Bel Fuse Inc (BELFA) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Bel Fuse Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this call is being recorded.

I'd now like to turn the conference over to Steven Hooser with the Three Part Advisors. Please proceed, sir.

Thank you, Claudia, and good morning, everyone. Thank you for joining our third quarter 2022 earnings call.

Before we begin, I'd like to remind everyone that this conference call contains certain forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and other factors.

Additional information about factors that could potentially impact our financial results is included in yesterday's press release and as discussed on our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our subsequent quarterly reports and other filings with the SEC from time to time.

We may also discuss non-GAAP results during this call and reconciliation of our GAAP results to non-GAAP results that have been included in our press release. Our press release and our SEC filings are available on the IR section of our website.

Now joining me on the call today is Dan Bernstein, President and CEO; Farouq Tuweiq, Chief Financial Officer; and Lynn Hutkin, Director of Financial Reporting.

With that, I'll now turn the call over to Dan. Dan?

Thank you, Steve, and thank you all for joining us on the call today. I'm once again pleased to report a new record-breaking quarter for Bel. Revenue, adjusted EBITDA and backlog were all the highest in our 7-year history.

From an adjusted EBITDA margin perspective, you would need to look back to the mid-2000 to see this level. These strong results were led by the collective efforts of our global team, as we work together in growing and enhancing the quality of our top line, increase profit margins and simplify the way we do business.

Across all 3 of our product groups, we continue to achieve certain target margins that are specific to each SKU, including addressing negative or low margins. We are not done yet, and it's still a material part of our revenue that still is being resized given certain agreements.

Aside from pricing, we continue to see robust demand from many of our end market. Sales into our commercial aerospace customers were $9 million for the quarter, an increase of 140% over last year's third quarter.

As demand continues to ramp up for both new aircraft production and aftermarket requirements, the premise wiring market hit a 3-year high, which contributed to $3 million or 36% increase in sales of our passive kinetic products over Q3 '21.

EV end market sales continue to be strong, up $2.4 million or 60% from last year's third quarter. In addition, revenue generated from our distribution partners across all Bel Group grew $9.3 million or 19% over the same period last year. This growth, coming from a number of end markets and products, is a testament to the diversity and resiliency of our business that has been built over the years.

Lastly, and similar to last quarter, we had $9.5 million of raw material surcharges, including the third quarter sales, which was passed along to our customers. Certain of our customers have been shortening their length of their purchase commitments with us, resulting in reduction in backlog revenues, particularly within the magnetic group. The reduction that we're starting to see is expected and will continue as long as there's a labor shortage.

I'm once again very proud of our team and the continued effort that resulted in another record-breaking quarter for Bel. I look forward to closing our 2022 with the same level of momentum.

Before turning the call over to Lynn, I'd like to take a moment to acknowledge 3 very long-tenured partners of mine with Bel. As previously announced, Ray Cheung -- Raymond Cheung, our VP of Operations in Asia, and Mr. Tso, Bel's Operations Director of Manufacturing site in Zhongshan, China will both be retiring January 1. On the corporate tax side, Tso will also be stepping down from his consultancy and advisory role next month.

Raymond joined Bel in 1991 and has been Vice President of Asia Operations since 2007. Under Raymond's leadership, our Bel Asia business has successfully grown and thought to be one of the most stable and reliable companies in electronic industry. Raymond has been instrumental in building long-term customer relationships and also establishing solid alliances with Bel partners across many Asian countries. We are honored to call Raymond a colleague and just as probably a good friend for the past 31 years.

Mr. Tso is one of Bel's longest tenured associates for over 50 years. We have benefited from his dependability and reliability as a manager over thousands of our associates in China and, sometimes, under the most challenging circumstances. As a former Board member, Tso has been a trusted of ours and a confidant for the past 50 years, first, with my father and then with me. He has been with us with countless acquisitions, change in tax regulations, and he's been instrumental in setting up the global tax structure that Bel has today.

There are not enough words to express our thanks to Raymond Cheung and Tso for their service and friendship over this many years, and we wish them and their families the very best in their future endeavors.

I'd like now to turn the call over to Lynn to provide further financial update. Lynn?

