Bel Fuse Inc (BELFA) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Bel Fuse fourth-quarter results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Dan Bernstein, President and CEO. Sir, you may begin.

Thank you, Todd, and welcome to our conference call to review Bel's fourth-quarter 2011 and year-end 2011 results. Before we start, I would like to hand over to Colin Dunn, our Vice President Finance. Colin?

Thanks, Dan. Good morning, everybody. Before we begin I would like to read the following Safe Harbor statement.

Except for historical information contained in this telephone call, the matters discussed on this call, including statements regarding the effects and costs of and the anticipated savings resulting from Bel's streamlining activities, the timing required to implement such streamlining activities, and anticipated changes in product offerings, are forward-looking statements that involve risk 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 effects 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; uncertainty 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 that 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 turning to our results. Sales. Year-over-year for the fourth quarter of 2011 our sales were $68.6 million, down 18% from the $83.7 million that we reported in the fourth quarter of 2010. Compared to the third quarter of 2011, sales declined by 9.6% with decreases across all major product lines.

We continue to experience significantly lower demand for integrated connector modules in comparison to prior periods. Although integrated connector module backlog has increased compared to the third quarter of 2011, it remains significantly below the highs we saw in 2010. Compared to the third quarter of 2011, the order backlog has decreased across all other product lines.

Cost of sales and net results. As noted in the second and third quarters, a significant shift in the nature of our business away from labor-intensive magnetic supplies towards more value-added modules products continued to have an impact on our gross margin during the fourth quarter of 2011. The products in our modules group, which include smart grid, powerline, and DC-to-DC converter modules, have a higher material content which results in the lower profit margins than our other product lines.

Although we have seen some moderation in commodity prices regionally, higher cost of commodities including gold, copper, and petroleum-based plastics and government mandates for higher minimum wages and overtime requirements in China continued to keep manufacturing costs high in comparison to the prior year. And fixed overhead costs representing a higher percentage of sales due to the current low level of magnetics production at our Chinese factory. The combination of these factors led to an increase in cost of sales from 78.5% of sales in the three months ended December 31, 2010, to 85.1% of sales in the three months ended December 31, 2011.

On an unaudited GAAP basis, Bel reported income from operations of $1.1 million and after-tax net income, net earnings, of $100,000 for the fourth quarter of 2011. Last year we reported income from operations of $100,000 and an after-tax loss of $1 million for the fourth-quarter 2010.

To state these results on a comparable basis, non-GAAP income from operations for the fourth quarter of 2011 was $1.3 million compared to non-GAAP income from operations of $8.2 million for the fourth quarter of 2010. Restructuring charges and a gain on disposal of property, plant, and equipment has been excluded from non-GAAP income from operations for the fourth quarter of 2011, while various amounts consisting primarily of litigation charges have been excluded from the comparable 2010 non-GAAP income from operations.

This increase in fourth-quarter 2011 versus 2010 non-GAAP operating income was attributable to lower sales revenue and combined with the decrease in gross margins that I described above. A reconciliation of GAAP to non-GAAP measures is included in our press release today.

Turning to selling, general, and administrative expenses, on a comparable non-GAAP basis the dollar amount of selling, general, and administration expenses decreased from $10 million during the three-month period ended December 31, 2010, to $9.2 million for the fourth quarter of 2011. Due to the year-over-year decrease in fourth-quarter revenue which I discussed earlier, SG&A as a percentage of sales for the fourth quarter of 2011 was 13%, up from 11.7% of sales through the fourth quarter of last year.

Turning to taxes, Bel recorded a provision for income taxes of $1.1 million for the three months ended December 31, 2011, compared to $1.2 million for the three months ended December 31, 2010. This was mainly due to taxable operating profits in the US, combined with operating losses recorded in Asia, with minimal tax benefits in both [years].

The Company's effective tax rate, which is income [tax dilution], as a percentage of earnings before income taxes was more than 90% for the three months ended December 31, 2011, and exceeded 100% for the same period of 2010. The Company's effective tax rate will continue to fluctuate based on the geographic segment in which the pretax profits are earned.

Of the geographic segments in which Bel operates, the US has the highest tax rates. Europe's tax rates are generally lower than the US tax rate, and Asia has the lowest tax rates. The Internal Revenue Service audit of our federal tax returns for the years 2004 through 2009 is nearing completion, and we do not expect it to have a material impact on our results.

