this situation and in future situations, we'll try to work -- go after our investment banker and more in a friendly manner.

Okay. I understand. Thanks very much.

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

Yes. Good morning. I believe I heard on the conference with Needham a while back that the pricing pressures were abating or they were firm. Is that still the case?

At this time, I think they are. Once again, they're all looking at different programs to get their pound of flesh with consigned inventories, with lean manufacturing, with putting more risk on us on managing the inventory for them. So -- and with RoHS -- the other thing that's out there is the RoHS been switching over a lot of products. But I think customers understand that we have increased costs with the RoHS products, the [inaudible] of our good standards are set forth. So with that I think customers are being a little less aggressive on the price pressure as we see now.

Okay. In your release this morning, it says you feel you're well positioned for the future. Could you elaborate on that? And it's okay to actually be positive here.

Well, I think, what we say, for us, when we have that much money in the bank, I feel we can weather any storm, also it gives us a lot of opportunities to look at a lot of different things to grow the company. And with the mix of products we have and the varied customers, we feel that we're very well situated to grow the company in the future. And if you look at us, just from an acquisition standpoint of what we've tried to do over the last two or three years, there's been very few companies that have made the acquisitions or have been as aggressive as we've been in trying to grow the company.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Your next question comes from the line of Michael [Melnyk] from Wolverine Capital. Please proceed.

Hi. Sorry, I had to enter the call late, but two questions. One, did you buy any stock back during the quarter? And if so, could you comment on how much? And number two, did you say that you're more or less resigned to the fact that Artesyn is not a viable candidate or if the door is open to you would you entertain it?

Okay. We haven't bought back any stock, I think, for the last three years. We've been -- the Board has discussed this, we believe, very strongly that the acquisition role is a lot better way to go. Regarding Artesyn, we've stated in our press release that at this time we're satisfied with the offer on the table and that we're very happy with the money we're going to make on the stock. So once again, we were somewhat disappointed that they never gave us an opportunity to look at the books and look at the company.

Thank you.

Thank you. The next question comes from the line of Chris McDonald from Kennedy Capital Management. Please proceed.

Good morning, gentleman. I was wondering if you could give us a little bit of an outlook on the Galaxy business, and when do you see that getting to profitability - or either the revenue increasing at that point?

It's somewhat difficult. We were hoping [here] -- we always hope the next quarter. What makes Galaxy, when you talk about profitability, somewhat difficult because we have our own power group that's working inside Galaxy now.

So our power group has been somewhat profitable over the last quarters, while Galaxy hasn't. We're concerned that when going forward, they're going to be combined together, so we tend to thing they are going to be profitable. [But] Galaxy has given Bel power a lot more critical mass, so when we address some of our major customers by having Galaxy and Bel together as one company, they perceive us in a lot different light. And I don't know how that creditability factor - how you put that into the bottom line. So we would hope going forward that they would be profitable. But, our whole Power group is going to be profitable, I would think, in the first quarter. Colin, would you agree or --?

Yes. Now the -- actually the -- in total, our Power group is profitable now. We did -- Galaxy was a little -- the first quarter we had it was fine. This last quarter wasn't so good. But the sales are improving again. We went through a little bit of a trough. In first quarter, our sales will be definitely up over the fourth quarter. We've also had a few reductions in costs. And hopefully, I think, if not in the first quarter, certainly the second quarter it should be back to profitability.

Okay. Thanks. And then on the gross margin degradation, is it possible for you to kind of break down how much of that was energy and raw material versus how much was driven by mix?

Very difficult. No, I can't give that to you. No.

Is it primarily one versus the other and was mix a minor point in copper and energy?

No. It's probably about 50/50. It's -- if I was knowing what I do know, it's probably about 50% of each.