Thank you, Dan. As Dan mentioned, Q3 was very strong with year-over-year growth seen across each of our product groups. Overall, third quarter sales were $178 million, an increase of 21% from the third quarter of 2021. Gross margin for the quarter increased to 29% as compared to 24.5% a year prior.

By product group, Power Solutions and Protection sales were $76.4 million, up 27% from last year's third quarter. In addition to Dan's commentary on EV sales and raw material surcharge invoicing, the Power group also benefited from strong sales in our CUI business, which posted an increase of $3 million or 18% from Q3 '21.

Gross margin for this group was 32.4% for the third quarter, a 630 basis point improvement from Q3 '21, largely driven by a favorable shift in product mix, the benefits of pricing action taken over the past year and some favorable impact from FX.

Our Power Solutions and Protection group had a book-to-bill ratio of 1.2 during the third quarter of 2022 and a backlog of orders of $356 million, an increase of 48% from the 2021 year-end.

Turning to our Connectivity Solutions group. Sales were $50.3 million, an increase of 25% from last year's third quarter, mostly due to the continued rebound of commercial aerospace and premise wiring end markets. Military sales continued to be challenged this past quarter, resulting in a 10% year-over-year decrease in the defense end market.

Gross margin for this group came in at 26.1% for the third quarter of '22, up from 24.8% in the third quarter of 2021. While we've seen improvement in margins for this group over last year's third quarter, it remains below our target expectations. As such, we believe there is still much improvement to go on margins here, and we'll be hearing about such activities over the coming months.

Throughout the majority of 2022, this group had been impacted by inefficiencies related to a ramp-up in workforce needed to accommodate the rebound in commercial air. These inefficiencies will be reduced over time.

The Connectivity Solutions group had a book-to-bill ratio of 1.3 during the third quarter of 2022 and a backlog of orders of $116 million at September 30, an increase of 37% from December 31.

Lastly, our Magnetic Solutions group had Q3 sales of $51.1 million, up 10% from last year's third quarter. Gross margin for this group improved significantly to 30.4% in the third quarter of 2022 from 23.1% a year prior. Margins for this group benefited from the higher sales volume and also a favorable shift in exchange rates of Chinese renminbi versus the U.S. dollar, which lowered our labor cost in China versus 2021. This favorable effect of FX was really felt in September.

Our Magnetic Solutions group had a book-to-bill ratio of 0.4 during the third quarter of 2022 and finished the quarter with $111 million worth of orders, down 22% from the 2021 year-end level. This group is seeing most of the supply chain management on orders from our data customers.

At the consolidated level, there were $34 million of orders that were scheduled to ship in Q3, which did not primarily due to component availability. This is a similar level to what we've seen in prior quarters, and we anticipate this waterfall effect will continue in the near term.

Our selling, general and administrative expenses were $22.2 million or 12.5% of sales, up from $21.2 million in the third quarter last year, but down as a percentage of total sales. Within SG&A, the primary increases were related to salaries, fringe benefits and rep commissions.

Turning to balance sheet and cash flow items. We ended the quarter with a cash balance of $70.9 million, an increase of $9.1 million from December 31. Our working capital increased by $23.3 million from the 2021 year-end. We saw an $18.2 million increase in our accounts receivable balance.

Our DSO were 53 days at December -- I'm sorry, at September 30, 2022, compared to 54 days at December 31, 2021.

Inventories increased by $33.9 million from year-end. While there was continued investment of cash and working capital during the third quarter, it was to a lesser extent compared to each of the first 2 quarters of 2022.

In addition to changes in working capital, other items impacting cash flows for the first 9 months of 2022 included capital expenditures of $5.6 million and our continued dividend program where we made payments of $2.5 million.

Cash paid during the first 9 months of 2022 for income taxes was $7.5 million, and interest payments totaled $2.1 million.

I'll now turn the call over to Farouq for additional color, outlook and expectations. Farouq?

Yes. Thanks, Lynn. As we've noted in the past, Bel is on a journey to better serve our stakeholders by streamlining the way we do business, optimizing our operational footprint and improving profit margins.

When I joined Bel 18 months ago, there was work to be done. And while we can certainly celebrate our successes to date, our third quarter results reflect just another step in this journey.

Phase 1 of the journey was better alignment to our customers' use and proper margin strategy. And as Dan mentioned, we're not done yet and more progress to be made.

