Bel Fuse Inc (BELFA) 2017 Q4 法說會逐字稿

Good day, and welcome to the Bel Fuse, Inc. Fourth Quarter and Full Year 2017 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Tiffany. Joining me on the call today is Craig Brosious, our Vice President, Finance; and Lynn Hutkin, our Director of Financial Reporting.

Before we begin the call, I'd like to ask Lynn to go over the safe harbor statement. Lynn?

Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following safe harbor statements. Except for historical information contained on this call, the matters discussed on this call, such as statements regarding the amendments of the company's credit agreement, the possibility of future acquisition, the repositioning of the Cinch Connect -- the historic connectors business, potential growth in the company's commercial aerospace business and the potential impact of increased backlog, are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Actual results could differ materially from those projections.

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 factors that rely on our products; the effects of business and economic conditions; difficulties associated with integrating recently acquired companies; capacity and supply constraints or difficulties; product development, commercialization 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; our ongoing evaluation of the consequences of the U.S. Tax Cuts and Jobs Act; 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.

We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our release.

I would now like to turn the call back to Dan for a general business update.

Thank you, Lynn. Before going through the financials, I want to provide a brief update on how the businesses did from the operation standpoint this quarter and what we see going forward.

Sales during the fourth quarter were $119.9 million, up 1.2% from the fourth quarter of 2016, led by sales growth within our Connectivity Solutions group of 8.1%. This was partially offset by the decline in sales at our Magnetic Solutions products of 1% and our Power Solutions and Protection group of 3.3%.

While sales increased during the fourth quarter over last year, our bottom line was unfavorably impacted by the following items: an $18 million increase to our TARP provision related to the new tax reform; $1 million of incremental interest expense related to the acceleration of deferred finance costs at our prior credit facility in connection with our refinancing; inventory-relating charges totaling $2 million, which had 170 basis points impact on our gross margins for the quarter; and a $1.1 million increase in consulting fees related to our ERP implementation. As many of these items are not expected to reoccur in 2018, we anticipate improved profitability going forward.

Looking at the full year, we are pleased that 2 of the 3 product groups showed year-over-year sales increase from 2016. Our Magnetic Solutions group closed the year with $5.8 million increase in sales over 2016 levels, largely due to our new product introduction with our ICM and Signal Transformer product lines. We have been expanding the presence of our magnetic products through our distributor channels, which also continue to grow year-over-year sales growth.

Our Connectivity Solutions group had year-over-year sales growth of $1.5 million. Our Cinch business increased revenue by $7.1 million compared to 2016, led by a strong demand for our active optical products using flight-grade, high-speed communications and encrypted (inaudible). The top line growth in Cinch was also aided by more breadth and depth of our products going through distribution channels throughout the year. These gains on Cinch side were largely offset by a $5.6 million decline in sales within our Stewart Connector business due to customer consolidation in late 2016. There has been renewed focus on repositioning the Stewart's business, which has led to a $1.5 million or 43% increase in Stewart backlog since 2016.

Our Power Solutions and Protection group had yet another challenging year in 2017, with a $15.8 million decline in sales in 2016. Much of that decrease related due to a $10.1 million drop in sales from our NPS product line, which previously divested. Sales of our upfront -- front-end board -- I'm sorry. Sales of our front-end and board-mounted power products declined further in 2017 as large OEM customers continue to have lower demand for their hardware products. These declines were offset by growth within our Power Europe Group in Italy, which generated $3.1 million of higher sales related to marine and broadcast applications.

Our circuit protection business has also experienced much success in 2017 with better utilization of our distribution channels yielding of $1.2 million or 11% increase in circuit protection sales compared to 2016. Although our 2017 sales were not very impressive from the overall Power Solutions and Protection group, we did see a turning point in the fourth quarter as that was the first quarter since 2014 acquisition of Power Solutions business, where we saw a year-over-year growth excluding the effects of the NPS divestiture.

On a regional basis, in Europe, increased sales by $3.2 million or 4.2% increase in 2017 as compared to 2016. Sales in North America decreased by $10.9 million or 4.3%. And sales in Asia were lower by $770,000 or a 5% decrease.

On a consolidated basis, the company's backlog has increased to $146.5 million at December 31, 2017, which represents a $33 million increase or a 29% increase from its level at December 2016. While we're unable to predict the effect that this increase will ultimately have on 2018 sales, it's a good parameter we're well positioned for organic growth in the future periods over the next 4 quarters.

