Bel Fuse Inc (BELFA) 2008 Q2 法說會逐字稿

Welcome to the Bel Fuse second quarter results conference call. (OPERATOR INSTRUCTIONS)This conference is being recorded Wednesday, July 30, 2008. I would like to now turn the conference over to Dan Bernstein, President and CEO. Please go ahead.

Thank you, Rhonda and I would like to welcome everybody to on conference call to review Bel's second quarter 2008 financials. Before we start, I would like to hand it over to the Colin Dunn, our Vice President of Finance. Colin.

Thank you and good morning, everybody. I am going start with a Safe Harbor statement. Except for historical information contained in today's news release and in this conference call, the matters discussed including statements regarding the impact of price increases, corporate cost reductions, and acquisition possibilities are forward-looking statements that involve risks and uncertainties.

Among the factors that could cause results to differ materially 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 contains or difficulties, product development, commercializing or technological difficulties, regulatory and trade environment, risks associated with foreign currencies, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and competitor responses to those new products, and the risk factors detailed from time to time in SEC reports. In light of the risks and uncertainties, there can be no assurances that any forward-looking statement will in fact prove to be correct. We will undertake no obligation to update or revise any forward-looking statements.

Having finished with our Safe Harbor statement, I will now move to financial results. For the second quarter 2008, our sales were 72.454 million, which was 80% higher than the 81.612 thousand in the second quarter of 2007. The 72.454 million was also 90% higher than the 60.869 million of the proceeding quarter ending March 2008. Sales for the second quarter over second quarter were up 39% in the modules product group that includes DC to DC converters and custom modules. Up 7% in the magnetics products group that includes MagJacks integrator connectors and up 280% in the interconnect product group with the circuit circuit protection group down slightly.

Profits and cost of sales. Ended the quarter on a (inaudible) GAAP basis with net after tax earnings with $1.811 million after a non-cash pretax charge for the temporary impairment of Bel's holdings in Toko, Inc. Before this charge, we were well below the net earnings of 6,158,000 for the second quarter 2007, but above the 2,167,000 in the previous, that's the first quarter of 2008. Our gross margin for this first quarter was approximately 18.1% and below the 21.1% gross margin for the same quarter in 2007. In the second quarter, margin was similar to the 18.5 gross profit margin for the first quarter of 2008. The low margin, when compared to second quarter 2007, was apparently due to increases in material cost and total labor costs that had nothing pass through to customers. As we said in our press release, over 5000 workers have been hired since we are in a new year. We actually hired 8,900 workers but some 3,600 of those chose not to stay. Our net hiring through June was 5,300. The continuing addition of new workers curtains our output as they lower productivity levels until they become familiar with our methods of production.

However, on a more positive note, those workers hired in the period immediately after (inaudible) remain with us and significantly improved their productivity. In addition to recent mandates increases in wage and corresponding increased overtime rates, we have been working longer hours at the premium overtime rates. BIC officials announced an increase in wage rates to be effective in 2008 in the areas where our products are manufactured. The US dollar continues to fall against the (inaudible) in which all (inaudible) factory workers are paid. The combination of efficiency of rural workers, higher wage rates, overtime hours worked and unfavorable currency effects has resulted in higher total labor costs. Those customers have increased prices during the second quarter and those increases are taking effect in the third quarter, and it is possible that additional price increases will be necessary for Bel to recover the additional material and labor costs incurred.

SG&A. The presenting relationship of selling, general, and administrative expenses to net sales decreased during from 48.9% during the three months ended June 30, 2007, to 12.8% during the three months ended June 30, 2008. The decrease in the dollar amount of selling, general, and administrative expenses for the three months ended June 30, 2008, compared to the three months ended June 30, 2007, was approximately $100,000. Higher sales and marketing costs would have increased sales volumes, such as commissions, were more than offset by a $500,000 decrease in legal and professional fees from the second quarter of 2007. The decrease was primarily due to reduced patent litigation activity in the second quarter 2008 accounting for a $400.000 reduction in legal fees. The implementation of an internal audit and (inaudible) function which reduced external consultant fees significantly.

Interest income. Interest income earned on cash and cash equivalents decreased by approximately 400,000 during the three months ended June 30, 2008, as compared to the comparable period in 2007. The decrease is due primarily to significantly lower interest rates on invested balances during the three months ended June 30, 2008, as compared to 2007.

Taxes. The slight increase in the global tax rate was caused by a larger portion of earnings being generated in higher tax jurisdictions in North America and Europe offset by lower profits in the lower taxation locations.

Balance sheet, cash and equivalents. At the end of June 2008, our cash equivalents and securities included restricted cash and long-term investments, were $116 million which was $1.4 million above our December 2007 balance of $114.8 million.

Receivables and payables. Receivables net of allowances was 51.7 million compared to 52.2 million at December 31, 2007. This reduction of almost $500,000 occurred despite much higher sales. Accounts payable for the same period is $20.8 million.