Phase 2 is operationally focused to ensure we are better positioned for the exciting road ahead of us. From an operation standpoint, we continue to see better ways to optimize our business.

As noted in yesterday's earnings release, we recently launched a series of initiatives to simplify our operational footprint in a project expected to be completed by mid-2023. We will initially be consolidating 2 of our magnetic sites in Zhongshan and Hangzhou, China spread across 9 manufacturing buildings in total and bringing them together into a single centralized site in the [Banyan] County of Southwestern China.

Restructuring costs of $10 million are expected related to the China initiatives. Of this amount, $3.6 million was recognized in the third quarter, and we expect the balance to be recognized probably through the third quarter of 2023. Incremental CapEx spend of approximately $3 million is expected over the next 12 months. We expect to realize annualized cost savings of approximately $3 million on the China initiative beginning in the fourth quarter of 2023.

As we set out on this project, we examined our options outside of China and concluded that a consolidation in Southwestern China was the most logical choice driven by labor availability and predictability, wages, raw material availability, the location of the segment, customers and manufacturing partners, our long-tenured engineering talent desires, our operational complexity of such move internationally in the midst of a 0 COVID lockdown policy, to name a few.

Further, the new site location is desirable given its geographic proximity to our existing manufacturing partner in Vietnam. When this project is complete, we will have slimmed down our magnetics operations into 2 locations and 2 main buildings.

On the connectivity side of the house, a number of actions are now underway in both the U.S. and in Europe. In the U.S., our Tempe, Arizona and Melbourne, Florida sites will transition their manufacturing operations into our existing site in Waseca, Minnesota. our Arizona facility will ultimately close, and Florida will continue to focus on the high-tech engineering work they do.

These U.S. actions are expected to result in restructuring cost of $600,000 primarily over the next 2 quarters, with incremental CapEx spend of $350,000. We expect to realize annualized cost savings of approximately $1.1 million on the U.S. initiative beginning in the second quarter of 2023.

In Europe, we plan to exit our facility in Sudbury, U.K. and consolidate those operations into our existing site in Chelmsford, U.K. These U.K. actions are expected to result in restructuring cost of approximately $250,000 spread over the next 2 quarters, with incremental CapEx spend of $1 million. We expect to realize annualized cost savings of approximately $650,000 on this U.K. initiative beginning in the third quarter of 2023.

Separately, as previously announced, we closed on the sale of one of our corporate buildings in Jersey City, New Jersey, resulting in a $1.6 million gain being recognized in the third quarter.

These initiatives are a continuation of our operational work that gets us excited for the years ahead as a healthier company. As we look ahead to the fourth quarter, we expect top line growth in the high single-digit versus Q4 2021, with gross margin expansion from last year's fourth quarter to be more in line with margin levels from the third quarter of 2022, the one we just had. We expect to see more favorable effect in this quarter as well.

On the backlog side, we know not all backlogs are created equal, and the shift that we're seeing is a decline in lower margin products in exchange for a pickup in higher-margin, longer-cycle end markets. We believe this favorable shift in product mix will position us well for 2023 and beyond.

Overall, we are very happy with our results this quarter and the momentum for positive change that continues to drive our global team. While we've shared some of our recent initiatives with you today, there's still additional work to be done as we continue on our journey.

And with that, I'll turn the call back over to Dan.

Thank you, Farouq. If possible, can we open up the call for questions now?

(Operator Instructions) The first question comes from Theodore O'Neill from Litchfield Hills Research.

Congratulations on a great quarter. .

Thank you.

Yes. So the question on the consolidation of operations. Can you give us an idea of like why now is the right time for that to happen? And it hasn't happened until now. Is there some event that occurred?

No, no. I think we have done a substantial consolidation over the past years, just as the same strategy going forward and looking at everything with a fine comb.

I think just to add to that. With this one specifically in magnetics, it's been on the docket for some time. But obviously, it's been a little bit of a rough last, call it, 3-plus years. And as we assess where we are, we have to balance the need of getting -- going on this with obviously some of the world's 0 lockdown COVID policy in China today. So we ultimately took a little bit longer to get going in alignment and so on, but this wasn't time.