Cash and equivalents, on to the balance sheet. At the end of 2010 our cash, cash equivalents, and investment securities were $94 million, which was $8.4 million higher than our December 2010 balance of $85.5 million. The increase in cash resulted primarily from earnings and favorable operating cash flows, partially offset by the posting of a total of $13 million in the form of a supersedeas bond that to the Court in the Eastern District of Texas, while the previously disclosed SynQor case is on appeal to the United States Court of Appeals, as well as the payment of $3.2 million in dividends and $2.0 million of capital expenditures.

Receivables and payables. Receivables net of allowances was $39.1 million at December 31, 2011, compared to $53.3 million at December 31, 2010, a decrease of $14.2 million. Accounts payable at December 31, 2011, were $19 million, a decrease of $2.2 million from December 31, 2010. At the end of December 2011 our inventories were $53.4 million, down $3.6 million from the December 2010 level.

Other balance sheet comments. Our capital spending for the three months ended December 31, 2011, was approximately $700,000, while depreciation and amortization was $2.2 million. Our per-share [book value] at December 2011 was $18.72 when we include goodwill and intangibles. Excluding intangibles and goodwill, our per-share value was $17.45.

On the outlook, as we proceed into 2010 with shortening lead times, we expect to see continued price pressure.

Just some general comments. In addition to streamlining our operations, we have begun to focus our product development efforts on non-commodity products. This major effort will be in the module product line in both power and value-added products, and the mil/aerospace products found in our interconnect product line. Our acquisition strategy has refocused our companies to produce such products because we believe they provide the greatest opportunity for balanced long-term growth and profitability.

Now I will turn the call back to Dan Bernstein.

Can we open up the call for questions at this point?

(Operator Instructions) Zach Larkin, Stephens Inc.

Good morning, gentlemen. Thanks for taking my call. First off, Colin, I wondered -- do you have the segment revenues for the quarter?

Let's just (inaudible) we have.

Just one minute, Zach.

No problem.

We had them. Zach, let's answer another question while we just (multiple speakers).

Okay. While you are looking for that, I wondered if we could get a little bit more color on the restructuring activities. Is there anything specific that you will be working on? Things we should look for? And also the way you think that it might flow through expense lines as we move through the year.

Okay. Colin, you want to --?

Yes, it's -- we can't go into a lot of detail because some of these are related -- some of the issues we undertake [though] -- we've sort of a (technical difficulty) in many different segments, if you will, and affect facilities, different facilities and plants and so on and (inaudible) still are subject to some regulatory approval.

But most of the expenses will be sort of back-end loaded through the year. So really not very much in the first quarter; a little bit more in the second quarter; and we really expect the bulk of the expenses to be in the third quarter.

Okay. Are you going to report those as a line item? Or are there going to be SG&A or OpEx impacts at all?

They're going to be all over the map.

Okay.

The bulk of (inaudible) they will [all] be in cost of sales and G&A. But I think probably thinking about it more likely mostly in G&A -- in cost of sales.

Zach, would you like the sales breakdown by quarter or by 12-month period?

Quarter would be fantastic.

Okay. So for the fourth quarter our modulars is 2.883. Magnetics is [21,407]. Interconnect was [24,341]. And circuit protection [2,011].

211 for Circuit?

2,011.

Okay. That's what I thought. Perfect. Then also just maybe if you could talk a little bit more on magnetics. Obviously it's continued to be under pressure. You're shifting focus into more of the module activities.

Do you expect the pressure -- I mean any relief in sight on magnetics at all, or just continued (multiple speakers)?

Again, historically a lot depends on lead times. When you have shorter lead times you do see a lot more price pressure. However, one of our major customers have allowed us to sign up for an 18-month agreement, which allows us to look at materials a little bit different and look at stocking differently and running a lot more efficiently. So that should help out a lot.

But we do think that historically we have been a market leader. We have been single source for many customers, and there we are seeing a lot more pressure. So -- and we do think that's going to continue.

I don't know if the lead times do get stretched out, but I believe that [then] that price pressure should ease.

Then just one final question, if I may. Obviously cash balances remain robust even in difficult situations. Do you guys have any thoughts or plans for use of the cash?

(inaudible) that one-time dividend, but somehow the Board doesn't want to make me rich. But we really have been focused on the acquisitions, and we feel for the growth in the Company -- we had conversations with the Board yesterday, should we even increase our dividend. But we think that the best return we possibly could get is through acquisitions, and that's where we really are focused and will use the funds for.

Okay, thank you very much.

Sean Hannan, Needham & Company.

Good morning. I was actually looking to see if we could dive back into that streamlining cost actions that you've been taking, as well as the plan. So when you look at COGS and SG&A where is -- can you help us to identify where more of the impact is going to be, and how that split will transpire?