At this point, I'd like to turn over the call to Craig.

Thanks, Dan. As previously mentioned, sales during the fourth quarter were $119.9 million, up slightly from the fourth quarter of 2016. Gross profit margin declined to 18.4% in the fourth quarter of 2017 as compared with 20.7% in the fourth quarter of 2016. This was largely due to $2 million of inventory-related adjustments recorded during the fourth quarter of 2017.

Our selling, general administrative expenses were $21.2 million or 17.7% of sales as compared with $16 million or 13.5% of sales in the fourth quarter of 2016. The $5.2 million increase in SG&A costs from last year's fourth quarter resulted from several factors. Foreign currency gains of $2.7 million recorded during the fourth quarter of 2016 did not recur during the fourth quarter of 2017. In addition, there were incremental costs in the fourth quarter of 2017 related to our ERP system implementation and higher professional fees related to tax consulting and the adoption of the new revenue recognition standard as compared to the 2016 period.

On a go-forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near term, barring any significant fluctuations in foreign currency. As a result of these factors, we generated income from operations of $708,000 in the fourth quarter of 2017 as compared to $7.6 million in the fourth quarter of 2016.

Income from operations in the fourth quarter of 2016 also included $1 million gain on the sale of a property in San Diego, which had a favorable effect on last year's operating income. Interest expense was $2.3 million in the fourth quarter of 2017, up $900,000 from the same period last year. During the fourth quarter of 2017, we refinanced our credit agreement, which caused us to accelerate $1 million of amortization related to our prior deferred financing costs. The impact of higher interest rates in 2017 was mitigated by our lower debt balance compared to 2016.

The terms under the new credit facility improved our pricing grid over the new 5-year term, which should help to offset increases in the LIBOR rate. Our effective tax rate for the fourth quarter of 2017 was a provision of 1,219% compared to a provision of 46.9% during last year's fourth quarter. The change in the effective tax rate was primarily attributable to an $18 million impact related to the U.S. tax reform recorded during the fourth quarter of 2017. This consisted of a $16 million transition tax on our accumulated foreign earnings and incremental tax provision of $2 million related to the revaluation of our deferred tax assets due to the lower U.S. corporate tax rate.

Based on a 2-year average of where our profits have historically been earned, we are estimating that the reduction in the U.S. corporate tax rate offset by the effects of the GILTI tax on our low tax foreign income will result in an estimated global effective tax rate of between 17% and 19% for 2018.

Loss per share for the Class A common shares was $1.66 per share in the fourth quarter of 2017 as compared with earnings of $0.27 per share in the fourth quarter of 2016. Loss per share for the Class B common shares was $1.74 per share in the fourth quarter of 2017 as compared with earnings of $0.29 per share in the fourth quarter of 2016.

On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares was a loss of $0.09 per share in the fourth quarter of 2017 as compared with earnings of $0.31 per share in the fourth quarter of 2016. On a non-GAAP basis, EPS for Class B shares was a loss of $0.10 per share in the fourth quarter of 2017 as compared with earnings of $0.33 per share in the fourth quarter of 2016.

And now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at December 31, 2017, was $69.4 million, a decrease of $4.1 million from December 31, 2016. During 2017, we made net payments of $18.8 million towards our outstanding debt balance. We also used cash for capital expenditures of $6.4 million, dividend payments of $3.3 million and interest payments of $4.4 million.

Accounts receivables was $78.8 million at December 31, 2017, as compared with $74.4 million at December 31, 2016. Days sales outstanding was 60 days at December 31, 2017. The increase in our accounts receivable balance was largely due to the higher sales volume in the fourth quarter of 2017 as compared to the fourth quarter of 2016, coupled with an increase in DSO, which was primarily a function of the timing of payments from larger customers in our Asia segment.

Inventories were $107.7 million at December 31, 2017, up $8.8 million from December 31, 2016. The increase was seen mostly in raw materials and finished goods to accommodate the increase in bookings during 2017. Accounts payable was $47.9 million at December 31, 2017, up slightly from December 31, 2016, due to the increase in raw material purchases.

Bel's total outstanding debt as of December 31, 2017, was $125 million, excluding deferred financing cost. This represents a net decrease of $18.8 million from our 2016 year-end debt level. Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of stock, outstanding was $13.13 per share at December 31, 2017, as compared to $13.17 per share at December 31, 2016.

