Bel Fuse Inc (BELFA) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Bel Fuse First Quarter Results Conference Call. This call is being recorded. With us today from the Company is Bel's President and CEO, Mr. Daniel Bernstein and the Vice President Finance, Mr. Colin Dunn. At this time, I would like to turn the call over to Mr. Daniel Bernstein. Please go ahead, Sir.

Thank you [Francisca] and I'd like to welcome everybody to our conference call to review Bel's first quarter 2010 results. Before we start, I'd like to hand over to Colin Dunn, our VP of Finance. Colin?

Thanks, Dan. Good morning everybody, thanks for attending the call.

As normal, I'll start off with our forward-looking statements. Except for historical information contained in today's news release and this conference call, is the matters discussed including statements regarding the Cinch Connector acquisition, future profitability, future performance and efficiency of our workers 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 integrating the Cinch Connectors business into the Company's existing business, 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 these 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. That concludes the forward-looking statements. [I have to say safe harbour].

Now, I'll turn to our financial results. On January 29, 2010 we completed the acquisition of Cinch Connectors, which has materially impacted Bel's results of operations during the first quarter of 2010. This morning, I will discuss our results with and without the impact of Cinch Connectors to aid in comparisons with prior periods.

First of all, the sales. For the first quarter of 2010, our sales were $56.1 million, which was up 28% from the $43.9 million that we reported in the first quarter of 2009. Excluding the $9.9 million of Cinch first quarter sales, Bel's first quarter 2010 net sales increased 5.5% versus the first quarter of 2009. As usual, and we have looked at this over the last three years, so this has now become I think a permanent trend.

Bel's first quarter sales were down 5% from the preceding quarter that ended December 31, primarily due to the shutdown of our factories for the Chinese New Year holidays during February. Sales for the first quarter of 2010 in our magnetics, circuit protection and interconnect product groups increased as compared with the first quarter of 2009. However, sales were lower due specifically to one significant customer in our modules product group.

Cost of sales and net results. On an unaudited GAAP basis, Bel ended the first quarter of 2010 with a loss from operations of $66,000 and after-tax earnings of $32,000. These were relatively lower than our income from operations of $2.3 million and net earnings of $800,000 for the first quarter of 2009.

To take these results on a comparable basis, non-GAAP income from operations for the first quarter of 2010 was $1.6 million as compared to non-GAAP loss from operations of $1.8 million for the first quarter of 2009. Approximately half of the first quarter 2009 non-GAAP income from operations was contributed by Cinch.

Severance, inventory related purchase accounting adjustments and professional fees associated with the Cinch acquisition have been excluded from non-GAAP income from operations for the first quarter of 2010, while severance, restructuring charges related to the closure of our Westborough, Massachusetts facility and a gain on the sale of real estate have been excluded from the comparable 2009 non-GAAP loss from operations numbers. A reconciliation of GAAP to non-GAAP measures is included in our press release of our earnings today.

Turning to selling, general and administrative expenses. A percentage relationship of selling, general and administrative expenses to net sales decreased from [17.4%] during the three months ended March 31, 2009 to 16.3% during the three months ended March 31, 2010. The dollar amount of selling, general and administrative expenses for the three-month ended March 31, 2010 increased by $1.5 million compared to the same period last year.

On a comparable non-GAAP basis, which excludes Cinch SG&A expenses, severance and acquisition related costs, Bel's SG&A expenses as a percentage of sales decreased from 16.9% to 16.1%. This decrease resulted primarily from that continued focus on cost containment, particularly travel costs, as well as general and administrative salaries and fringe benefits as a result of staff reductions completed in various locations during 2009.

Turning to the balance sheet. Cash and equivalents. At the end of March 2010, our cash, cash equivalents, short-term investments and securities was $79.9 million, which was $44.3 million lower than at December 2009 where the balance was $124.2 million. The decrease in cash resulted primarily from the payment of approximately $40 million for the Cinch acquisition and working capital changes during the first quarter of 2010 mainly on an increase in inventory. The Cinch acquisition was funded entirely from cash on hand.