I think as I said, Sean, or indicated it is not all finalized yet. We've got some broad parameters of where we go, and obviously we've [worked] up the numbers, so we've got a pretty good handle on it. But most of it -- the vast proportion of it is going to be in COGS.

Okay.

And the [butt-ends] are going to be in COGS also. (multiple speakers) announcing to overhead people, right? This plan is to get to the core of the operations.

Great. So based on the timeline that you have put out there, we should be at a $4.4 million annualized savings run rate in December, in the December quarter? Is that accurate, or is there for some reason a lag?

That's accurate.

Okay. Then when you consider some of the product development efforts you have versus M&A, what do you suspect at this point could be more likely to contribute incrementally to your top line when you exit '12?

It would have to be through acquisitions. You know, the cash pressure we feel, what we're doing [for] product development, it's kind of a slight trade-off. The growth (inaudible) now and the growth really truly has to come through acquisitions.

Okay. Then for those products that you are focusing greater efforts around, what's the degree that you are aiming to improve that margin profile?

And could you elaborate on what you mean by value-added products? Because when I see that, some of that I think of as also similar to the Ambient business, which I believe has a lot of material content and that's not necessarily margin-enhancing.

It's not margin-enhancing, but again our point being -- is again the bottom line, not the margin, and how much profit we can make the Company. So again we know that as (inaudible) whatever you want to call it, (inaudible) making a [baby QEM], then the margins are not going to be as good as [some are] on the products. But we [feel] it's a viable business with our overhead structure and our S&T capability.

But generally our sweet spot is to look at any device where we can control maybe 25%, 30% of the bill of material and that the volumes are not [overly integrated] to get the large (inaudible) interested in.

So an Ambian was a perfect example of that, where we [offered] a lot of (inaudible) value for them. [It] really worked in the redesign of that product.

So we feel those are the opportunities. You know niche, anywhere [near] our target, [any] device, [could] be anything that gives us revenue of anywhere from $2.5 million to $5 million is probably our sweet spot.

Okay, so a scenario of taking on more contract manufacturing business is certainly within the realm.

Yes, but to where we would be pushing a lot more (technical difficulty) [to] our sales organization and passing -- you know, in [developing] an incentive system. (inaudible) all our sales people looking differently at these [best] products.

Okay. Then in terms of the actual product development efforts, are you funneling more dollar resource into R&D? Should that tick up much in '12? Or are your efforts really more laser-focused on identify products that perhaps you are already working toward?

I think at this time we will focus, but I don't see an increase in R&D possibly maybe (technical difficulty) but not substantially, and it's probably minor. I think our (inaudible) we're spending a tremendous amount of time in the AC-to-DC area, because many of our [process] we're [actually] getting into AC-to-DC product lines.

I think maybe at a certain point that we can't [fund] the cost of our acquisition (inaudible) bring in a group of people where for probably six months to a year we won't have sales but the group will cost us $1 million as they design product in that area. But at this point we are [having] focused on the AC-to-DC area with an acquisition, but that might change by next spring.

Okay. Then when you think about the balance of strategy in terms of customers, again when you think about either expanding some of the contract manufacturing services in value-add or new products, how do you think about the balanced strategy for your customers? Is it going after a new base as a larger emphasis, or is it really just a continued complement to selling to your existing base?

I think, yes, what we have, we're going to (inaudible). Again, more will be in niche markets, moving away from the high-volume telecom networking people. All our customers have just -- are so big that (inaudible) [suited] for us with them. They tend to go into the Foxconns, the [Jabils], and the Flextronics.

I think we're looking for customers again looking at (inaudible) where I think we offer a unique approach. Besides giving them very good production we help them from a financing standpoint and we really help them from a production cost standpoint.

So I think that's where we -- the more value we can add I think is where our sweet spot. And that's how I get back what we are looking at is that $2.5 million to $5 million type of product we can run through, because those are the types of products that need I think a lot more engineering design, more (technical difficulty) the other types of products.

So again, back to the question, yes; I think we are looking at niche markets and industrial markets and getting away from the high-value and networking telecom (inaudible) [for] the value-added products.

Great. That's helpful, Dan. I'm going to jump back in the queue.

(Operator Instructions) [John Hudson].

I really appreciate hearing that you are still continuing your look at acquisition possibilities aggressively. I think with the world economies as volatile as they are right now, there are certainly more risks; but I think on the other side there is even more potential.