And now I'd like to turn the call back to Dan and open it for questions.

Tiffany, at this point, we'd like to accept questions from our listeners.

(Operator Instructions) We'll take our first question from Sean Hannan with Needham & Company.

First thing, I'm not sure if I perhaps had missed in the prepared comments. What were the explicit revenues for each segment in the quarter?

I can give that to you, Sean. Are you looking for the fourth quarter or the full year?

Fourth quarter.

Fourth quarter, sure. So for Power Solutions and Protection, fourth quarter was $39.4 million; Magnetic Solutions is $38.5 million; and Connectivity Solutions is $42 million.

Okay. All right. And then in terms of that inventory affect that you had, it sounds like for the most part, you're not expecting that to continue or repeat in any manner in the next few quarters. Is that accurate? Or is it just a much smaller magnitude? How do we think about that?

Well, we continue to evaluate our inventories for net realizable value. In the fourth quarter, we -- in other words, say, it's a higher-than-normal adjustment that we had in the fourth quarter. We would have adjustments every quarter, but this was just kind of an outlier in terms of the magnitude.

Okay. And what specifically drove that? I mean, is there any further detail we can get to understand exactly what happened there?

Well, there were 2 things. There was -- one was related to the valuation of some inventory, where we had to make an adjustment to our purchase price variance allocation to the inventory -- between cost of sales and our inventory balance. So that was an item that kind of arose as we were reviewing the year-end balances. The other item was some inventory that we had a reserve on in prior periods. Again, expecting that we would be able to do some rework on some products that whether the design -- there was an incremental design change, and we thought, we'd be able to rework our existing inventory to satisfy the customer requirements. As time went on, the customers made some additional incremental design changes and we made a decision at the end of the year where we felt that it was going to be too costly to rework that inventory so we basically reserve for the remainder of that product.

Okay. All right. That's helpful. All right. And so next question just in terms of looking at the backlog here, the first that I'd have is, can you remind us -- as I think about your backlog and try to think about where the revenue opportunity is as we all have our models, say, for '18, what do you typically see as a split in revenues that come through a quarter? What comes out of backlog versus what's typical book and ship? Is there a way to characterize that for each of your segments? Don't know if it's maybe 40% out of backlog, 60% book ship, any help on that would be great.

In our magnetic segment, the turnaround is typically pretty fast. I wouldn't say all of it turns in the following quarter, but a large majority will turn in the following quarter because our lead times tend to be a little bit shorter there. In the connectivity segment, some of our -- some of these orders are either in our aerospace or military applications, and those tend to be longer-term in nature. So I don't really have a good handle on how much of our Q4 backlog will actually turn in the first quarter. And the Power and Protection segment, it's kind of -- that's kind of what's in the middle. We have a couple of large orders that are longer term in nature, but then we also have our, let's say, recurring orders, which would, again, kind of follow in the same pattern as the magnetic. So it's difficult to answer.

Okay. Well, at least, we have some perspective there. Okay. So moving on to another topic here. As we look at the costs incurred around ERP, what should we continue to factor there? And how is that overall effort going? When you folks sense that the elevated cost burden from that would be concluded, et cetera?

(inaudible)

Yes. I think the last -- the fourth quarter was -- we were making a very large push towards getting the first phase of the project completed at the end of the first quarter or late spring. We expect, probably, we'd have more expense. I don't know if it would be similar to what we had in the fourth quarter, hopefully little lighter in the first quarter. It should start to trail off in the second and third quarters.

But we're -- I think we're looking at $500,000 a quarter, and the fourth quarter was about $1 million. And we project it probably for another 1.5 year.

Okay. So 500k a quarter next 1.5 year, next 6 quarters. Okay. That's helpful.

Trust me, it hurts me more than it hurts you to take up on that. But then again, I have a BlackBerry. So what do I know, right?

Understood. All right. And so last question here, and it's really kind of been the big topic for a while. It's been referenced a little bit in your prepared comments, the Power business. What comments can you share with us in terms of understanding or thinking about or any incremental degree of enthusiasm for finally getting a much more material uptick in that revenue generation? We've been waiting for a while as a lot that you've been designed into. You're getting good indicators through increases in backlog. Just trying to get a better understanding around where you folks sit? How you're thinking about this business? Do you feel you're almost out of the woods and we're going to start picking up here?

