Bel Fuse Inc (BELFA) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bel Fuse first-quarter release conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Monday, April 30, 2007.

I would now like to turn the conference over to Dan Bernstein, President of Bel Fuse. Please go ahead.

Thank you, Mark, and welcome, everybody, to our conference call to review Bel's first-quarter 2007 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance.

Good morning, everybody. Thanks, Dan. Let's start with the Safe Harbor statement. Except for historical information contained in this call, the matters discussed are forward-looking statements that include 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 continued viability of sectors that rely on our products; the effect of business and economic conditions; 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.

Now I would like to move on and start to talk about our financial results -- first, sales. For the first quarter of 2007, our sales were $61.807 million, which was 13% higher than the $54.626 million in the first quarter of 2006. The $61.807 million was also higher than the $60.573 million in the preceding quarter ended December 2006.

Sales were up significantly in the modules product group that includes DC-to-DC converters and custom modules, and with other product groups remaining relative stable, as we would expect through the quarter that includes the Chinese, [Hunan] and India holiday periods.

Turning to profits and cost of sales, by the end of the quarter, on a GAAP basis, we have net after-tax earnings of $4.009 million. This is above the net earnings of $3.997 million for the first quarter of 2006, which was impacted by a fire in our Dominican Republic factory, and below the $4.697 million the previous fourth quarter of 2006.

Our gross margin for this quarter was approximately 23% and below the 27% gross margin for the same period of 2006. For the first quarter, margin was -- the lower margin when compared to first quarter 2006 was primarily due to higher sales of modules. Module prices are particularly strategic to Bel's growth, but important to overhead absorption and total earnings. However, they return a lower gross profit percentage margins as a larger percentage of the [building] material of process components. As these sales continue to increase as a percentage of our sales mix, our average gross profit percentage has decreased.

While Bel and its suppliers have for some time through increasing the efficiency of operations have taken a lower margin, absorbed many cost increases, we continue to experience higher material costs for semiconductor, [ousteds], PCBs and petroleum-based components, plus labor cost increases that we were not able to pass through to our customers.

Other significant margin impacts this quarter were the closedown costs associated with the termination of fuse manufacturing at our old Hong Kong facility and amortization expenses from the acquired Galaxy Power.

Turning to SG&A, there was an increase of $105,000 from the same quarter in 2006. SG&A was 15% of sales in the quarter compared to 17% in the same quarter of 2006. A major component of the increase was $171,000 for sales commissions due to higher sales levels.

Taxes -- the increased provision in 2007 is principally the result of higher taxable income in the U.S. and an increase in foreign deferred income taxes arising from various book versus tax timing differences. During the first quarter of 2006, the Company incurred a $1 million casualty loss in the U.S., which reduced U.S. income tax expense. This was offset in part by lower foreign taxes and [filings] due to the implementation by the Company of its Macao Commercial Offshore Company, which is not subject to Macao Corporation income taxes.

On the balance sheet, cash and equivalents -- at the end of March 2007, our cash equivalents and securities were $103 million, which was $11 million above our December 2006 balance of $92 million. Included in the current balance were the then-shareholdings in Toko Inc.

Receivables and payables -- receivables net of allowances was $42 million at March 31 compared to $41 million at December 31, 2006. Our accounts payable for the same period is $16 million.

Inventories -- for this March period, our inventories were $45 million, which was $1 million below December 31, 2006, when we had lower sales. Impacting inventories were the increased sales and increased raw material price. On the other balance sheet comments, for the three months, our capital spending was approximately $2.8 million, while depreciation and amortization was $1.9 million. Our book value at March 31, 2007, was approximately $19.44 a share.

Now I'll turn it back to Dan.

As per our previous press release regarding Toko, we have substantially reduced our ownership from 6% in Toko to 1.9% today. Bel's Board of Directors reviewed the Technitrol offer that was received and also consulted with our investment bankers. We initiated a face-to-face meeting between independent directors of both companies. The conclusion of the Board was at this time, with external and internal opportunities, that Technitrol's offer undervalues the Company.

At this time, I would like to open up the lines for any questions anybody might have.

(OPERATOR INSTRUCTIONS). Ali Motamed, Boston Partners.

We are a pretty big shareholder of your A shares, and I'm wondering why you've made such a big deal about who runs the Company afterwards. I don't think that's so much in the consideration of shareholder value, and my understanding is that so many of your meetings have focused on that, and you have made that a big priority. Can you address that, please?