I wanted to just encourage you and say I appreciate the direction you are going, and I also wanted to comment on Pulse Electronics. Still looks like a good potential candidate to me, and I am hoping it's part of the mix of the companies you are looking at still. I think even though the value of Pulse has gone down from where it was two years ago to Bel Fuse, it still has a lot of synergies.

I think of course it's a potential acquisition at a lower price today. And so short-term they've got a lot of problems but long-term I think it's still a great synergistic opportunity for Bel Fuse. So I am not sure if you can make any further comments than you already have, but if you can I would appreciate any (multiple speakers).

Here again the love affair between Pulse and Bel has been going on I think for 22 years. I think at this stage (inaudible) never went out and spoke to the investment community a year and a half ago. One of the things that we really try to stress with the merger of both companies, that were going to get into a very difficult marketplace, that we needed the synergies, so we could better prepare ourselves.

And in addition to getting in a more difficult marketplace, because of the upsurge after the recession, we knew that wouldn't last forever -- (inaudible) [shut in with shorter] lead time following that. This was [informed] that we were facing a lot more competition in our major [groups], our major (inaudible) which at that time was the MagJack.

Now that we do have Molex and Tyco out there competing against us, it kind of lost a lot of the glamour we were looking at with Pulse. So a lot of those synergies, I think the synergies were a lot stronger possibly two years ago than they are today as they evolve more into a wireless business. So again I think we would always like to do a friendly deal with them, and we always look forward to speaking with them. But I think at this point -- I think from a shareholder standpoint that I think there's a lot better opportunity with other companies who can give us a lot more growth potential.

Again I do appreciate the synergies. But we want to have a company that we can grow (inaudible) and I don't know if that's going to be possible.

Understand. I appreciate that you are looking at things closely and that all makes sense.

Great, and I appreciate your call.

[Ted Morrow], Senior.

My questions, Colin, I might address this to you since the question of pricing pressure came up at our investor meetings last fall. But at that time I was under the impression that there was a lessening of pricing pressure. Is there a change in the environment?

And I would assume the economies and maybe competitor pressures, but it may well be that some of the more value-added products may not be on the market yet. But can you just comment on maybe the magnitude of pricing relative to what it was back last fall?

This is Dan, and maybe I will take this one on. The (inaudible) industry is a component industry. And again, as we move more to the modular business these are going to change.

[On] the competitive business, as much as we like to say certain things, cost is always going to demand a 4% price reduction every six months. They don't care that the materials are going up in the world. They don't care if labor is going up in China. The only mantra they know is there's going to be a 4% price reduction, and I don't care how you get it.

In reality, however, when the lead times are 20 weeks they know they are not going to get it; and they're stuck; and then at that point we get increased price. However with a 12-week window which I believe deliveries are down to now, (inaudible). That margin [is really] stronger and they had a lot more leverage against us.

It's always just constant [throw] back and forth. I know it sounds crazy; because you say -- hey, shouldn't you be pricing based on bill of materials (inaudible) all that? And in reality I've been in the business over 30 years and the number-one deciding factor in our industry when it comes to pricing is definitely lead times.

And at this point in time, the lead time is short; but you don't know what's going to happen in four or five weeks. It could just change just as quick as I say this today.

So other than the timing issues there isn't a material change really in the pricing environment from a competitive standpoint?

(inaudible) [48]% reduction and we're telling our customers because of materials, labor situation in China, should be a 4% or 5% increase. So that's where they are probably -- somewhat stable I would think, but again depending on the day of the week.

Yes. Is the strategy going forward nonetheless to come out with more value-added products that might not be as commodity-driven and consequently may be a little less on the pricing?

That's our hope (inaudible) look at again. Look at product (inaudible) there's a lot more engineering design (inaudible) in it. That you don't have (inaudible) three or four competitors you're competing against. That you're looking at one or two competitors.

So that's basically the [way] we thought about the power industry. (inaudible) our major customers (inaudible) necessarily three or four competitors again. A lot of the [ausro] are really pushing into mil/aerospace business, where you are dealing with the Raytheons and the Honeywells and the Boeings of the world, where you are looking at -- it takes you two years to get designed in or three years; but once you're designed in you can get a contract for five to six years.

And the major thing you are selling is its quality, and that's number one thing we are looking at it. Yes, [we] do [things] price pressure, but that conversation (inaudible) first. That's where we're trying to migrate and focus more of our intention is again the modular group and the military/aerospace group.

Right. Great, thanks. One other just question on the subject of acquisitions. Is the environment fairly active? Is the pricing reasonable? Are there a lot of opportunities out there? Are companies maybe in any difficulty and providing some opportunity for you? What's the general macro environment for the acquisition (multiple speakers)?