Inventories. For this second quarter of 2008, our inventories were 46.3 million which was 7.2 million above December 31,2007, and 2.3 million higher than a year ago. Impacting our inventory dollars were higher raw material prices and transportation costs. However, inventory returns for the 12 months ended June 2008, slightly improved over the 12 months ended June 2007, indicating that the bulk of the increase in inventory is in support of higher customer demand. A couple of other balance sheet comments. For the three months, capital spending was $1.4 million while depreciation amortization was 1.8 million. In the second quarter of 2008 we repurchased 13,289 Bel Class A shares at a cost of $374,000 and for the six months we have repurchased 25,496 Bel Class A shares at a total cost of $766,000. Our book value at June 30, 2008, was 20.86, that includes good will and intangibles. That is the end of my comments. Now I will turn the call back to Dan.

Thank you, Colin. Rhonda, if we could, could we open up the call for questions, please?

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Todd Cooper with Stephens, Inc. Please proceed with your question.

Thank you. Dan or Colin, can you be more specific of the corporate wide cost reduction plan, the specific steps involved?

I think at this -- I think we need another couple of days. We have to finalize things. I don't think at this point -- would you agree Colin?

I think we intend to put out a press release in a couple of days with further details, Todd.

Is there a dollar amount that you are targeting?

No.

Okay. Let me then move to the productivity gains and the timing of when those might begin to positively impact gross margin.

That was the question?

They should be coming quickly. Once again, we have, with the new rules in southern China, for example, you have to pay double time for Saturday and Sunday because of the extreme backlog that we had in the first half of this year we were working all day Saturday and Sundays. We have gone to alternating Sundays in the last four weeks and going forward, we are hoping to get down to just half a day Saturday and work only overtime during the week. The problem is being in an area where you have dormitories, the worker demands overtime. So we can cut down a good portion of it but we still have to give a minimum of 10 to 20 hours of overtime.

Are those measures and the price increases that you have implemented, should we look at gross margin getting back to the 20% level in the current quarter?

The only problem we have is that we are getting more involved with the power modular business and those margins are a lot less. So it is -- can we move quicker on one side and increase sales on the other side? Colin.

Yes, I think, Todd, we expect to see some improvement. Some of the price increases are coming in through this third quarter. However, not all of them sort of it on the for example on the first of July. So we're not going to get a complete full quarter of some price improvements, but there be some coming through.

We will be seeing the overtime cut back coming through?

Definitely, yes.

So gross margins should improve but you are not ready to --

Hypothetically if we grow power by 30 million, right, Todd, then that will be not like what we do in the other pass if oil prices components. So that is what we -- if we didn't have power, I think we would be very comfortable saying our margins would improve to where it was. With the growth of power, we don't know how that will offset it. It will be from earnings per share we would be up but not from margins. Depending on the growth of sales of the products.

So margins on the power module business are less than the magnetics?

Yes, because of the material cost we use and the powers. Once again, when we are using the build materials are substantially greater than the power products in the ICM area, the magnetic area.

Okay. What was the backlog relative this quarter relative to last quarter?

It's been basically the same, around 57, 60 million.

And the strong demand that you are seeing, have you been able to discern if there is any double ordering?

At this time, I met last week with Juniper, HP, [Syco], and we have -- everything seems pretty strong and we have not seen many cancellations to date.

Okay. Thank you very much.

Thanks, Todd.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.

Yes, thank you, good morning.

Good morning.

Good morning, Shawn.

Just a quick question. Where there any other GAAP expenses that hit your income statement during the quarter beyond the impaired investment?

No.

Okay. And then if I can dive a little bit into your different segments, and I am not sure if I heard this correctly. Modules did you say was up 30 or 13%?

3-0.

3-0. Okay. Is there a way to provide a bit of color around the linearity of the segments during the quarter and where it is that we stand today, how that might be different?

We expect that -- we don't expect that in the next quarter the module section will be quite as strong in the third quarter. Within the module section also we have a couple of pieces of that. We have some telecommunications and more traditional DC to DC. The telecommunications side of that is we expect it to be a little lower which is probably the worst part of the margin in the third quarter. So, that might help things a little bit, but it is a little early yet for us to know completely how that will roll out for the end of the quarter. Other than that, we don't see any other significant changes taking place.

From a demand standpoint, was the quarter -- I guess what I am trying to get a sense of is the track of demands that you saw. Has it been a steady flow? Was this back end weighted and is now at a consistent point from that level exiting June? Any color would be helpful.

Once again, when you look at our, besides we have two things we are looking at when it comes to sales increase. One is the magnetic group where in the summer of last year our backlog went down substantially. We had a backlog of 15 million. Then in a three-month period we went from 15 million to 25 million in the magnetic backlog. Which, in reality, we had to hire 4000 people in the calendar fourth quarter. The problem being in Chinese new year we could not hire people and our backlog stretched out from 12 weeks to 24 weeks.