And we're excited about it, and we're ready to go. So we feel confident that we are -- that this is the right time for us. Obviously, you can never design these things ideally, but this was the right time for us, and we're excited to move ahead.

Okay. And on the balance sheet, if backlog continues to sort of stagnate here or not change very much, do you expect to see inventories and accounts receivable go down over time?

So just maybe on the backlog comment, as you know, historically, we have 8 to 12 weeks. Obviously, depends on the business, but let's just call it a quarter worth of backlog. Today, we have roughly 4 quarters worth of backlog, and partially it's to all the complexities within the supply chain, elongated lead times and all that kind of things that have been happening in the last few years.

So I think our expectation would be some kind of levelization or maybe a little bit of return to potentially -- my guess is not on the near term, but maybe it will come back a little bit below the 4 quarters.

So as we think about where we are today, we're seeing some of the management for some of the things that are scheduled, call it, late next year, Q4 '24. So this is really more of the management of that supply chain, if you will, from a customer's perspective. But we think fundamental demand remains strong.

On the inventory AR side, I think we expect our sales to continue to grow. I think the backlog made it a little bit different. Inventory has gone more than we'd like it to be. Partially, it is a flight to security on acquiring raw materials where maybe normally we wouldn't do that.

And as Lynn said, we had $34 million we expected to ship out that all of a sudden not shipped in my inventory. So we do think a little bit of level -- normalization of inventory will occur. It's just really hard to figure out when and where, especially with an environment that we're in still.

The next question comes from Jim Ricchiuti from Needham & Co.

This is actually Chris Grenga on for Jim. Could you talk a bit more about the drivers of the gross margin improvement? And which contribution came from price and mix? And how do you think about the sustainability of gross margins at that level? You had mentioned the guide for Q -- the next quarter. And do you expect the consolidation efforts to have an impact on gross margins?

Maybe I'll just address the high level of that. As Dan said, we're focused on margins, and there's going to be a series of initiatives. And the alignment that we talked about here on the cost side is really to optimize our cost structure.

So our expectation there would be is that it would be contributory in a positive way to our profit margins. So our expectation is, as Dan said, we're not done yet, right? So our expectation is continued improvement, and we're liking the early signs.

The improvement is going to come from, quite frankly, better mix of products as we pursue new products, ensuring that there's proper margin and customer alignment there and then also on kind of the cost side of it, which we start.

So it really has to be a multi-pronged approach. And our perspective, change, I would say, is rarely linear. We like our linear path that's been off for the last handful of quarters here. But from our expectation is we're not done and continue forward momentum.

I would say on the margins this quarter here, and Lynn will elaborate on it, but kind of 2 things for the most part offset here is kind of the low-margin PPV, which obviously is a detractor to our gross margin profit. But then also we were favorably impacted by FX. But fundamentally, those 2 are kind of net in large.

So Lynn, why don't you give color on that?

Yes. So I -- so just kind of delving into it by product group. On the connectivity side, the margin improvement there largely resulted from the rebounding in the Commercial Air business that we mentioned, so that has been depressed for several years. And that rebounding, while it was a pressure on our margins as we got the additional workforce in and up to speed, the increase in that end market is certainly helping us there.

In addition to our distribution end market, that was across the board, across all 3 product groups was very strong this quarter. So that aided the margin expansion as well.

On the Power side, this was largely the efforts of the team over the past several quarters here with kind of rightsizing, pricing. And there was some FX benefit in the Power group. We do have some manufacturing in China related to that group.

And then the other factors for the EV end market, which continued to be small but is steadily increasing year-over-year, that tends to be at a higher margin. And our CUI business had a very strong quarter. So those were kind of the main drivers on the Power side.

And then magnetics, this is a business that would have had the most impact related to favorable FX. The majority of that manufacturing is in China. But also included in that group is our Signal business, and a lot of work has been done over the past couple of quarters taking a better look at that business, the profitability there and just kind of a renewed focus. And so that's also contributing to the margin improvement for that business.

Great. Very helpful. And with respect to the consolidation, what does that process, particularly in China, entail? And how are you thinking about minimizing disruption during that transition?

Yes. So we have a site, and we've already hired an initial build-out crew. The site is already starting to get set up, and we already have not an insignificant amount of people there already.

