Bel Fuse Inc (BELFB) 2004 Q1 法說會逐字稿

Welcome to the Bel Fuse Inc. first-quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, April 29, 2004.

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

Thank you, Michelle. And we would like to welcome everybody to our conference call to review Bel's first-quarter 2004 results. Before we start, I would like to hand over to Colin Dunn, our Vice President of Finance.

I would like to start by reading our Safe Harbor statement. Except for historical information contained in today's news release and in this conference call, the matters discussed 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 business practices that differ from the Company's business practices; capacity and supply constraints or difficulties; product development, commercializing or technological difficulties; the possibility that changes may occur in the Company's financial statements between the Company's announcement of preliminary results and the filing of its periodic reports with the SEC; the regulatory and trade environment; uncertainties associated with legal proceedings; the market's acceptance of the Company's new products and the 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 assurances that any forward-looking statements will, in fact, prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

Having said that, I would again like to thank you for attending this morning, as we attempt to (ph) discuss Bel's first-quarter results and our integration of the March 2003 acquisition of the Insilco Technologies, Inc. passive components group.

On its profit picture (ph) Bel ended the quarter with net after-tax earnings of 4,655,000 or 41 cents per fully-diluted share. This is well above our net earnings of 1.78 million for the first quarter of 2003, but below the 5.6 million in the previous fourth quarter of 2003. You may remember, in the fourth quarter of 2003, results included a write-back of some overprovisions for accounts receivable and inventory. In the first quarter of 2003, we only had the benefit of earnings from the Insilco acquisition for just over one week.

Turning to sales, in the quarter our sales were 42.357 million, and 70 percent above the 24.9 million in the first quarter of 2003. However, this was sequentially $500,000 below the 42.865 million of the fourth quarter in 2003.

I wish to point out that, consistent with Bel's integration of the passive components group into Bel after June 2003, we do not effectively break out revenues from the passive components group. We have already allocated production of some Bel legacy products in the passive components group facilities, and vice versa.

Our sales mix changed as we added the passive components group during 2003. For the first quarter of 2004, magnetics, including connectors, accounted for 66 percent of sales. Interconnect devices, 17 (ph) percent; circuit protection, 11 percent; and modules, 6 percent.

You will note that we have regrouped and retitled our four sales segments. Let me briefly go over these; they are not that much different from what we had before, but we think going forward they will be much better indicators of our performance. In the magnetics group, we are including discrete components, power transformers and our MagJack line of connectors. In the modules group, we are including DC-to-DC converters, integrated analog front-end modules and custom-designed products. Circuit protection is miniature, micro and surface-mount fuses. And in the interconnect devices segment, passive (ph) jacks, plugs and cable assemblies.

Turning to cluster (ph) sales, our gross margin for the first quarter was 30 percent, compared to a gross margin for the same period in 2003 of 28 percent. This 30 percent was slightly better than the 29 percent gross margin in the fourth quarter of 2003, and of course this was despite the inclusion of the passive components group, which had slightly lower gross profit margins. Transitional inefficiencies (ph) with the addition of Insilco are now eliminated.

(indiscernible) headcount increased during the quarter, as we added additional workers to manufacture the more sophisticated gigabit connector products, and an increase in orders for delivery commencing in the second quarter of 2004. In total, we expect an increase of almost 3,000 workers, which will be approximately 33 percent.

SG&A -- this increase of 985,000 from the same quarter in 2003 reflects the addition of the Insilco acquisition, plus significant efficiencies from consolidation of functions. The percentage (ph) relationship of SG&A expenses to net sales decreased from 19 percent during the first quarter of 2003 to 16 percent during the first quarter of 2004.

There's not much change in taxes, and for this quarter our taxes remain lower than U.S. statutory rates, because we operate in areas where their local rates are much lower.

Balance sheet -- cash and equivalents. At the end of March, our cash and equivalents and securities were $70 million, which is an increase of 8 million for the quarter. In addition to cash from profits for the quarter, we lowered inventories by $200,000 and accounts receivable was lowered by $900,000. You may recall we took down $10 million of term debt in the USA during March 2003 in conjunction with the Insilco acquisition. We continue to pay this down 500,000 per quarter, in addition to the quarterly cash dividend that consumes just over another $500,000 per quarter.

On the receivables and payables, our receivables net of allowances at March 31st was 29.5 million. During the quarter, we saw significant improvement in payables by several major customers, while our accounts payable for the same period is 8.5 million. For this quarter, our payables increased by $700,000.

Inventories -- at the end of March, our inventories were 26 million, which was $200,000 better (ph) than December 2003 levels. Capital spending for the quarter was a modest 700,000, which, of course, is well below our depreciation and amortization for the three months of 2.2 million.

As we have discussed before, we continue to investigate several potential acquisition candidates, but at this stage have nothing new to report.

Our book value at March 31, 2004 was approximately $13.56 per share.

A couple of general comments. We have essentially completed consolidating the Insilco companies into Bel's global operations. We have consolidated the San Diego operations in Bel's existing San Diego facilities, and we have consolidated the Monterrey, Mexico operations into the Dominican Republic facilities and closed that Monterrey facility in the third quarter of 2003.

In the Far East, effective January 1, 2004, we merged the sales and administration functions with Bel and moved all the Far East and Stewart Connector operations in Pennsylvania under the Bel standard computer systems.

Bel has been aggressively progressing the Section 4 requirements of the Sarbanes-Oxley Act. In 2004, we expect to incur approximately 400,000 in onetime charges related to compliance. In addition, we will have an ongoing but as yet undetermined annual maintenance and additional order fees to maintain compliance. This, unfortunately, is quite an open-ended cost area, because many areas of the law are not defined, and the ultimate effort (ph) in costs is still undetermined.

