Bel Fuse Inc (BELFB) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bel Fuse Incorporated Second Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At that time, if you have a question, please press the "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded Monday, July 28, 2003.

I would now like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Kelly. We would like to welcome all of you on this conference to review Bel's second quarter results of 2003. Before we start, I would like to hand over to Colin Dunn, our Vice President-Finance.

Thanks, Dan and good afternoon, everybody. I am just going to start with the Safe Harbor Statement. Except for the historical information contained in this news release and with the discussions today including the company's timing estimate with respect to the integration of the businesses acquired from Insilco, statements made regarding customer preferences are forward-looking statements that involve risks and uncertainties.

Among the factors that could cause actual results to differ materially from such statements are, the market concerns facing our customers, the continuing viability of sectors that rely on our products, the effect of business and economic conditions, the difficulties inherent in integrating remote businesses that may have followed businesses practices that is differ from the company's business practices, capacity and supply constraints or difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and competitive responses to those new products, and the risk factors detailed from time to time in the company's SEC reports.

In light of the risks and uncertainties, there can be no assurance that any forward-looking statement or fact proves to be correct. We undertake no obligation to update or revise any forward-looking statements.

Now, I would like to move on to discuss the results. First of all, thank you for attending this afternoon as we discuss Bel's second quarter results and our progress with the March 2003 acquisition of Insilco Technologies, Inc. Passive Components Group. First of all, discussing profits -- by the end of the quarter, we met after-tax earnings of $2,757,000 or 25 cents per fully diluted share. This is significant increase from the net profit of $1,293,000 for the second quarter in 2002 and compares to profit $1,781,000 in the previous quarter of 2003.

Sales for the quarter were $44,821,000 and this was 81% above the $24,727,000 in the second quarter of 2002, and this was sequentially above $24,948,000 of the preceding quarter ended March 2003. Included in the sales of $44,821,000, was $17,590,000 from the Passive Components Group that we acquired from Insilco Technologies in March 2003. So when we compare like numbers, we show increase in the base [inaudible] sales to $27,231,000 from $24,720,000, which would be an increase of 10%. I wish to point out that consistent with those [intangent] to integrate the Passive Components Group into Bel.

After this June 2003 result, we do not expect to be in a position to effectively breakout revenues from the acquired Passive's Group. We are already allocating production of some Bel legacy products into the Passive Components Group facilities and vise versa. We continue to see ongoing interest in the newer versions of our Integrated connector modules in a very competitive marketplace. Although as we've said before, we continue to see several major competitors continuing to aggressively drop prices in what appears to be an ongoing attempt to buy market share, a practice that we feel really never works.

Our sales mix has changed as we entered the Passive Components business during the quarter. For the second quarter of 2003, our sales mix is broken down into four categories, which we expect to be the way we'll report going forward. magnetics including connectors accounted for 74% of sales; a new category for us plugs and cables, 11% of sales; fuses were 10%; and value-added products 5%.

Turning to cost of sales. As a percentage of sales, our products mix this quarter continues to contain a high percentage of products that have a high material content. Products such as these while good for revenue streams and total profitability do not typically produce gross profit margins assize our traditional products. And gross margin for the quarter was 26.6% compared to gross margin for the same period in 2002 of 25%. This 26.6% was below the 28% gross margin for the first quarter of 2003. This was caused by the inclusion of Passive Component Group with slightly [inaudible] gross profit margins and some transitional inefficiencies that we believe are now largely eliminated.

In our Far East facilities, we had a total of 8,264 workers at June 30, 2003. And the increases were primarily attributable to the addition of the Passive Components Group. SG&A -- this increased to $3,878,000 or 87% increase from the same quarter a year ago. Some $1,370,000 was Bel related and included additional personnel termination cost, increased sales and sales related-charges such as commission on trade, and professional fees, which I will talk about later in this presentation.