The product that's moving over from our facility, there is a lot of know-how and knowledge and, quite frankly, pretty high-level engineering that goes into that product. So that's going to -- the challenge is ensuring that we move it over without disruption.

So I would say we're being extra careful here. We have alignment internally, and we've kind of set up various processes to ensure that. Obviously, also we have to work with our customers as we (inaudible) it up for the new site.

So we're -- I'd say we're being diligent and -- but obviously, you know how these things go. Hope for the best and be ready for anything going sideways. But as of right now, we started this for a few months now more with a -- let's get a tactical crew of associates. And so far, we like our chances.

But to your point, it also offers us the opportunity to upgrade some of the equipment and also build some redundancy on some lines there for future expansion. So it really gives an opportunity to look at just the way we do everything and potentially lay out a more lean and efficient facility given we're spread out across 9 buildings. Now we'll all be under one roof.

So it's really operational improvement that will be multipronged, quite frankly. So that's why it's really exciting for us.

But in addition to that, it should be noted that we're very familiar with this area. We have about 1,200 people working in an area that understand the product line. Historically, for -- we move mostly every 10 years on this product line because of the law labor because of the labor content that you always have to be -- find the best labor you can throughout the world.

So again, I think the people have been very experienced in this. They work very hard, and we do understand the area we're moving into very closely. And we spent a lot of time in consideration, as we mentioned, looking at other areas like Malaysia, Indonesia, Thailand, the Philippines. And we still felt that China at this point was our best bet also being, as we mentioned, close to our Vietnam where we do have a strong subcontract that we work very closely with.

Great. And one more for me, if I may. With respect to the backlog, have you seen any signs of pushouts or cancellations given the changing macro environment?

Our backlog has been pretty strong, around $580 million for the past 9 months. We do see occasionally pushouts. But again, we don't see any negative visibility of when lead times are going to come back to normal again.

But I think everybody is kind of walking on eggshells also. We've never experienced this period for such a long time. But again, things still from our perspective still seem very positive from every area we deal with. And as we mentioned, with the increase in commercial aerospace, that's really boding well for us also.

Yes. And I think Dan said it here is, fundamentally, we think the demand in most of our end markets in the near, mid and long term will be there. So we like the end markets we're playing in. So we -- so even if we go through a little bit of management, if you will, like we're saying on the magnetic side, we still fundamentally like the play -- the areas where we're playing within the customer's work. So we feel that, fundamentally, we're set out nicely here, regardless if a little it has in the backlog.

The next question comes from [Robert Martin] from Martin Asset Management.

Congratulations, guys, on a nice quarter. Welcome to your peer group returns in both sales, profit margins and even the improved valuation. That's very excellent. I'm sure the shareholders are very appreciative.

Now that you're sort of rolling up as a business from a profitability basis, is there any chance you would consider establishing public revenue and profit margin targets over a multiyear period in order to have some sense of visibility as to where this company can proceed over the next few years as the structuring matures?

Yes. So Robert, thanks for the question there. We have internal targets and metrics that we are working towards. In terms of putting them out there and providing guidance, I think the short of it is we would like to, yes. It Is really a question of when. And where we are right now with a multitude of ongoing initiatives, with more to come, coupled with some of -- a lot -- call it a lot of the craziness in the world that we're operating today, and quite frankly getting ourselves internally aligned to provide a little bit more clarity in pinpointing where we want to go. So it's a matter of when in our mind, but not if it's a matter of when.

Okay. Well, I would like to start with a bid of $1 billion sales targets since you're not far from the $250 million quarterly run rate anyway.

That was like talking -- I have to say since Farouq came to Bel, I think he's done a tremendous job to really focus on the margin more importantly. It's a nice goal to have $1 billion. But without the proper margins, it doesn't make sense to us any longer.

And I think that's our key focus is that we want really good revenue with really good margins. I mean, again, we know how important top line growth is. But for us, a little bit more important is the margin side of things.

And as you know, Robert, right, the playbook has kind of evolved and changed. And right now, we're doing a lot of the margin improvement stuff. And then once we've set that at course and as we're seeing our margins kind of going out there, to your point, obviously, we're not sleeping on revenue growth.