Well, I think now we are -- I can tell you (inaudible) closing two acquisitions. (inaudible) probably 75%, but they should be completed by the midyear this year.

The other acquisitions again, we look at the multiples, [it's] 6, 8 times EBITDA. We are still debating, are we competing against P&E people, where sometimes they go a lot higher? Which we can't understand. But I don't think we see multiples beyond 10 or 11 EBITDA out there.

But (inaudible) again it's 6 or 8 for us. Just because we have so much cash and we're not getting money on our cash, and we might tend to be a little bit more aggressive in this, what we're calling our sweet spot now. It's a -- generally maybe a year and a half ago we might [try] a multiple of 6 or 8. We might pay a lot higher or say, hey, might not be accretive for the first two quarters but we know how we can get into a company and take out costs very quickly, and [then] it adds value to us.

One of the things that we are clearly looking at is with the Cinch acquisition, because they were kind of a bastard child of SATCOM, they didn't have much resources behind them. So [you learned]. What we are trying to do is look at acquisitions that could be nice add-ons to Cinch that we go can back in [valuating] and have [nice] (inaudible).

[Obviously] we say, hey, we are committed to this company. We have done add-on acquisitions. We are looking at new technology, and hopefully they can see us a lot better and [beyond] -- and again (inaudible). Say again, who would [allow guys] to beat against? Is it the Pulse, [Galaxy] of the world or the [Jorials] and Radialls against the world? I think I'd rather feel more confidence that I [need] to be against Jorial and Radiall, the big connector companies out of Europe when we (inaudible) power people, power [on], because you take the [yen] people.

Right. Well, great. Well (multiple speakers)

Again, so the acquisitions might take time to look, to be really positive. But again they are helping because they give a whole new oppression of Cinch and where we want to take Cinch going forward.

Great, thanks for addressing my questions.

Sean Hannan, Needham & Company.

Thank you for taking my questions again. So one question I wanted to was when you're at this point in time and looking forward and in your planning process, is there anything that was or is incremental that seems to be on the horizon that could possibly have part been part of the catalyst for the cost actions and the streamlining you are now pursuing? Other than (multiple speakers)?

I think (multiple speakers). I'm sorry. Looking out, [I'd say] (inaudible) have relented. Our MagJack sales are down by $30 million. (inaudible) roughly around $95 million, and I think they were around $65 million. So I feel -- they were $61 million.

So I feel that you are (inaudible) around $65 million, $70 million business. (inaudible) because of the competition we see out there, that it's going to be a mature cash-cow business. So how did we realign that business to be more efficient?

So that's where we are focusing a lot of our attention. There again as we try to grow Cinch after we streamline the (inaudible) division to make it more efficient to (inaudible) the business it could be cost (inaudible). So basically the major initial focus I got (inaudible) A, let's look at the MagJack group; and how do we rightsize the [copper]. And then while we are doing that and taking those costs out, how do we look at everything else in the company and make sure that everything is really as proper as it should be.

That's very helpful. Then last quarter I thought that I had heard MagJack lead times were roughly 7 to 10 weeks. And I thought that I heard today (multiple speakers).

(multiple speakers) 10 to 12 week.

Okay, so there was a slight pop, but it really hasn't stemmed the tide for a price increase?

(inaudible) I think the 8 days after Chinese New Year probably; the jury is still out. We had a [blind period] return rate of about 90%, so we're pretty confident.

Okay. And did (multiple speakers)?

(inaudible) slowed down and overnight our backlog and lead times did increase pretty rapidly.

Okay. Through the first five weeks of the quarter and considering that Chinese New Year impact, how would you say that sales are tracking thus far versus your December quarter?

I think if (inaudible) for the Chinese New Year it kind of botched us up, so we can't really apples to apples. So we've got to look, where would I be? The best time to look at it is probably March 1. [Again] the two overlap, because Chinese New Year came so early this year. But it may have screwed up the month of January; and then last year Chinese New Year was in January. So now it's just -- until we clean up both those months then we can have a good idea. (multiple speakers) I think it's (inaudible). I think it's where we are projecting that it should be close to last year.

Okay, that's helpful. Then did you have a 10% customer in the quarter and can you characterize the nature of that customer?

We had one customer, and I think you know who it is.

(inaudible) which had record numbers yesterday.

That's very [helpful]. All right, thank you very much.

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

All right. Once again we appreciate everybody joining us and hopefully we look forward to speaking to you again. Thank you for your time.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may now disconnect and have a wonderful day.