Bel Fuse Inc (BELFA) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter Bel Fuse investor 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, Thursday, July 27, 2006.

I would now like to turn the conference over to Mr. Dan Bernstein, President and Chief Executive Officer of Bel Fuse. Please go ahead, sir.

Thank you Wendy and welcome to our conference call to review Bel's second quarter 2006 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance. Colin?

Thanks Dan. Good morning. I would start with the safe harbor statement.

Except for historical information contained in today's news release, the matters discussed in this conference call, including the statements regarding growth to the Company's businesses and discussions with Toko, Inc., 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 effects 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, difficulties inherent in predicting the outcome of negotiations regarding some potential business combinations 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.

Now, I'll move forward to discuss the results, starting with the profits. Bel ended the quarter on a GAAP basis with net after-tax earnings of $8.763 million or $0.74 per fully diluted share. This was above the earnings of $6.669 million for the second quarter in 2005, and also well above the $3.997 million in the previous -- that's the first quarter of 2006. The results both above and below the income from operations line included credits and charges of either one-time in nature or charges that we did not have a year ago in our comparable second quarter results.

The biggest item, of course, was the $5.24 million pre-tax and pre-bonus gains on the sales of the Company shares in Artesyn. After taxes and the bonus, which is accounted for within SG&A, the after-tax gain would be approximately $2.6 million or $0.22 per share.

Additional cost of sales items included almost $0.03 a share per additional quarter cost related to the first quarter 2006 fire in the Dominican Republic, in addition to another penny recorded as a casualty loss related to that fire.

The biggest individual cost item is to be in the air freight, which we incurred to fly raw materials to manufacturing facilities and finished goods to the USA from temporary manufacturing facilities in Asia.

Gross profit margin slipped to approximately 25% as the Company was forced to pay sharp increases for raw materials and to a less severe, but still significant amount, additional cost of labor, and the manufacture rollouts that those [indiscernible] products that are more costly and difficult to make, yet still do not experience a premium price in the marketplace.

Turning to sales. For the quarter, our sales were $66.47 million and 16% higher than the $57.45 million in the second quarter of 2005. In both the second quarters of 2005 and 2006, we had the full effect of a quarter of sales attributable to the Galaxy Power acquisition in March of 2005. And these sales were above the $54.666 million at preceding quarter ended March 2006. The strong sales of interconnection devices manufactured by Stewart Connector, which is a division we acquired from Insilco in 2003. And also strong sales in integrated front-end analog modules through our APC division that was also acquired in 2003. Adding to these, we had strong sales of DC-to-DC modules and our best sales quarter in circuit protection in six years.

In July 1, 2005, we concluded the acquisition of NetWatch s.r.o. For the three months of the second quarter in 2006, it had sales of $670,000. Excluding the 2000 [sic] acquisition of NetWatch, Bel had an organic sales increase of 14% for the second quarter on a year-over-year basis. These sales increases are particularly noteworthy in view of the difficult environment in the global components industry.

Cost of sales, as I said previously, our gross margin for the second quarter was 25% and below the 29% gross margin for the same period in 2005. The 25% was also below the 27% gross margin for the first quarter of 2006. The lower margin was primarily due to increases in raw material prices, particularly copper, steel, and petroleum-based materials and supplies. While Bel and its suppliers have for some time, through increased efficiency of operations and taking all the margins, exalt many cost increases, we are still seeing extensive material and some labor cost increases. While cost increases would dictate significant price increases should be implemented, we are doing all we can to maintain current pricing and not resort to cost pass-throughs in our role as a vital supplier to the electronics industry.

Module products and some interconnect products are strategic to Bel's growth and important to total earnings. However, the return on all gross profit margins of [indiscernible], a job that builds the material of purchased components. As these sales continue to increase, our average gross profit percentage has decreased.

Of the significant margin impacts were amortization expenses related to the -- the 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 approximately $230,000 related to the Galaxy acquisition and $270,000 of 123(R), that's the stock compensation expense. The increased sales also have had an impact on the accelerated write-off of goodwill related to the acquisition of E-Power and Current Concepts.

We continue to run duplicate RoHS and non-RoHS production lines to support our customers as they continue to convert to lead-free products. However, this is inefficient and requires us to maintain additional equipment. We are hopeful that this will decrease through the next six months, although as not -- will not be eliminated for many years.

SG&A, there was increase of $1.614 million from the same quarter in 2005, when we didn't own NetWatch. However, $1 million of this $1.614 million was related to the Artesyn share sale. SG&A net of the $1 million, was 13.9% of sales in the quarter compared to 15% of sales in the same quarter of 2005. Total cost increases were primarily selling expenses and shipping expenses of $500,000 of which some $300,000 was commissions due to the increase in sales and a $150,000 expense for restricted stock awards, which is in addition to the $270,000 and included in the cost of sales number above.