We're still focused on the hunting for business. But it's just we have a different potential lens that we're applying to that today. So we share your aspirations of being a bigger company. We want to do it the right way in this time, in this environment, where we're kind of doing it.

And certainly, one other thing I would offer up is if you look at our profit that has gained in the last 4 quarters, let's say, for example, EBITDA, if we have to go out there and buy this EBITDA, it will cost us a lot more. Here, we're able to get internally for relatively low spend.

So we still think there's more to be gotten here on the cheap, if you will. But ultimately, yes, we're focused on growth in the long term, for sure.

Okay. Regarding R&D, it seems as though you could afford to spend a little more now that there's significantly more profitability in the business to further innovation and new product introduction. Last year, you guys talked about having a very high year in new product introductions.

How is this year looking? And are you comfortable with the amount of productivity and innovation you're getting from the business as far as new product introductions and trying to maintain some pricing power with semi-proprietary features and technology?

Again I think, again, from an R&D standpoint, increasing R&D, I don't think we have to. I think each department of our 3 product groups have strong R&D. I think we are committed to NPI. I think our goal is almost to increase our NPI almost 50% by product group over the next 3 years.

We're doing a lot besides evolving product ourselves. We're looking at working with partners throughout the world to start with a private label agreement. We realize that we don't have to invent everything we sell. We have tremendous distribution channels that we can put product through.

The best example of that is EOS. So we felt that EOS had a great product that fit our niche very well, rounded out our power supply market. We had a -- we were selling their products under our name for about 3 years. When they decided they wanted to sell, they came to us. They didn't shop around. And we were able to pick up that business.

We feel for a very reasonable price based on our long-term relationship. So again, it's -- as much as we're doing products, developing ourselves, we are committed to grow through private labeling and increase our sales every way possible.

Okay. And then one last question. As the company starts to -- as this growth spurt perhaps starts to fade a bit to more normal levels, and they call on the balance sheet, and working capital is reduced, and the company frees up cash, does the management team have any expectations of reentering the acquisition business? And which areas of the market would you like to acquire, if so inclined?

We never left the acquisition market. We've constantly looked at acquisitions. Today, we have 4 acquisitions of NDAs we have signed. We do believe that acquisitions are a key part of Bel's growth going forward.

And we're not prejudiced. I think all 3 of our product groups look at areas where they can strengthen themselves, and we will continue looking in those areas that we can give the best benefit to the company.

(Operator Instructions) The next question comes from Hendi Susanto from Gabelli Funds.

And then congrats on strong results.

Thank you.

First question is for Farouq. Farouq, can you characterize how much price optimization have been completed? And how much more to go?

Good question. Our revenue continuously changes. But if I were to kind of just throw a shot in the dark here, Dan, I don't know if you agree, I'd say we still got another 30% to go maybe or, call it, 25%, 30% would be my uneducated guess.

But we do know it is still meaningful to go and it is not reflected yet in our results. So these are discussions that are happening in the background, have happened as contracts are coming up. So I would say it's not an insignificant amount that we still need to price optimize.

And then Farouq, when you said like 25% to 30%, is that based on the SKU? Or is that based on like total sales volumes?

I would probably say, just if I were to kind of -- but I'll take my answer back to 20% or 25%, then I'll think of it as a revenue.

Okay, yes. And then a question for Dan. So Dan, I think -- so Bel Fuse has -- you reported outstanding backlog and then record sales performance. On the other hand, I think we kept hearing concerns about inventory correction at customers, at distributors.

And then while they may not be in the same markets, I think there's like -- there is a growing concern about weaknesses like broadening in some areas. So how should we compare and contrast with those concerns and -- so like outlook for Bel Fuse?

Based on all the data we have today, and we hear those concerns in the marketplace, but we don't see them. Based on our backlog, based on our customer relationships, based on the lead times we have from a majority of our semiconductor companies, we haven't seen anything to make us panic, but the cliff is coming or if the cliff is going to come.

So at this point, we are very bullish on the company and what we see in the future. And again, as we mentioned that military and aerospace, which were laggards over the past 3 years, we only hear very positive strong things from the orders and from the sales people. So again, that's why I think that we are bullish at this stage.

I'd say I'll build up what Dan said. I kind of think about it more simply indeed. Our magnetics, power has been leading the way. And connectivity business, we have ways to go. And we will get there because it has happened in our Power group.

