Bel Fuse Inc (BELFA) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bel Fuse third quarter release conference call. [OPERATOR INSTRUCTIONS].

As a reminder, this call is being recorded Friday October 27, 2006. It's now my pleasure to turn the conference over to Dan Bernstein, President and CEO. Please go ahead, sir.

Thank you [Mark] and welcome to our conference call to review Bel's third quarter 2006 results. Before we start, I'd like to hand over to Colin Dunn our Vice President Finance. Colin?

Thanks Dan, good morning everybody.

I'll start with the Safe Harbor statement. Except for historical information contained in this conference call and today's news release, the matters discussed are forward-looking statements and involve risks and uncertainties. Among the factors that could cause actual results to differ materially from such statements and comments are the market concerns facing our customers, the continuing viability of sectors that rely on our products, the effect of business and economic conditions, capacity and supply constraints or difficulties. Product development, promotionalizing, 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 forward-looking statements will in fact prove to be correct. We undertake no obligation to revise or update any forward-looking statements.

Now I'd like to move on and start by discussing Bel's third quarter and year-to-date results. I'll start with profits. Bel ended the quarter on a GAAP basis with net after tax earnings of $7.745 million or $0.65 per fully diluted share. This is above the net earnings of $5.986 million for the third quarter 2005. Also below the $8.763 million in the previous second quarter of 2006. In that quarter we included $5.245 million pretax and prebonus gain on the sale of company shares of Artesyn. Excluding the Artesyn sale, the after tax earnings for the second quarter of 2006 would have been $0.52 per fully diluted share.

Gross profit margins were approximately 24% as the company continued to pay sharply higher prices for raw materials, and to a less severe but still significant amount, additional costs for labor and the manufacture and roll out there of the lead-free products that are more costly and difficult to make, yet do not experience a premium price in the marketplace. Effective September 1st, 2006, the local PIC authorities implemented a new revised standard work week and new minimum wages and overtime rates for the areas where our factories are located in China.

We'd also like to remind our investors that Bel charges all R&D type expenses to cost of sales. And so 24% after R&D expenses -- 24% gross profit margin is after R&D expenses have been accounted for. We do not expect we will see any significant reduction in raw material prices going forward. And so we are taking steps to rework designs to minimize the use of cost of new materials and adjusting our pricing where current margins are not adequate. Turning to sales, for the quarter our sales were $73.263 million and 30% higher than $56.248 million in the third quarter 2005. In both the third quarters of 2005 and 2006 we had the full effect of a full quarter of sales attributable to the Galaxy Power acquisition in 2005. And this $73.260 million was also 10% above the $66.474 million of the preceding quarter ended June 2006.

Sales were strong in categories. However we obtained significant increases in all four groups. In the modules group, we had particularly strong sales from DC to DC, and integrated front-end analog modules through our IPC division that was acquired in 2003. Turning to cost of sales. I said previously our gross margin for the third quarter was approximately 24% and below the 28% gross margin for the same period in 2005. This was also just slightly below the 24.5% gross margin for the second quarter 2006. The lower margin, when compared to 2005, was primarily due to increases in raw material prices, particularly copper, steel, and petroleum based material and supplies. While Bel and its suppliers have for some time through increasing efficiency of operations and by taking lower margins have absorbed many price increases and cost increases, we continue to experience extensive material and cost increases, we continue to experience extensive material and labor cost increases. While cost increases will dictate significant price increases should be implemented to our customers, we're doing all we can to maintain current prices and not resort to cost passthroughs in our role as a vital supplier to the electronics industry.

Module products are strategic to Bel's growth and important to total earnings. However, the return of lower gross profit margins as a larger percentage of their bills of materials of purchased components. As these sales continue to increase, our average gross profit percentage has decreased.

Other significant margin impacts were amortization expenses from acquired Galaxy Power and increased prices, as I said before, for raw materials. Also included in cost of sales for the quarter was a pretax goodwill charge of $230,000 plus a one-time adjustment of $200,000 related to expenses of Galaxy and $269,000 of 123R. That is the stock compensation expense. We continue to run duplicate RoHS and non-RoHS at the lead-free production lines to support our customers as they convert to lead-free products. Our (inaudible) requires us to maintain additional equipment. We are hopeful that this will decrease through the next three months although it will not be eliminated for many years. On the SG&A front, there was an increase of $287,000 from the same quarter in 2005 when we did not have a NetWatch and had sales that were 30% lower.

SG&A was 12.4% of sales in the quarter compared to 15.7% in the same quarter of 2005. Cost increases were primarily selling expenses and shipping expenses of $700,000. This was offset by a $200,000 reclassification of goodwill to cost of sales as I mentioned before and reduced goodwill payments in connection with the acquisition of E-Power and Current Concepts. The acquisition of NetWatch added approximately $200,000 of SG&A in the quarter and restricted stock awards added expense of another $130,000 per quarter.

On the tax front in Q4 2005 Bel received a license from the Macao 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 continue to expect when this company is fully operational with more stability and predictability will be brought to Bel's tax rate. Our blended worldwide effective tax rate in the quarter was 16.3%. The prior year for the same was 18.7%.

Balance sheet, cash and equivalents, for the end of September, our cash equivalents with securities were $96.8 million, which was $6.3 million above our December 2005 balance of $90.5 million. Included in the comp balance are our holdings in Toko, Inc.

Receivables and payables, receivables net of allowances were $53 million at September 30th compared to $39 million December 31st, 2005. We continue to get pressure to increase our credit terms to unrealistic levels from some customers. Bel firmly believes that the vendors should not be the customer's bank. Accounts payable for the same period is $22 million. Inventories for Q period, our inventories were $40 million, which is $7 million higher than December 31st, 2005, when we had lower sales. Affecting inventory to increase sales and increase raw material prices are shortages of certain ICs that are causing us to buy much further ahead than we would normally would do.

