Bel Fuse Inc (BELFA) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bel Fuse Third Quarter Results 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 Wednesday, October 29, 2008.

I'd like to turn the conference over to Dan Bernstein. Please go ahead, sir.

Thank you, James. And I would like to welcome everybody to our conference call to review Bel's third quarter 2008 results. Before we start, I'd like to hand it over to Colin Dunn, our Vice President of Finance. Colin?

Good morning, everybody. Thanks for attending. I'd like to start off by reading our Safe Harbor Statement.

Except for historical information contained in today's conference call, the matters discussed, including statements regarding the impact of price increases, cost reductions, and acquisition possibilities, 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, capacity and supply constraints or difficulties, product development, commercializing or technological difficulties, the 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 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.

With that said, I will now move on and discuss our performance. First, I'll start with sales. For the third quarter of 2008, our sales were $66,964,000, which was 1% higher than the $66,379,000 in the third quarter of 2007. The $66,964,000 was 7% lower than the $72,454,000 for the preceding quarter ended June 2008.

Sales from the third quarter over third quarter were higher in the modules product group that includes DC-to-DC converters and custom modules, in the magnetics product group that includes integrated connector modules, and in the interconnect product group, while the circuit protection group was down slightly.

Profits and cost of sales. Bel ended the quarter with an unaudited GAAP basis with net after-tax earnings of $1,946,000 after a non-cash pre-tax charge of $1.3 million--or $1.4 million--primarily the other than temporary impairment of Bel's holdings in Toko, Inc., and an initial $329,000 restructuring charge at Westford, Massachusetts. In addition, the Company's, the income tax provision for this year's third quarter was reduced by the reversal of an accrual for uncertain tax provisions resulting from the expiration of certain statutes of limitations and the finalization of a tax audit, partially offset by changes in estimates for prior years' taxes upon finalization of 2007 tax returns.

The earnings were below the net earnings of $5,940,000 for the third quarter of 2007, which included $1.2 million from the sale of property in Macau and Hong Kong, but similar to the $1.8 million in the previous, at the second quarter of 2008.

Our gross margin for the third quarter was approximately 15.4%, and this, of course, is below the 21.2% gross margin for the same period in 2007. And this third quarter margin was also lower than the 18.1% gross profit margin for the second quarter of 2008.

The lower margin when compared to the third quarter of 2007 was primarily due to increases in total labor costs. When we take total labor costs, we're talking about base wages, we're talking about foreign exchange because of the strengthening of the renminbi, and also overtime costs. In addition, materials that had not been passed through to customers.

Bel advised customers of increased prices during both the second and third quarters, and these increases are now taking effect.

Turning to SG&A, the percentage relationship of selling, general, and administration expenses to net sales increased from 13.1% during the three months ended September 2007 to 13.3% during the three months ended September 30, 2008. The increase in the dollar amount of selling, general, and administration expenses for the three months ended September 2008 compared to the three months ended September 2007 was approximately $300,000 and was a result of the following factors. The Company's legal and professional fees increased by $400,000 from the third quarter of 2007, primarily due to increased legal activity associated with the closure of Bel's Westford, Massachusetts, manufacturing facility, and a related lawsuit against former stockholders and key employees of Galaxy, and also additional audit fees.

As a result of the strengthening of the US dollar versus certain European currencies, during the three months ended September 30, 2008, the Company's currency exchange losses increased by $200,000, as certain of the Company's European purchases are denominated in US dollars, and some sales are carried out in local European currencies.

And the third item was a $300,000 loan reserve for bad debts following the payment by several customers of past due balances.

Interest income. Interest income earned on cash and cash equivalents decreased by approximately $600,000 during the three months ended September 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 period.

Taxes. The benefit for income taxes for the three months ended September 2008 was $1.5 million compared to a $1 million provision for the three months ended September 2007. The Company's earnings before income taxes for the three months ended September 2008 are approximately $6.4 million lower than the same period in 2007. The Company's effective tax rate, the income tax rate or benefit provision as a percentage of earnings before provision for income taxes, was a favorable 293% in 2008 and a cost of 13.9% for the three months ended 2007.

The Company's effective tax rate was partly based on the geographic segment where pre-tax profits are earned in. Of the geographic segments in which the Company operates, the US has the highest tax rates. Europe's tax rates are generally lower than US tax rates, and Asia has the lowest tax rates. The decrease is principally related to the tax benefits in the US of $2.3 million resulting from the expiration of certain statutes of limitations of a previously recognized liability for uncertain tax positions. This was offset in part by higher US and European taxable income from operations, the total pre-tax income during the three months ended September 30, 2008, compared with September 30, 2007.