So our results, despite the records, is -- these have been delivered with, call it, 2 of our 3 segments leading the way. So even if we see a little bit of weakness, to Dan's point, on those 2, I'd say our Connector business is in the early stages of waking up.

And then as we look at beyond kind of the connectivity business, both on the revenue and margin side, where we know what needs to be done there. And then as we look at things like power, there are some very growing things in there. As we think of e-mobility, rail starting to see some nice things as well, our distribution business.

So back to one of the comments that always comes mind, that diversity of contribution. And we're doing this not with everybody running hot. So I think that should give focused comfort that we're touching all 3 segments, work is being done in all 3 segments, and we like our hand.

And in addition to that, if you look at our -- looking at the reports that we're reviewing, our industry, most people are falling within the 6% to 10% sales increase, and we're hanging at 20%. So we think that we are doing many things right, and that our NPI strategy is right, how we focus is right.

So we are getting a little, I'd say, cocky, maybe not cocky, but confidence that we haven't had in the past based on a lot of the data that we're reviewing at this moment.

And if I can just add, Hendi, to your question on backlog. While we are starting to see, particularly in magnetics, that to come down a bit, it's important to note, it's really the -- it's really a shortening of the length of the backlog that we're seeing.

So for example, if someone had 4 quarters worth of orders on the books with us, maybe they only want to have 3 quarters on the books with us. So it's that fourth quarter out that's getting canceled at this point because they don't want to have that level of purchase commitment open that far out. So it's more of a shortening of the backlog that we're seeing right now and not an indication of the overall demand.

I see. And then do you have any insight into the data center market, including networking and IT infrastructure?

Just from our opinion, that's one of the areas that have been a very difficult area to be -- to have the proper margins we want going forward. So for example, if you look at data centers, Facebook 4 or 5 years ago was a key customer of ours, and we decided to drop out of that business.

So again, we hear -- so from a data center standpoint, we're a lot more exclusive in the customers we look at. From networking, we do deal with a lot of major networking companies, and we do feel that the end market is still very stable for us.

The only problem that we have with the networking companies, like most industries, the problem is they can't get the semiconductors in on time. And based on that, they're putting on some shipments on hold until they can get the semiconductors in. And their inventory, so they have to rightsize their inventory to make up for the lost semiconductors, what they thought they would be bringing in.

I see, yes. And then one more question. So in terms of manufacturing, footprint location, real estate assets and operational efficiency, would you be able to share what kind of metrics do you usually look into?

Metrics for kind of where to decide to consolidate or open up a factory?

Yes.

Yes. So I mean, it's really nothing too significant. As Dan said, we've been in China for a very long time. And general labor availability, wages, real estate rents, right, what's your cost to operate, the other thing in China that's very critical is, as you know, our Q1 generally tends to be a little bit weaker due to Chinese New Year where a lot of people come home and kind of the change in disruption and the migration patterns we saw during COVID.

So one of the nice things about kind of this new facility is you hit on a lot of those metrics, and one of the bonuses tends to be more of a local workforce. So we think it will minimize our turnover. And as we onboard people, people there also to -- a lot of them, I think, live in that area where we will be. So we think a lot of that is going to be positive for us.

And then also to advance that in this situation, we have not an insignificant contract corner in Vietnam. So getting closer there on the other side of the border, it could potentially open up interesting opportunities. So -- and also the big overarching thing from my perspective is getting under one roof, designing a facility that is meant to be a little bit more modern versus spread out across 9 facilities is definitely no -- nothing to sleep on.

And also, obviously, we're still close to a lot of the CNs that are customers transacting work with us. So we'll look at some of the same things as a pretty textbook and then obviously going to do things like square footage and what's my needs for today and tomorrow, is there opportunity for expansion. We also look at employee headcounts. We look at potential automation upgrades that we've been doing here.

So it really is a blank slate for us to draw a great facility, and that's something that we haven't done for years because we've been in our current location, what, Dan, for 25 years -- a number of years. So the world has changed a little bit, and we are brewing a brand new building. So it's a lot of the things that you think about why you would do this.

Yes. And then may I squeeze one more question? So with regard to the China 0 COVID tolerance policy, I assume there was some impact in the last several months on Bel Fuse sales.