Receivables and payables. Receivables net of allowances was $41.2 million at March 2010 compared to $34.8 million at December 31, 2009, an increase of $6.4 million. Excluding the impact of the Cinch acquisition, receivables decreased by $100,000 during the first quarter of 2010. Our accounts payable at March 31, 2010 was $19.2 million, an increase of $2 million from December 31, 2009. Excluding the impact of Cinch acquisition, accounts payable decreased by $300,000 during the first quarter of 2010.

Turning to inventories. At the end of the first quarter 2010, our inventories were $43.6 million compared to $31.8 million at December 31, 2009, an increase of $11.8 million. Excluding the impact of the Cinch acquisition, inventories increased by $4.5 million during the first quarter of 2010.

Now, a couple of other balance sheet comments before I finish. For the three quarters ended March 31, 2010, capital spending was approximately $600,000 while depreciation and amortization was $1.9 million. Our per share book value at March 31, 2010 was approximately $17.88 including goodwill and intangibles. If we exclude the intangibles and goodwill, our per share value was $15.92.

That's the end of my comments. Now, I will hand the call back to Dan Bernstein.

[All right Francisca], can we open up the floor for any questions?

(Operator Instructions) And our first question comes from Steve Ferranti with Stephens, Inc. Your line is open.

Hi guys. Good morning and congratulations on closing the Cinch deal.

Thanks, Steve.

I wondered, maybe you can -- we can start by -- if you could maybe just walk us through what you are seeing on the demand side, in each of your, sort of major product groups, that would be probably a helpful way to start off.

Again, we see strong demand across all our product groups and everything we hear from our suppliers, there is strong demand. We have seen some suppliers like the [IC people] on allocation. So, if you look, the only product group -- I would say they all have pretty much very strong demand. The biggest problem we're facing is our magnetic product group where we make the integrated and magnetics -- integrated connector magnetics, the MagJacks. That's a labor-intensive product and it's very difficult to hire and train people, and that's where we have the longest lead times of probably 30 weeks and we're trying to work down that. But everything we see is very strong. All our customers have assured us there's no double ordering and they see everything strong for the balance of the year. However, I think, based on historical data we tend to be a little bit more pessimistic.

And did you guys build backlog from December going into the March quarter?

Yes, we just recently in the last week, our book-to-bill have started to decrease a little bit. But historically our billings were greater -- our bookings were certainly greater -- our billings, I am sorry.

Right, right. Okay.

And it's only in the recent week, in the last three weeks that our backlog has probably come down a little bit.

Okay. And is that because you brought these new workers on board in China now. Are you starting to see the fruits of that effort and is the effect of that to sort of work down backlog and lead times?

We are seeing a little bit more efficiencies - better efficiencies in our operations. However, from a margin standpoint, we are concerned because starting in May, the new laws in China regarding language is going to effect us. So, that's why they are also mentioned. Colin, you want to follow it up or --?

Yes. We had approximately a 20% increase in labor, which is mandated by Beijing, which will kick in on the 1st of May. So, the minimum wage goes up approximately 21% where we are and of course, when you roll that through with the overtime rates, that is a huge increase to our cost in China. We will have no choice but to roll those cost increases through to our customers and we are in the process of, over the next few weeks, of notifying our customers of that information.

Okay. So, the effective margins then should be mitigated by the price increase?

It will take a little while for it to get in place. We will give them a little bit of breathing space. Unlike some of our suppliers, we've had situations where some of our suppliers have come to us, major suppliers have come to us and said, giving us about two weeks notice and saying effective May 1 your prices are going up x percent and if you don't accept it, we will cancel all your orders, but it's not negotiable. We are not going to be quite that callous but we will be fairly firm. So, I would say it will take us 60 days to probably to get most of it in place.