The acquisition of NetWatch added approximately $200,000 of SG&A to the quarter. In addition, we included in the second quarter of 2006, a sizable reserve for expenses related to the termination of our previously -- previous general manager in Germany.

Taxes, in the fourth quarter of 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 that quarterly tax rate. However, the tax rate -- the point of tax rate for the second quarter of 2006 was impacted by the proceeds from the sale of Artesyn stocks, which was taxed at full U.S. federal and state tax rates.

Cash and equivalents, looking at balance sheet items. At the end of the June, our cash, equivalents and securities were $94.3 million, which was some $3.8 million above our December 2005 balance of $90.5 million. Included in the current balance was approximately $16 million related to our holdings in Toko, Inc.

Receivables and payables, receivables net of allowances was $47 million at June 30 compared to $39 million at December 31, 2005. We continue to get a lot of pressure to increase our credit terms to customers, particularly in Asia. Our accounts payable for the same period is $20 million.

Inventories for this June period, our inventories were $39 million, which is $6 million higher than December 31, 2005 when we were experiencing lower sales. In fact, the inventories, in addition to increased sales and increased raw material prices, are shortages of certain ICs that is causing us to buy much further ahead than we normally would do.

Other balance sheet comments, in the quarter we substantially completed construction of the newer production facility in China. The ground floor of this building is complete with eight full SMT and one sample line in production. The second floor is in operation for DC-to-DC products. Only the fourth floor needs to be completed in the third quarter of 2006. Each floor is approximately 22,000 square feet. Included with this addition was a new canteen to feed approximately 4,500 associates. That's three shifts at 1,500 people having a meal at a time.

For the six months, capital spending was $4.3 million while depreciation and amortization was $4.8 million. Our book value at June 30, 2006, was approximately $18.05 per share. And now I will turn it back to Dan Bernstein.

While we had strong customer demands, the profit margins remain unclear. There has been better labor availability in our factories and a much high employee retention rate following Chinese lunar New Year than we expected. However, we have seen numerous instances during the past quarter where customers have been requesting additional deliveries as well above their forecasts. In addition to the numerous last-minute part number changes that's increasingly taxing the capacity of our existing workforce.

And while we have been able to maintain the historical numbers of workers, we have not been able to hire as much additional labor as we would like to. Congratulations are in order to our Signal Transformer team, both in the Dominican Republic and New York. Not only have they been able to substantially support their customer base following the near total fire loss to their manufacturing facility in the Dominican Republic, but next week there will be the official opening of a new modern expanding facility in the DR. The new facility is substantially operating at a pre-fire level.

Also on a congratulatory note, I would like to wish and recognize the work that's been done by our associates at both APC and Stewart divisions where several years of hard work are now paying dividends.

We believe that the merger of Toko and Bel to capitalize the respective strength of the two companies would be positive to all shareholders, both in Japan and USA. We currently hold over 5% of Toko outstanding stock and are reviewing various strategic options on how best to move forward.

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

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

Yes. Colin, were the expedite cost accounted for in the cost of sales?

Yes, they were in cost of sales.

Okay, and with that new DR facility opening up next week, will those subside somewhat?

Hopefully, they'll go to zero within the next 60 days.

So given everything you know now, gross margin should improve a little bit in the current quarter?

That's correct.

Okay. What end markets were particularly strong for Bel this -- in the past quarter?

I think if you look at all our products, we're just -- we're very impressed with all our product groups, had really strong sales. So -- and I think all our products had all different customers. So from telecommunications to computers to computer peripheral to consumer, I mean, just -- and all our products did extremely well this quarter. So we [got it] straight from a lot of different areas.

Okay. Do you expect normal seasonality to be at play in the third quarter?

So far, our backlog is very strong and the demand has been very strong. So at this time, the [indiscernible] is cautiously optimistic.

But, Todd, we've never really -- Bel has traditionally not seen "August European vacation" --

Shutdown?

-- shutdown that other competitors have spoken about. It's just something we just have not really seen on a -- over the many years.

So then more of your business is in Asia?

Well, I think everybody's -- most of their business is in Asia. So I'm not too sure, but even when our business wasn't so much in Asia, we never saw the August phenomenon.

Okay. So if you were to venture out and give revenue guidance, you would say flat to slightly up?

Yes, I think that's a -- for your planning purpose, I think that would be a good way to approach it.

Okay. And then how receptive has Toko been to your offer?

They talked to us. So that was more than Artesyn did. So -- but at this point, it's our understanding that they feel that their shareholders are better suited by them going along and we're trying to open up dialogue with them again, and it's obviously shown them the value that we can bring to both companies.

Well, what is your next step?

I would not like to say at this time. I'm reviewing it with my investment bankers as we speak.

Okay, very good. Congratulations on a good quarter.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS]. Mr. Bernstein, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you for joining us today and we look forward to speaking to you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.