So what are puts and takes that we should think about, let's say, when we are in the first half or first 9 months of next year, so that we know how we should take into account that there was some impact of China lockdown in 2022?

I don't think there was any significant lockdown that affected the revenue. If we do have a lockdown, what did happen in the past year, because it was only a minor lockdown, we can make up the labor over the weekend or working longer days after the lockdown opened up. So we've been very fortunate not to be hit at all from a revenue standpoint.

Now going forward, they are very careful, and they're very watchful. And they move much more aggressive in China than any other country in the world. If someone does come down with COVID, they do react very quickly.

So we can't predict the future, but we do have all the COVID protocols we put in place. All remain in Hong Kong to make it as clean as possible, a place to work in.

I think the last one that we had was in March.

March, yes. So we were locked down for -- just for 10 days.

I had 4 days -- like 3, 4 days or something like that.

In March, so no one had in Q3.

The next question comes from Robert Brooks from Brick by Brick Capital.

Just wanted to congratulate you guys first on excellent quarter.

Thank you.

First question for Dan. You guys -- you mentioned at the top of the call that the EBITDA margins are similar to what you guys were seeing in the mid-2000s. I was wondering, could you maybe give us a little more color on what is -- what are the differences between the business now versus then?

And obviously, the -- there's -- the strategies that you guys have implemented over the past 2 years in terms of making the business more efficient, but maybe was there a bit different product mix back then?

I think the key thing we have to give -- I hate to say it, but I have to give Farouq a lot of credit when he came on board 2 years ago to really refocus the company of where we have to be, to be successful.

And it was my fault. I think we were too driven to be the $1 billion company from a revenue top line point of position. And maybe we took business in that we should have taken in. So I think with the substantial helpful from Farouq and then teams, have everybody to refocus on where we want to go and how to be strong, that we felt initially we really had to evaluate every part of the business and mostly from margin standpoint where we're selling, a, we had customers that really didn't fit what we had to be and we had SKUs that didn't fit.

So we spent a great deal of getting first, Farouq, working on the data so each group -- each division manager can look very specifically at each partner to see it was in the red or green or orange levels and refocus our energy.

And then we are (inaudible) with the long lead times where pricing did not become a factor, where most of our customers today are really focused on delivering that pricing. So that gave us a leeway to implement where we do have fair pricing, that our customers are paying a fair amount for what we give them, and I think that's been the major change.

I think from a product standpoint, correct me if I'm wrong, is back in the mid-2000s. It was largely magnetics. We have the concentration on one product group....

Yes, sure. So back in the mid-2000s, we would have been about 80% magnetics, largely focused on the networking space heavily in China, largely China manufacturing at that point. So over the past 20 years, we've done a series of acquisitions, diversified our operational footprint. Our product groups were kind of born over that time frame. So just lots of moving parts.

And to Dan's point, the revenue has been the primary focus over the years to build scale, and margins were just not a focus for a period of time. And since Farouq joined, the focus has definitely turned back on to margins, and that's what we're seeing today.

The next question is a follow-up question from [Robert Martin] from [Martin Asset Management].

Dan, a few quarters ago, we talked about the upside to the EV business. And while it's small and rapidly growing, it does seem to have potential to grow into a nice sized business in the next 3 to 5 years.

Since about a year has passed, do you have any more insight into that business and how it might progress to the $50 million, $60 million, $70 million revenue level over the next few years?

So I think we're putting money into that business. It's a key area also for us from an acquisition standpoint. We do believe that it should become a $70 million business, and what we'd hope in 5 years possibly $100 million business.

So again, I think we're doing all the right things. Initially, we were using -- for North America, we're using a rep network to sell to many different customers. But for this particular product, because of the unique design engine and so forth, we hired a direct person for North America and a worldwide global manager. So yes, we do think it's probably one of our major growth areas in the company.

At this time, we have no further questions. I'd now like to turn the conference back to Dan Bernstein for closing remarks.

Once again, thank you for joining us today, and we're looking forward to continue this momentum. And hopefully, this is just the beginning, as Farouq likes to say. Have a good day.

The conference has now concluded. Thank you very much for attending today's presentation, and you may now disconnect your lines.