In the balance sheet, cash and equivalents at the end of June. Our cash equivalents and securities were $42m. We took down $10m of term debt in U.S.A. during March 2003 in conjunction with the Insilco acquisition. Our current intent is pay is this down at $500,000 per quarter. Net cash provided by operating activities in the quarter was $4.5m.

Receivables and payables -- our receivables net of allowances at June 30th have increased to $31.5m. The Insilco companies had much more liberal credit terms in place with some customers over what we believe are industry standard terms. We will deliver some of these credit arrangements going forward, but is Bel intent not to continue those prior credit practices for new customers.

Our accounts [inaudible] for the same period is $8.8m as you can imagine many former supplies in the Insilco companies withdrew credit facilities when Insilco took Chapter 11 bankruptcy. We have been working due diligently with those industries to store the confidence in the merged company, and have them extend regional credit terms again to the company.

Inventories for the June period -- our inventories were 31m, which is 1m below the March 2003 levels. Capital spending for the year-to-date is $1.9m net of cost related to the acquisition. Our book value at June 30, 2003 is $12.32.

Some general comments -- we have made significant progress consolidating Insilco companies in the Bel's global operations. They have consolidated the San Diego operations in the Bel's existing San Diego facilities. And we've consolidated their moderate Mexico operations into the Dominican Republic facilities and we will close the moderate facility by the end of this month. In Hong Kong, we've moved the administrative functions of sales and marketing, purchasing, and finance into Bel's existing facilities in Hong Kong.

Bel has been aggressively progressing with Section 404 requirements of Sarbanes-Oxley Act. In 2003, we expect to incur approximately $400,000, in one-time special charges related to compliance and through the second quarter of 2003, we've already incurred and expensed against [cal] results $180,000. In addition, we've an ongoing, but is yet undetermined annual maintenance and annual order fees to maintain compliance with the requirements of the section 404.

Now, I will open it up to questions and turn it over to Kelly.

Thank you. Ladies and gentlemen, if you have to register a question, please press the "1" followed by the "4" on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your questions have been answered and you would like to withdraw your question, again please press the "1" followed by "3". If you are using a speakerphone, please lift your handset before entering your request. One moment for the first question.

The first question is from the line of Todd Cooper with Stephen's Incorporated. Please go ahead.

Yes, congratulations on the quarter, guys.

Thanks, Todd.

Are there any more savings to be run out of Insilco acquisitions?

Substantially, this is Dan. Substantially, we've taken out most of the savings. We took all the hanging fruit off the trees you could say. There's still some savings, but they're going to be a lot more minimum than before and then they're going to take us a little bit more time.

Okay what kind of guidance can you give us for gross margins going forward?

We're not big on guidance. No. We got two things going here. One, you got to look at what the marketplace is and what's going to happen with selling prices. There is very, still very tight marketplace. There is still plenty of capacity. There are a lot of players particularly in the connector market. There are a lot of companies still trying to buy market share. There are some folks that came in with technology weight, but that put them into disadvantage. So we are seeing some very, very aggressive flushing.

However, Bel, I think is doing a fairly good job on re-designed projects and working aggressively to continue to take cost out of products and try and bring in new versions, new designs to keep matching the competitive prices out there.

On the other side, we are looking at the elements of the cost of sales. Obviously with the addition of the business that came with the Passive's Components Group from Insilco and our rationalization of products in the different factories, we are going to be able to continue to move some costs out as quickly as it relates to overhead. When we look at materials, we are [inaudible] buying power certainly with another 60% - 70% more volume that we are going to offer our vendors is proving fruitful and not only is it helping Bel as far as the products we used to make, but are certainly helping on the Passive Components Group, the Insilco acquired companies to get their material cost down.

So, do I expect any dramatic improvement in gross profit margins? Not significantly, but I think we are going to be in a reasonable position to maintain fairly much where we are with the progress we go in place.

Can you position this better than higher revenue will possibly impact gross margin going forward?