Okay. And then in the event of a sizable acquisition, would combining the A and the B shares be something that you would consider as part of a deal? Just wondering if that's --

Once again, we've just -- to back up, one of the concerns that Artesyn management did mention to us was the A and B stock. We assured them that that was not a roadblock for Bel, that if it made sense that we would combine both shares. I think, once again, we have bylaws that if we get below a certain percentage in A shares, that both shares have to merge. So I would be surprised in five years that there would be an A to a B.

Okay. Thank you, gentlemen.

Thank you. And the next question is a follow-up question from the line of Joe Adasgo from National Securities. Please proceed.

To continue a little bit with the decline in the margins, energy, raw materials, transportation -- how aggressive are you going to be to try to address those increasing costs or can you give us any light on that?

Well, we have seen it's ease up a little bit. The -- we do have fairly good buying power. And the buying power had kept us pretty much isolated from some of those increases as they occurred earlier in the year. However, at a certain point, we just - our suppliers -- even if we could - we'd had increasing volumes, our suppliers [inaudible] said they just couldn't absorb it anymore and started to pass some of it back to us.

There seems to be some stabilization in the marketplace, so we don't expect to see those prices going forward. The other thing that happens is, as we bring out newer versions of our products, it typically enables us to -- it's very hard for us to go back and it's not impossible to raise prices on old products that are out there in the marketplace. But as we bring our newer products, we can typically get in effect those higher prices that we're paying for commodities reflected in our selling prices. And obviously, that helps us get the margin up. So some of it -- we can't -- no suppliers are going to sell to us below their cost or a decent margin. But it really comes back to our ability to be able to pass on these cost increases to our customers.

It doesn't sound -- is there much, though, that you can do internally to alleviate the impact by cutting costs here or there?

No. I think we're once again -- what we have to always constantly look at is, when we're faced with certain different situations with materials, is look at our overhead structure, or the areas where we could streamline, is every product group pulling their weight, and constantly re-evaluate-how are we -- are we using the Far East as best we can.

Last year, we were in the process of making a bigger push on moving office jobs into mainland -- into China. So generally, we might have purchasing people in Hong Kong. A lot of those functions are now being moved to China. So once again, when we're facing price pressure and material pressure, generally we have to resort to go back and look at our overhead structure and making sure that it can accommodate -- that we can withstand our pricing.

Okay. In a potential acquisition, are you thinking -- like in the last one that didn't work out, there was quite a bit of stock issue possibly that would have occurred. Are you looking at a fair amount of cash this time or is it also a stock issue?

We feel -- and maybe we were wrong and maybe you could help in this, Joe. . If you looked at our multiple, constantly over -- I think, the last two years, three years, we've been selling at a 14 to 15 times multiple. Our peers in the industry are selling at 25, 27 time multiple.

Now, some people say that they [agree]. But what we understand and we believe strongly, the biggest problem that we have is the float issue that we just don't have enough stock out there. We believe that we should have a float of 25 million. So any deal we're looking at -- we might borrow the money or we might use stock, but in the end, we really would like to get to a float of 25 million shares.

Okay.

And we hope with that type of float that our earnings would go from maybe -- not 25, 26, but at least from 14 to 20.

I can -- I can relate to that. On the other hand, issuing stock at this price would seem to be -- I would rather see you pay cash at this point and keep the shares down. Then, when the shares get up, then you can do something. But to issue shares at this price would seem to be kind of anti --

Well, we'd like to have -- if we're getting a whole bunch of new shareholders, I'd rather have them see a little upside. But -- and once again, when we do these acquisitions, our goal is to add their offering very quickly to the acquisition so the new shareholders would -- there is a risk in reward that they would be facing. Now, can't someone our size of a company [can] do $350 million acquisition. But we've -- historically, we've -- historically, we've always found our debt.

Yes, I know. Okay. Well, good luck on the acquisition. And I hope you can do a lot of it for cash and -- so the leverage is stronger. Anyway, thank you.

Thanks, Joe.

Thank you. Mr. Bernstein, there are no more questions in this queue. I'll turn the conference back to you.

Once again, we'd like to thank everybody for joining us, and we'll speak to you next quarter. Have a good day.

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.