We only made it a big priority if it's going to be a stock-for-stock deal. If it's going to be a cash deal, then that was not a priority at all. And if they acquire us for cash, they can do anything they want with management because they are buying the Company.

But my understanding is that it is a cash offer, and if there's a small, small stock component, then that would make it insignificant, but everything I've seen and read is that this is a cash offer.

No, and if it is a cash offer, we feel the cash offer undervalues the Company.

You feel that the cash offer -- so if they were to put a cash offer out there, you would consider it without any of the discussion of who is going to be running the Company?

We told them -- once again, they have misrepresented what we stated. We clarified with our letter. Once again, if it's a cash offer, Bel Fuse has no say in the management of what goes on with the future of the Company.

Okay. And then one other thing -- if you are rejecting -- because my understanding is the $43 was the cash offer. And the thing that would give your shareholders a lot of comfort is if you believe so strongly you can create value past $43, then why don't you take stock at $43 for your salaries? Because I think you have enough stock, enough to be able to support yourselves, and if you feel we should be turning down that offer, then you should feel comfortable enough that you can create value in excess of that, and as a gesture would take stock at $43 for your salaries.

Once again, the Bernstein -- I am a Bernstein. We are one of the largest shareholders.

Yes, sir.

And once again, if we sold the Company today at $43, my salary would be -- I would make probably three times more money off the interest than I do today. So it's not -- once again, we're not protecting jobs with the cash we make in our salaries. Once again, if you look at our salaries and compare them to Technitrol or people in the industry, I think you would realize that we are on the low end of salaries in our marketplace.

Right. But my whole point is that you should be -- we as shareholders expect to collect more than interest on our potential $43 offer, so (multiple speakers)

(multiple speakers). Will Bel Fuse shares over a two-year period, two-and-a-half-year period, will be substantially greater than $43 or not. That's the question. (multiple speakers) confident, and it would be greater, then we would have accepted the $43 offer.

Why don't you take stock as a comp, and then you would actually be incented with us, and we would feel good that --

Once again, I am incented with you. I own 3.8% of the Company. How much more incented do you want me to be?

Okay.

All right? Once again -- and my family, the Bernstein family, controls -- I think they control or have the ownership of about 22%. So how much more do you want us to be invested?

Okay. And if you're going to -- if the cash offer is not -- is a --

We -- once again, get the record straight here -- the cash offer that they put on the table totally undervalues the Company. All right? Once again, if you look at the deal that they proposed to you as a shareholder, they are using your money to buy the Company. We have $100 million in cash. I can do an LBO for the $100 million in cash. All right? So why are you letting them buy the Company with your money? Does that make sense to you? And then get no value for the synergies that we're putting on the table.

Okay. Sounds like you may address this later with them. Thank you.

Gerry Heffernan, Lord Abbett & Co.

I was wondering if you could talk us through the long-term prognosis of your gross margin in that it seems that the -- you spoke to it a little bit in the year-over-year decline, and I just want to understand -- there's someone else on the line there. I'm not sure if the moderator can handle that. I'm not sure if the DC-DC converter business, as you see that growing, if you get back to the mid-upper-20 gross margins or not.

Gerry, the big growth, as I said, was in what we call our modules group. And within the modules group, we have three subsets, but the two big ones are DC-to-DC converters and the actual -- we have some front-end modules.

What's been happening is that the actual margins in our DC-to-DC business have been fairly good, particularly if you look at it from an industry side, are they as good as some of our other product groups such as fuses? No, they are not. But they are well within where we budgeted them and expected them to be.

What's been sort of more of a drag is these front-end modules, which we've been doing on a contract basis. It's a design we're building. It wasn't our design. It has been doing very well with a huge volume. It's really been absorbing a lot of overhead, but there is -- and it's a niche. Is it going to last forever? I don't think so. But it's certainly something we needed to take advantage of when we saw it there. It is putting pretty good money on the bottom line.

But I think over time, we've got to do a little bit to just get that product up a little bit more, but if the rest of the business starts to come back in the third quarter, I think we will see somewhat of an improvement in our margins. As I said, for this particular quarter, the only growth we got were in these two lower-end margin areas, all within the modules group, while the rest of our business was fairly flat.