I see. And what are you guys seeing out on the sort of competitive front these days in terms of -- is everybody constrained still, in terms of your competitors or are you starting to see maybe some additional capacity online where some other folks trying to -- maybe trying...?

We would think that if we saw more competitors to come online that our backlogs would drop. But we haven't seen that. So, our bigger concern is more of a double order process and then they are going to cancel right before shipments. And I think that's a greater concern. And again, every customer we meet with unequivocally says they don't have any double orders on the books. So, that's what's very exciting, that we would hope -- but there should be a leveling effect anyway. If our backlog goes from 30 weeks down to 28, then hypothetically our competitors should go from 25 to 28. But at some point, you would think it all levels out, but we -- so that's why we think we don't see any -- that many inroads with our competitors yet.

Gotcha. One last one from me. I guess for Colin, what do you see as sort of the normalized run rate for SG&A here going forward, now that we folded Cinch into the mix here?

I would say, well, one thing you got to remember is, Cinch, we only had it for two months out of the quarter. So, we will have a little bit -- we'll have another 50% (inaudible) on a standardized rate. We did have -- if we look at the non-GAAP numbers, because in the GAAP numbers, we did have some severance costs, that some of those rolled through in G&A at Cinch. I think we are pretty skinny on G&A from a corporate point of view. Part of it is variable and so that will fluctuate and the biggest variabilities we've, the two biggest variabilities we have, sales commissions which obviously fluctuate directly with our sales volumes and they tend to be roughly 5% on most of that sales. The other major variable item we tend to have, legal expenses, related to these lawsuits that just seem to be hanging around and we're having trouble getting rid of. We have taken a lot of steps to mitigate our legal expenses on a monthly basis and we have brought in new folks to manage that. But other than legal expenses and the variable commission, we shouldn't have that much else. I think we are pretty much [bare bones] on G&A now, Steve.

Okay. And what would you say your -- what was the pro forma number for selling and admin expense in the March quarter?

We had -- the total, as we go to the normalized, taking out any abnormal items, the G&A for the first quarter was $8.8 million.

Okay, that helps. We just wanted to make sure we were calibrating right on our model.

Yeah. And let me just check one other number. If I took out Cinch, we would have been at $7.43 million.

Okay, good deal. I will stop taking up so much time and pass along. Thanks.

All right. Thanks, Steve.

Thank you. Our next question comes from Sean Hannan with Needham & Company. Your line is open.

Hi guys, [Conor Eve] filling in for Sean. I had a few questions here, so bear with me. Could you comment specifically on your lead times for MagJack, and how long do you expect them to be staying at these stretched levels?

Our internal lead-time was probably running from 30 to 32 weeks. At this point, we'll probably project it to get down to maybe 22 weeks September 1. That's pretty aggressive. However, a lot depends on the bookings that go [forward]. It was our goal initially after the Chinese New Year to get down to about 18 to 12 weeks by June 1. But the way the situation has become more difficult and we've seen a lot more orders than we projected.

And where do you guys stand in terms of hiring new workers? You spoke about passing some prices forward to your own clients. Comment on that first and then I'll follow up with a question.

Yes. We hired approximately 14, we had a very good return rate; come along, we had a very good return rate from -- after Chinese New Year, much better than we've had, not much better, but it was good and a little better than we've had in previous years. It was getting very close to 90%, which is I think in the industry is remarkable. Since then we've hired, you get them back and some of them leave. And net hirings since Chinese New Year, which was in February, is about 1400. We continue to hire, but like I think last week we had a net loss in heads. A lot of it just depends on who else is hiring in the area at the time. We are hopeful that [of at least] higher wage increases to go into place that maybe that will help bring in some more people, but we are not certain on that. We have -- as you know, we did take over a factory and buy a new factory down at the Vietnamese border in August of last year. We continue to add people there. We have a couple of folks that do some component lining for us and supply us some sub assemblies and they've been adding a number of people. But, it's still day-to-day, trying to highlight the number of people that's just not around and we are trying everything we can, but we do have an aggressive program. We have a lot of bonuses in place. We've bonuses for people to bring in their friends, we've bonuses when people arrive, we've bonuses when they stay 60 days, 90 days and so on. So, we are trying everything we can, but we and the rest of the industry are still struggling.