When we came back from Chinese new year, there is a lot of additional winter storms, Chinese new year, plus the earthquake at one of our major competitor's factories our backlog stretched out. We have seen strong demand and we still see strong demand and we have not seen that much cut back in double orderings or anything like that. The other high growth area, our major growth driver has been in the module, DC to DC converters and telecommunications modulars and, once again, we see some softening in the next quarter but still see tremendous opportunity for growth going over the next 12 months. Once again, because this is the new market for us, we do expect very strong growth besides the next 12 months, the next 24 months and we might see some hiccups from one quarter to the next, but overall we do project 20% growth over the next two years.

Okay. So when you talk about your backlog dollar that you provided earlier, that is really more specific to your MagJack line, correct?

No 15 to 25 million, that was the MagJack. 57 to 61 million that was our overall backlog that I successed with Todd. That has been pretty consistent.

In terms of lead times today, what are we looking at in terms of weeks?

Lead times, we are running probably at 12-14 weeks in lead time down from a high of 20 weeks and we probably work our way down to 10 to 12 weeks.

Okay. And so, when we look at some of the commentary around modules and the growth that you anticipate here, is there is way to get an understanding of the type of customer? Is this your largest customer mainly that is driving this growth? Is this more broad based?

Once again, we always have done well with five key customers. And so I would not say it is our largest customer. I think we have five major customers and I would say the same thing is true with ICM, the MagJacks. Five large customers that really generate a good portion and I think we are doing a good job hitting all five of those customers pretty well. It is not just one customer driving it.

Okay. That is helpful. I will jump back in the queue. Thank you so much.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Lawrence Goldstein with Santa Monica Partners. Please proceed with your question.

So here is the question, broken record-like. In saying we continue to seek acquisition opportunities with a potential underlying to increase "shareholder value," as you concluded, as you have for ages and I understand clearly why, why don't you finally try my method? Make $100 million acquisition now while we are down some 37% from the $43 [technitrol] offer you felt undervalued the company a little over a year ago and undervalued at 43 and take $100 million and buy in a third of the company? What do you think that would do for increasing shareholder value? Now, don't answer me now. Think about it. And the reason I am saying it on the conference call is I understand that the feeling is that you have got to ramp up revenues, become bigger, become more diversified, and the idea of companies wanting one supplier for all and all that sort of economic set of reasoning, but, the fact is we keep failing which ain't bad because you make money each time, most of the time, but why not try this. The listeners on the call, maybe you give Mr. Bernstein some feedback because he thinks that -- and I understand it -- that the company should become larger for the reasons I have touched on, and buying in stock would reduce the float and make the company less valuable. I think it would make it more valuable. Thank you.

Point well taken, Larry. And I will talk to both Needham and Stephens about it in the near future.

Thank you, again.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.

Yes, thank you. Just getting to the price increases, I think initially when you discussed this, you looked at this being implemented over one to two quarters and it seems that a large portion of this is going to be impacted within the September quarter. Is that the right way to think about things?

Sean, just so we clarify, we implemented the price increase immediately I think 8 weeks ago or 12 weeks ago. Colin will give the exact date. The problem we have is any new contract or new order that came in had a price increase with it. The problem was is that some of the contracts do not kick in for three or four months because we were on long-term agreements with some of our customers. That is the lag. It is not today we are going to implement new pricing. It was implemented a while ago and now we are just waiting for the new contracts to come into play.

For example, for some, we put in price increases in May and some of it did not become effective until late July and things like that. That is pretty typical.

Yes. I follow you there. That is helpful. I was just looking to see if you have a sense of how much of that might actually impact -- how much you are able to actually get in under the covers for the September quarter and is there anything that or to what extent actually bleeds over into the December quarter based on those new contracts?

It would be greater in the December quarter.

Okay.

We should get a flavor for it in the third quarter and the December quarter.

I think we should have a good flavor for it in the third quarter I would think.

Yes.

And once again I think, as you know, with the announcement of a 10% increase across the board, I think on the average of ours, we did 3% to 5%. So I think we would have to take another look at our price increase and see how competitive we are in the marketplace.

Okay.

Once again, I think it is fair that we do not want to become the price leader in our industry and that is not our goal.

Okay. Taxes. Should we continue to think about roughly around the 10% level going forward?

We are a lot higher than 10% at the moment. We --

Perhaps you have to think about the mix impacts on tax.

We have the mix impact which will probably stick with us for a little while longer, quite frankly, because with the way we are structured, when profits fall, the ratio changes dramatically from a lot more revenue being generated in the higher tax rate areas because that is where they distribute the product. We expect that to stay in place, I think. Probably not quite at the same level but at some level, at least for this quarter, this third quarter, and hopefully we will start to improve a little bit in the fourth quarter.

Okay. That is great. Thanks very much for the commentary and congratulations.

Thanks, Sean.

(OPERATOR INSTRUCTIONS) At this time, I am showing no pending questions. I will turn it back over to you.

Once again we would like to thank everybody for joining us today. We look forward to speaking to you in the future. Have a good day.

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.