Okay, so if it was this front-end module business that you're really doing as an opportunity --

Yes, we're really doing like a [CEM]. Yes.

That would mean, then, without that, then the volumes going through were still suboptimal or sub I guess a normal demand operating period. Could you take that statement and then speak to that in regards to the "orders have continued at a healthy pace" statement that you have in the press release?

No, I think the orders have maintained at a good pace. We expect that -- this quarter, it's still a little early for us to tell yet, but we expected this quarter that the other product lines will come back a little more and help us on our margins. I don't see any reason why that won't happen. But the fundamental problem we're still struggling with is that -- well, good news/bad news with our customers, and just not only ourselves, but everybody in this industry, the manufacturers of these components, have just -- we're having a really tough time battling the cost increases and trying to get these costs passed through to the people that buy the magnetic products and the conductors and fuses. That's where we're really struggling.

Okay. Can you give us an update on the status of the A share buyback?

Yes. It will be in the -- well, we're putting it out, obviously, in the Q when it comes out, but I think we are at about -- there are very few shares out there, and I don't have quite the exact figure with me, but it's about --

25 -- around 25,000.

It's less than 20,000 we've purchased.

Okay, and that's as of the --

As of yesterday.

As of yesterday?

Yes, as of today. Yes. Very few shares.

Okay. So they're just being -- just difficult to get a hold of them.

We've not been successful -- we've looked for some -- actually, we're not successful in acquiring any blocks, and so we are going by average daily trading rules. So there's very few we can buy.

Okay. Colin and Dan, then, I must ask you to address something that came out in the letters back and forth between yourselves and the management/directors at Technitrol, and that was the statement of acquisitions, that they alluded to you guys looking at something, working on something. Since it has been brought out at least to that level of light, if you could please give us a little bit of insight as to what you are thinking, what's going on, what are you working on?

We really think that because of the NDAs we had to sign, we really aren't at liberty to discuss it, but if you go back, I think if you read the press release, it stated that the President and CEO of C&D Technologies had to resign from Technitrol because of a conflict of interest. So I think you could put two and two together.

Okay. And that's really your -- is there anything else going on?

No, our meeting -- I'm talking with three or four companies. I was in the Far East talking to a company. I have a meeting tomorrow talking to a company. But on our acquisition plate, and also the Toko situation, I would say we average probably three or four acquisitions at every point in time. So if you look at the last three years, I don't think that there's ever a period of 12 weeks that we didn't have an acquisition we're looking at on the table.

Okay. Very good. I will get back in queue. Thank you, gentlemen.

(OPERATOR INSTRUCTIONS). Art Goldstein, Santa Monica.

Larry Goldstein, it is.

I thought you had changed your name, trying to sneak in.

I wonder if you could clarify something. I'm confused by this. You authorized a buyback. It's obviously difficult to buy stock in the market when your average daily trading is 43,000 for the billion, I think 11,000 for the A. So it will take until my baby becomes Grandma, right?

It seems that way, yes.

So why don't you do a Dutch tender offer, A., and B., what I'm really curious about is would you rather, instead of making $25 million, be wanting, be desirous of having, say, $35 million of earnings, or would your preference be to have, say, a $60 stock instead of a $35 stock?

Put it this way. Since you are willing to buy stock back and since you're wanting to make a nice-sized acquisition, what do you think about taking your $100 million and borrowing $100 million and buying in $200 million of stock in a Dutch tender offer? And if you have the shares outstanding, which that would roughly do, you would have twice the earnings per share and probably twice the price. Do you want to see the stock higher, or you want to see the earnings higher? I know you want both, but you've got the opportunity to do one or the other, and either one is hard. Obviously you're finding it hard to make a good-sized acquisition, and it's impossible to buy a goodly amount of stock.

Larry, I think if you asked the Board, I think, because we've discussed this -- we've been discussing buybacks with you for the past six years -- I think it's always been our -- we feel in the best interest of our shareholders to look at acquisitions, and I think at this point we have been very committed to acquisitions.

If you go back to the Artesyn acquisition and/or the Toko acquisition, really adding anywhere from $400 to $500 million (technical difficulty) and really, hopefully, with the synergies and combinations, that we can get the price back up. Down the road, we might change that. We feel, regarding a tender offer, we still believe, we think that may put the Company in too much of a defensive mode, and we think we'd probably get hit pretty hard at a discount if the Bernstein family controlled 51%. I think it would limit our float and I think a lot of investors might be upset by that, but I think what we really are trying to do over the next six months to a year is really focus on growing the Company through acquisition, and if there's certain blocks that break off, that we would look at buying those blocks.