Yes. We thought that we're out of the woods over the last year or so. So we think we're pretty well in the bushes still to be honest. You look at our backlog. We do have a -- it went from, again, in 2015, if you just look at the Bel Power Solutions, which is a large part of the Power-One, it was $32.2 million in 2015. Last year, it was $29.5 million. This year it's $34.4 million. So again, I think we have made some really good strides and good roads. What's really hurt us tremendously is the quality issues what we have at Facebook, where we think we addressed the issue properly and then something happened and we get pushed back. And you're talking about sales. That should run about $1 million a month. So we're looking at today possibly on that. We think it's fixed now, but we said that for other times. So I don't want to misuse it. But again, we can pick up $12 million from Facebook get back to our normal run rate, which we think it's going to occur now in May. That definitely helps out everything we do. Again, we do see a lot of good signs. We do see a lot of good things coming out of the data centers from doing our work at OCP. Again, but I -- until I see it, until I see consistent sales growth, I just don't want to hype it up. We are streamlining the organization a little bit more. We're taking $1 million of costs over the next 2 months at the group. So we know that, again, it's still a top priority of how do we turn around the top line growth.

So when you talk about the potential for a normalized run rate, maybe in May, and we'll see if that happens. Are you thinking about -- what kind of number? I'm assuming it's not a $12 million on top of the $39 million, but just trying to understand a little context.

I think what we're hoping for, we're like -- currently, our sales are at $110 million. I think our goal is to get back to $125 million this year would be our goal.

And that's just the Power Solutions, the acquired Power Solutions business Dan's referring to.

Yes, business. And there I think we should be getting momentum.

We'll go next to Hendi Susanto with Gabelli & Company.

Dan, could you talk about growth opportunities, new product and gross margin expectation in 2018?

I'll let -- again, we're predicting upper mid-single-digit growth in the 7.5% range, I think, we feel somewhat confident about. We do have some big opportunities in our modular group, where we do see -- it could be a possibly $10 million growth. We have (inaudible) for the product. We just don't know because it's a retail product. We just don't know how it's going to be accepted in the field. So we see consistent growth with our Fuse group. And then, of course, one of our large customers is Boeing, and we do a lot of work on the 737. So as they grow from 42 to 49 planes, we think we see upswing there. Also with the military budget that we see a lot of strengthening with the Raytheons, the Honeywells and the Boeing defense, those are opportunities that we can grow our business. So overall, I think -- and with the current backlog we have, I think we're pretty confident that we should hit that 7.5% growth. From a gross margin standpoint, Craig, do you want to touch that?

Yes. Hendi, we should be able to leverage that growth into some improved gross margins. Again, it kind of varies with our whatever line of business we're talking about. In the Mil-Aero segment, that has a little bit more leverage on gross margin than, let's say, the power protection business. But -- so I think, we would expect a 1 point, 1.5 point of margin, if we can accomplish within saying 7.5% sales growth.

And then, Dan, when you mentioned some retail products, are they consumer electronics?

They're -- again, we were working with a company that used to -- the group came out of nest, working at a new lighting.

Yes. The smart lighting application, Hendi. So it's consumer focus, but not mobile phones or anything like that.

And then, Dan, I think I would like to comment that, I think, it just sounds more optimistic than in the past in terms of growth opportunities. And I think that kudos to you.

I think a lot of that is based on our backlog. And again, looking at our backlog, again, going from -- as I said, in 2015, our backlog was $126 million. 2016 was $113 million. And today, our backlog is $146 million. So I think that gives me finally some good hope and hopefully some light through the forest now. And I think the other thing that I think is pretty exciting for us, as we mentioned in our press release, the ability to look at acquisitions, be a lot more aggressive with the acquisitions going forward with the new credit facility we have in place. So we think that's going to add a lot of growth opportunities to us also.

And then Craig, for our model, how much cash payment do you need to make to account for the onetime U.S. tax reform adjustment?

In the first year, I believe, it's like $1.3 million.

Okay. And I believe that it's like over 8 years?

It's over 8 years. That's correct.

Yes. So $1.3 million represents, I think, 8%?

8%.

Right, right.

We'll go next to [Lenny Dunn] with Mutual Trust Company of America.