Turning to the balance sheet. At the end of September 2008, our cash, cash equivalents, short-term investments, and securities, including restricted cash and long-term investments, was $98.3 million, which was $9.4 million below that in December 2007 (inaudible) of $107.7 million. In the third quarter of 2008, we repurchased 325,396 Bel Class A shares at a cost of just over $10 million. Over the nine months year to date, we have repurchased 350,892 Bel Class A shares at a total cost of $10,785,000.

Receivables and payables. Receivables net of allowances was $47.2 million at September 30 compared to $52.2 million at December 31, 2007. This is a reduction of $5 million. Our accounts payable for the same period is $19.2 million. During the expanded financial crisis, particularly in Asia, we have seen many vendors attempting to shorten established credit payment terms or eliminating credit completely.

Inventories. For the third quarter 2008, our inventories were $49.1 million, which is $10.1 million above December 2007. Impacting inventory dollar levels were higher raw material prices and transportation costs and the ramp of several new module programs, in addition to preparations for the 2009 (inaudible) production shutdown.

Other balance sheets comments. For the three months, capital spending was approximately $2.2 million, while depreciation and amortization was $1.9 million. Our per share book value at September 30, 2008, was approximately $20.54, including goodwill and intangibles.

That's the end of my comments, and I'll turn it back to Dan.

James, we'd like to open up the call now for questions, if we could.

Thank you. (OPERATOR INSTRUCTIONS.) And our first question comes from the line of Johnny Brown with Stephens, Incorporated. Please proceed.

Thank you. Hey, Dan. Hey, Colin.

Hi, Johnny.

I was wondering about just, in terms of the general economic slowdown, it seems like it could be two sides of the same coin here. Obviously, on one side, you don't want your revenues to come down or the growth in revenues to slow down too much, but at the same time, it seems like it could free up some capacity and kind of lower your pressure to pay so much overtime. I wonder if you could talk about how you see that impacting your margins going forward.

I think Colin can go over the margins. I think psychologically for us, going forward from this point off, if we do schedule overtime, because of the new laws and regulations--you know, it went from 1.5X to 2X--so we believe that we have to pass those overtime costs on to the customer. What we're also trying to do is look at areas where the overtime, you don't have to pay an overtime rate. So hopefully--I don't think we're going to get there in the next quarter or two--but hopefully, within six months. If we do have to increase our production, we can do it without overtime. Colin, from the margin standpoint?

Yes. We had been spending in premium labor costs, I--but let me back up a little bit. First, we have to work some overtime. If you're not working some overtime, you're not going to have any workers to start with. So part of the balancing act we have to go through is to try and determine--which I think we've got now--is what's the minimum amount of overtime you can work and keep the workers, particularly in the areas where our factories are right now.

And that's more important, also, in areas where the workers are housed in dormitories. They're migrant workers, and they don't have to go home. So one of the things we're trying to look at going forward is to try and find, to put production to areas where, more in local villages where there's less migrant workers, and so the workers aren't housed in dormitories, where they do go home and maybe they live in their small farms also, so they're more keen to go home, so we won't have this issue of basically mandatory overtime to keep the workers (inaudible), not the workers' problem.

So the total, what it had been costing us was fairly close to $0.20 a quarter in labor premiums over the last few quarters. Now, we don't, that's not going to go away completely, but we hope we, with our reductions in overtime, which basically came into play effective late in the third quarter, where we are now only working half a day on Saturday, for example, that we maybe ought to get that, that premium down in half going forward.

Okay. What about the slowdown in China in terms of your ability to retain workers? Are you seeing any more loyalty there?

I think that the problem here, we know the government for a long time, the past year, has really tried to move people and move them back from southern China to northern China. With the recession, we know now the government is concerned regarding the toy industry and the textile industry--you know, how to keep the workforce hired. I do, it's really, you know, we do have the Chinese New Year. You really can't get a good read for how things are looking. Once again, the problem now is because we're so close to Chinese New Year, it's very easy to retain your workforce. And then coming back after Chinese New Year, then the workers try to look at what's the best possible deal and how aggressive they want, where they want to look for jobs. So if there is a downturn, if it will be here in China, then we think that the workforce should be more stable.

Okay. Now, sticking to margins, with commodity costs coming down, Colin, what does your inventory makeup kind of look like, so how long before you see those cost savings impacting margins significantly?

Well, we haven't got a lot of--the bigger issues have been labor for us over late. And while we've got copper and steel and petroleum-based products in there, we're not seeing any--so far, although on the world markets, the prices have come down--that hasn't started to come through on our pricing decreases yet. I don't think it will for a little while. So it's going to be quite a while, we think. I would say, and to burn off the inventory we've got, we're probably looking at up to six months, I think, before we're likely to see anything, if we see a lot, come through on those products coming down in price significantly.

Okay. And just overall demand, your backlog, I think, the last few quarters, has been about $57 million to $60 million. Is it looking like that, still, in the current quarter?

It's probably going to be less than that, you know, around the $52 million to $53 million range now.

Okay.