In our final balance sheet comments, in the quarter we substantially completed construction of the newest production facility in China. The ground floor of this building is complete with nine full SMGs and one sample line in production. The second floor is in operation to DC-to-DC products, the fourth floor was completed and put into production in the third quarter. We are currently holding the third quarter open for additional DC-to-DC production capacity. Each floor is approximately 22,000 square feet. Included in the new addition was a new canteen to feed approximately 4500 associates, at three shifts, with 1500 people eating at a time.

In the third quarter, our new generator was installed to increase backup power in emergencies and also to lower our overall electricity costs. We are completing the edition of three new dormitories and are expecting to move associates into these buildings in November. For the nine months, capital spending was approximately $7.6 million while depreciation and amortization was $7 million. Our book value at September 30th, 2006, was approximately $18.62 per share.

Now I'll turn it back to Dan for some general comments.

Thank you, Colin. As Colin stated previously, we are extremely pleased that all four segments which comprise the Bel product groups had strong sales for the quarter. The DC-to-DC power products that fall under the module group had sales greater than $10 million for the first time. Signal Transformer, which was acquired as part of the Insilco (inaudible) group and falls under the magnetic group, had the best sales for us since we acquired them. To accomplish this after a fire that completely destroyed the main manufacturing facility is an amazing feat. This could not have been done with out the hard work of all of the associates at Signal.

The circuit production group, which is Bel's oldest product group, had its best sales since 2000 and with the introduction of resetable fuses over the next six months, we expect sales to continue to grow. Finally the interconnect group comprised mainly of Stewart connector can continue to grow even after their fastest growing product line, MagJacks, has been shifted and now falls under the magnetic group, not the interconnector group. The television of NetWatch in mid 2005 has allowed them to acquire fiber-optic technology. NetWatch personnel has been able to train our associates in Mexico in this type of technology, which will allow us to serve North American market in all five products. We continue to believe that the merger of Bel and Toko and our respective strengths of both companies will be positive to both shareholders. We currently hold just under 5.4% of Toko's outstanding stock and our holdings increased by 465,000 shares during the quarter. We continue to review various strategy options on how to move forward with Toko. I would now like to open up the call for any questions people might have.

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

Dan, given the strong results, can you kind of discuss what you're seeing in the macro conditions in the electronics markets that's causing your growth to be what it is?

Good question, Todd. Once again, you just read different things from different companies. I don't know. Maybe Colin?

Todd, is has been very strong. I think there has been strong capital installations. A lot of product is going into capital expansion and replacement in data applications. We don't do a lot in the commodity side, commodity products, we're more in the infrastructure products. Although as Dan said before, across the board it's been very strong. We think it seems to be industry wide. We're not seeing, you know -- we don't think we're -- I think we've gained a little market share, although that's always very hard to tell. But I think when we look around and listen to what our competitors say, they seem to be all doing quite strongly also.

This is a strange situation. It's been up for quite a while. I don't -- I can't imagine this growth rate is going to continue indefinitely. For us, this 30% sales increase was all organic because we had no acquisitions within the period, so it is rather outstanding.

Is your visibility still relatively cloudy?

Yes. I would say the way market conditions are now with so much in the -- just in time and warehousing product, it's very difficult to get a good read like you could have five years ago like backlog and knowing that you're shipping directly to them from the factory. Most of our shipments are going into staging areas before they go directly on the production floor.

Given your backlog and book to bill and limited visibility, would you expect the fourth quarter to be better than the third?

We don’t think so at this time.

So, your guidance would be roughly flat?

Whether we're flat or up or down a little bit we really don't know. We have still got this situation that until the last day of the quarter, we just don't know what the sales are going to be. It's still too early. We're still in October. I'd say we'd have a much better handle by the end of November of what's going to happen. We're still fairly pessimistic folks. We don't glorify something unless we can really back it up. We've never had that lead time and that information from our customers to be overoptimistic.

I would assume that pricing has been relatively stable, given the level of demand.

I think pricing has been level more because of the cost that people are incurring in China in raw materials. I think that is the driving factor that kept pricing pretty stable.

Okay. You've had issues in the past with not enough labor in China. Where do you stand on that?

At this point, labor's not our concern. But, once again, Chinese New Year comes up in February. And that is where your true sign is; how many people —- you know, once they go home for Chinese New Year how many people come back and that's where you really see problems. Two years ago we had a tremendous amount of problems after Chinese New Year. Last year, very little problems. So it's very difficult historically to come up with predictions on that at this point.

Is the new facility you're talking about, is that in the same area of the facility that I visited a couple years ago?

Yes, in the same compound.

Okay, congratulations. Very good quarter.

Thank you, Todd.

Our next question comes from the line of Chris McDonald of Kennedy Capital. Please proceed with your question.

Good morning.

Good morning.

I was going to follow up on one of Todd's questions. I'm curious to know if were it part of a new product cycle or if there's anything more Bel specific that's driving the really impressive organic growth that you guys have shown the last couple quarters here?

Once again, if you look at our product which is coming from all different product groups and all products kind of hit different markets. So I don't think it's one or two new products that are doing it for us. Each product segment we have, we're in the process of always introducing new products. I think overall it's just -- it's moving pretty well together.

Okay. Well great quarter. Appreciate it.

Thank you.

[OPERATOR INSTRUCTIONS]. There are no further questions at this time. And I'll turn the call back over to you.

Thank you for joining us today and hopefully we speak to you on our next quarterly report.

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