I'm glad to see that you have apparently turned things around and digested that Power-One, which turned out to be just a can of worms, but pails of worms. But it does appear that you have things under control and you can now start paying down debt. I mean, this is always a debt-free company with a lot of cash. We don't need to be that. But we're recurring a lot of debt. And I get a little nervous when I hear acquisitions because you don't know for sure what you're buying, and Power-One will be a strong example of that. And if you have everything turned around and we're growing internally or not go through some time of internal growth, pay down debt a little before we start moving on more acquisitions.

I think, [Lenny], the problem we have -- and we have a pretty active board. And one of our key board members is a person called Avi Eden from Vishay. And he was responsible being with Vishay from that growth cycle of a $60 million company up to a $2.4 billion. The problem that we face in our industry is that we've always -- our customers really are not concerned with price increases and labor whatever or what happens with copper now or minimum material cost. They demand 2% or 3% price reductions twice a year. And the only way you really can get those costs to meet those demands even with organic growth of 7.5%, you'll be treading water. And the only way you really can be successful is really growing the top line, knocking out, looking at acquisitions, taking out overhead and really running a lot more efficiently. I wish I could do it with organic growth. But to be honest, to see the demands that we have out there from our customers, at 7.5%, it helps, but it really doesn't get us where you have to be. If we were having 15% to 18% growth, then I could say, hey, acquisitions wouldn't be as high as a priority as it is today. But at the current rate, I do think of that best is tread water. Hopefully that makes sense.

Well, it makes sense, but the danger of buying something unknown after the experience we had with Power-One makes me a little nervous. That's all.

That makes me nervous. I think we've learned a lot of lessons. Again, we did spend a lot of money. It really was -- came down to almost, if you look at the sales today, it was only 1x sales. So we really didn't pay a high premium for it. But from a share standpoint, the relationships we have with our customers now, what we can offer our customers and a lot of intangibles is really strengthening overall relationship with our customers. And from a power standpoint, one of the things that we never realized was when you are dealing -- generally, a lot of our products are commoditized. So a lot of times when we talk to our customers, it's price, price, price. But one thing about power, it's really a engineering design product, and it's not as price-sensitive as our other product groups are, and that's a great opportunity for us. We hope we can shine a lot better than we have in the past. So if I -- by the way if I had to do the acquisition again, I would do it again, but probably beat up the price a lot better than I did.

(Operator Instructions) And we have no further questions at this time. I do apologize. We do have a question from Hendi Susanto with Gabelli & Company.

Dan, if may add one more questions, I think there are some growth areas, such as like smart homes. You made some smart lighting and then increasing electronic contents for industrial and automotive. How should we view Bel Fuse's position in those growth areas?

I think it's too early to tell. I mean, again, the Internet of Things, harsh environment, that's where we see a lot of growth. A lot of the things that are outside that connect things together, we do think a lot more opportunities for the Stewart Connector product line. Automobiles, we really just started to scratch the surface from a circuit protection standpoint. We think there is a good growth. I think, we could do a lot better. That's one of our key areas that we look at focusing going forward is in automobile and what goes on inside the car from electronic standpoint. However, I think at this point, the journey is still half. For example, Tesla was supposed doing the model 3. I think they are supposed to be building 5,000 cars a month. And they still add 500 a month, where I think 250 going back for quality. But those are the markets we're trying to address a lot better.

So you can do that organically, inorganically? Do you have interest in acquiring companies that have components in those areas?

Definitely, yes. I think what we're looking at now -- some of the companies we are looking at now are stronger in that -- on those markets than we are. And they can give us better entree into those markets. So that's an area, but it's similar to the products we have today.

And we do have a follow-up question from Sean Hannan with Needham & Company.

Yes. Sean?

Sorry, I was on mute there. Just really quick. How should we think about an effective tax rate, as we look out to '18 here?

Yes. I mean, we look at that. And again, it's very highly dependent on where our profits are earned, but we did an analysis over the last -- looking at the last couple of years and assuming 2018 kind of mirrors those last couple of years. We think it's going to be in the 17% to 19% range for 2018.

And Sean that does include an estimate for the what's termed as the GILTI tax that the global tax on low tax foreign earnings. (inaudible) effective tax rate.

And with no further questions at this time, I'd like to turn the call back over to Mr. Bernstein for any additional or closing remarks.

Again, we thank you and appreciate you hanging with us. And again, if you have any questions, feel free to call us all. Talk to you in May.

And this will conclude today's call. Thank you for your participation. You may now disconnect.