And again, as we head into the fourth quarter, they tend to drop when people have got to clean out the inventories for year end, but that's not unusual for us.

Right. Okay.

And if we had seen, if it was $40 million, I think we'd be panicking, but at $52 million, it's been like this since the beginning of September, so it's been pretty stable.

And is it consistent with the third quarter, a little proportion of circuit protection and higher proportions of modules and magnetics?

Yes, it's been pretty consistent that way, yes.

Okay. Thanks, a lot, guys.

Thanks a lot, Johnny.

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

Yes, thank you. Good morning.

Good morning, Sean.

So I suppose--first, if I can just dive into pricing for a moment. You had some of these increases that were implemented at the end of the quarter. There is a, I think one of your competitors also had looked, entering the September quarter, to increase some of its prices. I think they had a second period where they actually implemented another round of increases. Is this something that's perhaps on the table for you, and can you perhaps elaborate on that a little bit?

Well, we have had one. We had basically two rounds of pricings. I think going forward, I think a lot depends on where we stand on the recession and the labor situation in southern China. Once again, if you asked me that question about five weeks ago, I would say there was a high probability that we would have another price increase. But the way that the raw materials and oil is going down and the uncertainty that labor might be flattening out a little bit in China, I think we'll hold off on it for now.

Okay. So what, to what degree--what has been your general feedback from customers on these price increases?

They love it. They jump up and down. You know, basically--

I mean really, the net, or the question is, has this led to any lost business?

I'd say it's difficult to say. It depends on the product, where we stand in the product. If it's a product that we're single source or second source, the customers are staying with us. If it's a commodity item like a D circuit protection device where there's more than two or three competitors, they're always going to put the price pressure as much as possible. You know, it's starting, we have seen companies in the past go to quarterly price reviews. Just recently, we heard that Dell Computer is planning to go to a year contract. We know other customers are possible looking at that.

It's just, it's so much due to a tremendous amount of uncertainty out there. But once again, any time you give a customer a price increase, they're going to do everything possible to evaluate you with who the other vendors are to see what the true story is. It doesn't leave a good taste in anybody's mouth, that's for sure.

Sure. I understand. Well, that's helpful. You had discussed some of the performance for your different product groups, and I think that the comparison was year over year. Is it possible if we can get some color in terms of the performance versus the June quarter?

I think it's kind of misleading. I could go over all, we always say if you look at the three groups, the mature groups at Bel--the circuit protection, the interconnect and the magnetics--we always talk in the range of 3% to 6% growth. We feel the big driver for us going forward is going to be the modular group. And this was kind of hitting a little bit in the last quarter because we had a major project with IBM on a Blue Gene computer. And so it was just a big run-up last year, and that's kind of, there's not been, IBM's not selling too many Blue Genes anymore. But we do think going forward, we're hoping in the 2% to 5% in the mature pipeline, and we're hoping to get back to 10% to 15% in the power group.

Okay.

The modular group, I should say, Sean.

Sure. No, that's helpful. And then perhaps could you provide a little bit of color around lead times, where you are today? I guess they were MagJack and then for the broader firm?

Sure. Lead times, when we were having our problems about six--four or five months ago--our lead times had stretched out to 18 to 20 weeks. And currently our lead times are about 10 weeks and maybe dropping a little bit before the next month or so. But I think at this point, because of the uncertainty, we are definitely keeping our lead times--once again, we're more concerned at this point with our margins than cutting down lead times. And that's why we eliminated the overtime.

So I think at this point we're thinking that 10 weeks is a good point to be at until we get a little more clarity on what 's going to happen with the world.

Okay. And that 10 weeks is just specific to MagJack?

Well, that's our--I would say MagJacks, modulars, circuit protection, and generally the interconnect products. Those two groups, anywhere from stock to six to seven weeks. Material content is not that difficult.

When we look at the other groups, we're dealing a lot more with--you know, ICs have longer, stretched-out lead times and their components are a lot more stretched out.

Okay. And then lastly, if I could perhaps get a little bit of color. Did you have a 10% customer again in the quarter?

Yes. I think we might have had more than one.

Would it be possible to, for the second 10% customer, at least, an indication in terms of what that end market is that that customer's in?

I think everybody knows that the customer is Cisco. See how honest I am today with you, Sean?

Cisco being the number one?

Yes.

And the number two being--?

I don't know. I'm not going to that far. Come on, Sean. I would say generally, though--.

It was just a way to get a sense of the market, which, you know, are we talking about between storage--?

It's computer, computer peripheral, and telecommunication. So the problem we have again is Lucent and Avaya. Are they networking companies or are they telecommunication companies, or are they the same company? That's the gist of our product is that networking, telecommunication type of companies.

Okay. All right, that's very helpful. Thank you.

Thank you, Sean.

There are no further questions at this time.

All right. I want to say we appreciate everybody calling us up, and thank you for joining us. I'm looking 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 lines. Thank you.