Do you think you could ballpark if any -- if you've forgone any revenues due to labor constraints?

Well, yeah, we could probably add another -- I think with our current facilities, if we had to waiver maybe another 25%. [Both hands], Dan and I both agree it would be 25% higher.

Great. Also, could you provide an update with your relationship with [EMEA] to the degree you were shipping versus where you expect to be full volume and it is fully ramped in about three months?

We are producing everything they're selling at the moment, and there are no holdups there. We have a very strong program with them, I know they are looking for additional customers. So -- but our relationship is very strong and expect huge volumes, but certainly meaningful volume to us and I think a meaningful volume for them also.

Lastly, any 10% customers in the quarter, and what segments were they in if there were any?

We always have some customers that fall into that category, but typically they are the contract manufacturers who are the ship-throughs and they could be -- really are, not could be but we know they are, they are producing to several principles. And so you name two or three, which I am not going to name but they would be purely the contact manufacturers.

Give an opportunity to introduce any new 10% customers in the June quarter.

No.

Great guys, I appreciate your help.

Okay thanks, Conor.

Thank you. (Operator Instructions). Our next question comes from [Mike Merry] with [Merry Asset Management] your line is open.

Hi, I had a couple questions. What should Cinch do in a normal year in terms of operating or pre-tax profit?

We're still working our way through that, we would think they're going to be in the $3 million to $4 million range.

In terms of net or in terms of operating?

In terms of operating.

Okay, so you paid about 10 times operating profit for Cinch?

Yes.

Okay. And if I put back in this 25% revenue, which I understand we don't have the labor to perform right now, but if I put it back in that gets you pretty close to pre-recession demand levels, is that accurate?

Yes.

Okay. And then, I am not sure I understood in terms of where we were on the labor situation, it sounded like we had 1400 new hires but then you lost some?

We lost a couple of hundred previously.

No, I mean what we are just trying to say is, it's a very fluid situation to trying to hire these many people [here] in China. As long as we get down to 12-week lead-time, we need to probably hire another 3,000 workers through all our different operations. And [as of now], this is going to be a pretty tough task.

Okay. So, tough task meaning we interpret about what a quarter or two to hire --?

Generally it's a lot easier hiring people after Chinese New Year because they return. What people begin [setting] their job it's difficult to recruit people. So, generally, the easiest time to hire people is right after Chinese New Year, because farther you get away from Chinese New Year the more difficult it becomes. And then when we hit the September or October time frame, it is almost impossible to track down [laborers] mostly from the north of the factories.

Okay, so it doesn't sound like we're likely to get these other 3,000 employees anytime soon?

I would say that's a good guess, a better guess. That's pretty much a fact.

Okay. Is there anything else you can do about that, or have you discussed any other options?

Again, we have looked at and we all -- that's always [there in some] facility outside of Southern China where the language is more stable -- and we are opening up a -- we have one -- we started with 500 people, we are up to about 1200 people. We are opening up a new operation within a two-mile radius of that facility where we can go up to 500,000 people. So we are still very aggressive, the people that wind some of the components for us, we are in the process now of changing our pay structure for them. So, we have taken steps, we will be taking steps to [charge] over the lead-time.

Okay, thanks very much.

Okay, thanks Mike.

Thank you, and I'm showing no further questions at this time.

I appreciate everybody calling us and hopefully we will have better results next quarter and thank you for taking your time to speak with us today.

Ladies and gentlemen thank you for participating in today's conference, this does conclude the program, you may all disconnect, and everyone have a wonderful day.