While piece count goes up dramatically, we are really gaining on pieces as we go forward. The other thing we've got is a lot of the products we are making just get more and more sophisticated, so that's been driving some of the price gains. But Bell I think financially has been a leader in a lot of the newer products out on the marketplace.

Sometimes that gives us a little 2-3 months jumpstart on little better margins as we try and recoup the additional development cost we have, so that our competitors don't as they come along and copy the designs. So we do get a little jump but we don't keep it for long, it goes away fairly fast.

Okay and regarding the pricing pressure -- you talked about on last conference call and on this one; I must say it's not all that evident in the 2Q results?

No, but it's there. I think if it hadn't have been for some that pricing pressure, I think we would have been doing a heck of a lot better. But when in you are in an environment and you are seeing in some cases up to 15% price degradation on apart quarter-to quarter, that can't go on forever. You got to be very aggressive in your redesign projects. I think we've got a very dedicated team working on that, and I think we are doing a great job. But it's not easy.

Okay. Again, congratulations and thank you.

Thanks, Todd.

The next question is from the line Lee Zelster with Needham & Co. Please go ahead.

Hi guys. Congratulations on a strong quarter. I have a few questions. First, if you can help me reconcile the organic growth on a sequential basis was 10% or is that on a year-to-year basis?

Year over year.

Year-over-year so it looks like just by doing my math sequentially you are about 2.6% organically, if I strip out the passive components group from the March quarter and the June quarter?

Yes, we had about 8 days of the passive components group in the first quarter.

About $1.9m as I recall?

That's correct.

Okay so it looks like just doing that math and the 79 in the June quarter -- it looks like about 2.6%?

Yes.

Sequentially. Okay and then I am guessing, out of the $1.9m, where does that go in terms of breaking down in magnetics or was it in another area, I am just trying to get an apples-to-apples?

It's primarily magnetics.

Okay. So it looks like that would have declined sequentially in the June quarter if we just do it on an organic basis -- can you talk about some of the factors that would have drove that, is that pricing strictly or is it some unit trepidation there?

Well no, we didn't show a decline. I think it has been pretty flat.

Oh, that has been flat okay. I am guessing there was a fairly strong jump in fuses sequentially, can you talk about what drove that?

If I go back and look at fuses, they've been fairly flat [inaudible], if we look at the year-to-date fuses it's off -- actually the year-to-date they are down by about just a couple of hundred thousand year-to-date -- year-over-year.

Right, I was kind of looking more at the June quarter versus the March quarter, so it's up a little bit [inaudible]. Okay. I can scuffle up with you later on that. What was the pricing declines on the SG bases sequentially?

Oh, it's all over the map -- it's from nothing to, , 5-15%, 15% on the extreme. the typical price decline is 3-5%, but certainly on anything where there is decent volume there is -- it's everybody jumping in the ring and it is fairly aggressive pricing.

Okay fair enough. And then can you offer guidance for the revenue line next quarter?

I'll turn that one over to Dan. I don't have to act a collar.

We don't expect to see anything dramatic chase from where we were this quarter. It was discussed before, the economy here, particularly in the U.S., is fairly flat. Most of the activity that we are seeing -- the stimulation in the market place is certainly in the Far East, and there is basically no significant vision out there., As far as look forward -- everybody has got his own very tight lead times, and it doesn't take much to add 5% or take 5% off quickly. We are finding that almost month-over-month sales are running. They are up just a tad, but they are running fairly flat.

Okay, so from a linearity perspective things were pretty linear month-to-month for the June quarter on a sales basis?

Yes.

In terms of pricing, do you see that kind of subsiding a little bit?

One has to at a certain point. If you got new products out there and because you are going to recover your development cost, if you expect to get a little more margin upfront. However, once it comes back to the packet it becomes a very commodity-type product. That has to be -- the margins have to be somewhat decreased. There is always so far you can go. No one's in the business of giving away products, and at a certain point the -- so was down.