Well, I appreciate your opinion, but frankly, what most investors want, and that's the way you run the business, you run the business in the best way period, and if you had half the shares and twice the earnings per share, the stock would be a heck of a lot higher than it is, on the one hand, and obviously, if you made a good acquisition with the same money, say $200 million roughly, hopefully the same would happen, and you'd be bigger. So I'm just wondering, is it -- would you rather see a lot more net earnings per share or would you rather see a lot more price per share?

I think once again, [you're asking a very politician] here. We take both. And I think we are going to constantly be looking at both things. I'm not saying we're turning one to the other, but at this time we feel that what we have on the table, that the cash is a lot better because we are looking at or very [possibly] looking at a couple acquisitions.

All right. Then I accept that for the time --

Short term.

Yes, for the short term, but the idea of having a stock buyback when, even if you could buy your fraction of the daily volume, it would take forever, speaks to doing a Dutch tender offer, doesn't it?

I think it does. So I'm not disagreeing with that, Larry.

All right. So why don't you do it?

Couple more weeks. Couple months.

All right. Thanks.

Alan Mitrani, Sylvan Lake Asset Management.

You talked about C&D Technologies just briefly in reference to the Board resignation. Their Power Electronics division, they've had some real bad problems the last few years as they have mismanaged that, hasn't grown very much. I know it's on the block. They've said it. It doesn't seem like it's the kind of asset that can really get you the scale that you need, given that it's less than $200 million, although it may go at a good price.

Could you talk about your acquisitions or potential acquisitions in the power electronics DC-to-DC space and whether that, if you consummate it, could be, again, sort of like the way Artesyn would have been, more of a platform acquisition to get you a lot bigger in the space to make more acquisitions? Just talk about your outlook there.

Once again, we can't comment on C&D. But once again, if you go back and look at our acquisition history, we ended up buying Insilco -- that was in bankruptcy, and then after eight years. And they were not making money, and we were able to really take them over and do, I think, a tremendous job.

So we look at any acquisition, and I'm not -- we're not looking at per se a platform. We feel that if we do buy a company, that it's going to make us bigger and we have to get cost savings out and we have to get a lot more profitable. And if they can hit those types of criteria, then we would look at it very hard. And so all our acquisitions are -- I don't think because -- if we buy A, we're going to go out -- everybody knows that Tyco is up for sale, their power group, in the next three or four months. Because we have a short-term acquisition in power, I don't think that makes us more -- looking at other power companies. Each acquisition is going to be judged on their own and what value it brings to the Company.

The only reason I ask it, Dan is because if you think about it, you are asking shareholders, in essence, to take a couple-year view to Technitrol, whereas they probably didn't put it all on the table -- you probably could have gotten more, clearly, from their rhetoric, if you would have negotiated with them. And yet you look at the history of DC-to-DC businesses, Power-One can't get out of its own way with their stock. Maybe that's one -- Power-One, C&D, Artesyn, all these companies can't do it.

For you to go out there and roll up or buy companies, even if you buy them pretty cheap and you do a decent job, you are talking multi-years out on a business that probably wouldn't get a multiple. Whereas Technitrol may undervalue your stock right now, you have a chance to negotiate with them and get a pretty meaningful premium, together with the potential upside with some stock and cash. And I echo the sentiments of the last caller -- it seems like a Dutch auction is the right way to go.

Once again, back to the point -- with anything we do, the target is out there and there's no question I have the bull's-eye on my back. And the bull's-eye is $43. So whatever I do, if it's not above $43, I guarantee you that [Dave] would come back after me or someone else would come back right after me. So we're very aware of what the target is out there for us and what we have to do to get the Company beyond that price.

Excellent. Look forward to seeing you.

I bet you will be.

(OPERATOR INSTRUCTIONS). Mr. Bernstein, it would appear that we have no questions at this time.

Thank you, Mark, for your help, and I appreciate everybody listening in today.

I'm sorry, we do have one last question if you have time to take it.

Sure we do.

Lakshminarayana Ganti, Thomas Weisel.

Just a couple of questions on the quarter. Could you break out your sales by segment for the quarter?

No, we don't release that.