If we can keep bring it out to you better and faster and more exotic-type products, then we should be out of, get higher margins to [inaudible] then they will come down fairly rapidly. But if we don't have those products scaling into the marketplace and we are just selling more of the same sorts of products, then there is no where much to go with the prices and I think - it's going to slow down to 3% - 5% type decreases.

Okay. Actually, can you talk about the progress you are making on the DC/DC converter initiative, any revenues in the quarter or design wins that you can point to?

No, we were somewhat disappointed regarding where we stand from a sales standpoint. Now once again, from design standpoint, I think we are doing everything right. There are certain opportunities out there, but we have to say -- we are still -- is that anything close to significant amount of sales at this point of time. We are off what we projected internally and we are hoping by next year we will get back to where we are.

Okay, would you expect any meaningful revenues in '03 or that probably wait till '04?

We are hoping for '03 to be really what do you call -- help me out here, what do you call meaningful revenues?

I guess something in the range of $1m or $2m?

I would think we would be over $1m.

Okay.

Well, we will be significant will be over $1m.

Okay. Fair enough. Thanks, guys.

Thank you, Lee.

The next question is from the line of Joe Dasto (ph.) with National Securities. Please go ahead.

Yes, on your release, I see here that talking about product offerings expanding them through internal developments and etc., but some selective acquisitions are you -- so you are still interested in acquisitions, is that a very aggressive program yet?

We don't call it aggressive, but we still have substantial money. I think we have the debt about $33m of cash on hand. We are still looking at acquisitions, but at this point, we have nothing on the boilerplate we can discuss.

So you feel you can accomplish your objectives if you don't come up with any?

I think we still have [inaudible] to go. To grow the company, we would like to grow, we are going to have add acquisitions in the future.

Okay, okay. About your design wins, I have heard that you have been quite successful in design wins. You are still pretty aggressive there and you are still working pretty positively?

I am tired of kissing now. I want to move on with my life. We like to see more orders and less design wins at this point of time.

Okay. Thank you.

The next question is from the line of Todd Cooper with Stephen's Incorporated. Please go ahead.

Yes, one more follow-up if I may, for your DC/DC converter products you typically have to get qualified at the larger OEM's even though you may be selling magnetics or fuses, or something like that to Cisco, you still have to get qualified for the power products. Can you give us an update on how that qualification process is going?

it's still what the key thing is, because we have such a good relationship while a lot of these large customers like Cisco. We have a great amount of visibility, so for example, the commodity buyer could be in one product moves to the other product. So it does help that we do support them with our different products. On the smaller companies though, the power guy is the magnetic guy. However, a lot depends on the different products as much as the commodity manager.

So the certain products at Cisco, for example, that they endorse our type of technology, they are working very closely with us. There are others products at Cisco where we don't have a certain relationship where they don't see what we can offer them. So it's almost we have to attack it from two directions -- one from the commodity the power commodity group and the other from the end product and sometimes they collide. So at Cisco, for example, we have some successes, but we had some failures too.

Okay thank you very much Dan.

The next question is from the line of Joe Dasto (ph.) with National Securities. Please go ahead.

Kind of a follow up. Voice over internet protocol has been an area that you've been getting into, can you comment on how that is going?

It's a strong product line and we've done a lot of work from the magnetic side and also from the connector with the magnetics inside. So once the technology comes out, we should be supporting it with our work for the IC houses and the I-Chip [league] committees and with our customers. So, we have been doing voice-over internet, I think, at submitting price for last 2 years.

So you think that can be significant area?

I think it's a significant area today as we speak.

Okay, thank you.

I am showing no further questions at this time. Please continue.

Thank you everybody for your attendance today. There being no further questions, just one comment that the replay will be available. You can click on the weblink for a telephone replay and it will be on 800-633-8284 with reservation number 21152973 and that will be available after 6 p.m. Eastern Time today for the next week. Turning it back to you, Kelly.

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.