Okay. And --

We did say that the modules group was up and the other groups were flat.

Okay, and what's the outlook on the next quarter? What are you seeing? And you talked about a rebound and everything. Even Technitrol said that they saw something post-March 15 or something like that. But what's your near-term outlook, given what you've seen just now?

We're not seeing -- things are steady, steady, up a little bit, but we're not seeing any 20% upticks or anything like that. It's solid at the moment. But I don't think we're going to see anything through the roof in the second quarter, but it's very, very early yet, and we will wait and see what happens. I am pretty happy that we are pulling inventory. So in effect, we are shipping more than we're making at the moment, so that's a pretty good sign.

Okay. Looks like the gross margin declined due to the strength from DC-to-DC. That's going to come for the next quarter. Is that a fair statement to make?

It could, but if the non-module group products come up a little bit more, then that will help us on our margin.

[Bill Talicia, Talicia & Associates].

From the, I guess, press releases of Technitrol, they indicated that you met with them when the offer was $40, and then two members of the Board met with their members. And then they raised their offer to $43. Is there a reason why you didn't meet with them after they raised their offer, and could you just elaborate on what transpired?

I wasn't at the meeting, so I can't give you exact details. But I think they just -- the offer they made was once again substantially lower than what was discussed maybe at the meeting in ballpark figures. And once again, I think our Board said you have to take a look at the cash on hand, the synergies, if it's going to be a cash offer. So as I said, we felt strongly that it just undervalues the Company.

Do you have a number of what you would be willing to accept, and how far off was their $43 offer from that?

I think we do have a number, and I think the offer is far enough away that we didn't need to have further conversation.

Lakshminarayana Ganti, Thomas Weisel.

Colin, and maybe Dan can answer this -- can you talk about your acquisitions pipeline? We talked about C&D Technologies' Power Electronics division, and we know that Toko has refused to being bought out or something. At this point, when you have spurned the Technitrol offer, I wanted to know what kind of pipeline you have or what's the stability in terms of the candidates you are evaluating or -- can you update us on that?

You know, once again, I think the only thing that we have done, as you know, Avi Eden, who is with Vishay, and I thing Vishay went from $30 million to over $1 billion, and he was Dr. [Edmonds'] right-hand man, has been very active with us, and he's a board member looking at some -- I think the only really strong criteria we have is that, if we are looking at an acquisition, that if at all possible, we'd like to see it above $50 to $75 million. I think on the high end, it could be up to $500 or $600 million.

So I think what we basically look at, from a synergistic point of view, what we can do with them, from a growth standpoint, bottom line is what value it's going to add accretive to our earnings, and that's the driving force when we look at these type of companies. We feel like a lot of our shareholders do believe that there's not enough float out there, but we have no problem going out and taking substantial debt. We'll look at a company, and then hopefully down the road have a secondary offering and get enough shares out there, maybe up to 25 or 30 million shares, so the float issue won't be a problem.

So if you look at our major acquisitions in the past, which, as you mentioned, which is Artesyn and Toko, they both were in the $300 to $500 million range from sales and from a purchase standpoint. And with their sales and our sales, we're talking sales coming to about $800 million and possibly a market cap of around $1 billion, and that's what we consider our sweet spot to be, is that we want to get sales around the $700 million and get the market cap up to $1 billion and get our float to around 25, 30 million shares if we can.

That's very useful. Good luck, guys.

Alan Mitrani, Sylvan Lake Asset Management.

Just quickly, you guys didn't consummate the Artesyn transaction. I know you went after them, but it seems like the kind of target you would go, but in the end, you ended up just making a little money and moving on.

But he's asking what's our acquisition strategy, and I think Artesyn is a perfect example of the company that we went after. I think Toko, if you look at Toko and Artesyn, they are both very similar.

Okay, and then I realize you don't want to -- there's no reason to give us an exact amount, but Technitrol can pay for you or something like that, but can you give us the sense as -- I know you've looked at -- obviously, you have talked to Technitrol many times in the past. You guys have talked both ways and looked to the company. What kind of synergies do you think you can have with them? I mean, you're talking about --

It is our understanding, from the conversation that we had, that they're talking about synergies of $25 to $30 million. I don't know how realistic that is, but that's the number that was bandied about.

It would appear that we have no question at this time.

Thank you. We appreciate the follow-up questions, and thank you for your time, and we will speak to you next quarter.

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