That concludes the general remarks, and I will now turn it over to Michelle and open it up for questions. Michelle?

(OPERATOR INSTRUCTIONS). Todd Cooper, Stephens, Inc.

What was the backlog exiting the quarter?

Todd, we don't release absolute backlog numbers. But I think we're reasonably comfortable to say that backlog during the quarter increased over 30 percent.

From the fourth quarter?

Yes.

And it's been our strongest backlog, I would say, in the past 24 months.

So would you care to venture any guidance on revenue for the next quarter?

Not to you, Todd.

It certainly will increase significantly, although it depends on how you define significant, I guess. But a lot of the orders that came in -- and that came in pretty much over about a four-to-six-week period -- there were very rapid increases across the board in basically every product category. It wasn't, for example, just connectors -- it was all the industrial products as well, including fuses.

But pretty much across the board, it was for deliveries commencing in the second quarter. It wasn't for immediate deliveries in the first quarter. And there's a little ramp-up that takes place.

So what kind of lead times are you experiencing now?

Historically, over the past 24 months, our customers were expecting lead times from us of six to eight weeks, in that range. And at this point in time, we're facing lead times of 12 to 14 or 15 weeks, but we are trying to hire substantial amounts of labor in the Far East, to where -- you know, our goal is to get the lead times back to probably 8 to 10 weeks. I don't know if we can get back to six or eight weeks, in the next two or three months. But our goal is to strive to get back to eight weeks.

So it sounds like your capacity utilization is pretty high.

We are running at a pretty good tilt now, but we still have equipment -- our big problem is a lot of these products are based on the lining of components, which, because of the small diameter of the cores, have to be done by labor. And that's where -- our biggest stumbling block now is really direct labor.

And over the last three quarters, SG&A has moved around quite a bit -- from 7.6 down to 6, then up to 7 million. What causes this?

There has been a -- the issues that we dealt with over the last three quarters were related to -- we had some closures, we had some moving expenses, we had some write-backs of accounts receivable reserves, which were fairly significant. They are the major issues that took place.

For modeling purposes, do you all think of SG&A as a certain percentage of sales, or --

I think we're looking -- oh, and the other factor has been bonuses, as they have been accrued or not accrued, as they relate to the SG&A type folks (ph). We would expect, for modeling purposes, that our SG&A should be around about 16 percent. Before the Insilco acquisition, we were nearer the 18 percent, if you sort of annualize it fairly much (ph). And I think we feel fairly comfortable around about 16, slightly over, but pretty close to the 16 percent on an ongoing basis. And obviously, that's going to be impacted by sales. As sales increase -- a lot of the G&A is very fixed. We still, however, have some relationship to variability, as it relates to commissions and some sales expenses.

Your tone last quarter was things are relatively stable, you don't see where pricing can improve, you don't see end markets picking up noticeably. But it sounds like your tone has changed and improved. Is that a fair assessment?

I think that's a fair statement. I think we're more optimistic today than we have been over the last, once again, 24 months. And we are very optimistic over the next 14 -- you know, next quarter and maybe the next two quarters.

Our problem is, I think, we are just concerned -- is this a blip or is this for real? That's what we don't understand. Everything we hear from the passive component people -- everybody sees substantial increases in their backlog, everybody sees labor concerns in China. Everybody is, I think, holding firm with pricing, and some companies are looking for price increases. And I think, over the next 12 weeks, I think our customers are going to be more concerned about delivery than over price pressure, it seems to us.

But once again, we just don't know how long this is going to last. And in our industry, once you get those lead times down, then you're going to start seeing price pressure again. And we just don't know how quickly people can ramp up to meet the demand out there.

Lee Zeltser, Needham.

A few questions. First off, if you can give us a sense for comparative purposes, you have changed kind of the way you categorize your products. Can you give us a sense of what the fourth quarter of '03 levels were, so we can get a sense of kind of what grew --?

To be honest, the two major growth areas -- and we had growth across the board, but the real growth areas are in the magnetic part of the business, with the integrated connector module and the fuse business, the circuit protection group. Those are big, had substantial growth. But across the board in all our product groups, we had growth -- previous year.

What about sequentially, Dan?

Sequentially, it has been -- I think everybody, even from Intel to Technitrol, it looks like everybody had a softer first quarter compared to the fourth quarter, and we don't know, because of -- you know, the February, shorter month, because of Chinese New Year. We just don't know at this time.

But from a mix basis, on a sequential basis, there would not be any variability or much variability between the mix this quarter versus the fourth quarter of '03?

No, Lee; it was very, very close. That $500,000 drop was sort of just here and there. There is no niche (ph).

Fair enough. Dan, you mentioned folks were probably more concerned about deliveries than price at this point.

I think more concerned about delivery than -- historically, over the past 24 months, because there was such a surplus out there, there is a tremendous amount of price pressure. And this is the first time that we have seen that deliveries have not been pushed out. And I think people are staying (ph) because you have the increase in the metals -- silver and copper -- and the labor situation in China, I think people are being a lot more firm on price. I don't think we're going to see price reduction, to a great extent, over the next 12 to 14 weeks.

So would it be fair to say that prices might be flat to just down very slightly?

I would say that it depends on how gutsy you are. Some of my competitors might think this might be an ideal time to increase price, and we're judging where we should stand on our pricing.

So flat would be a reasonable assessment for the balance of '04?

I would say flat. We tend to be on the conservative side, so we would hope (ph) flat or slightly down a little bit, but not to what we have seen in the past quarters.

And can you give us a sense, not the Insilco acquisition; it's been largely digested -- give us a sense of some gross and operating margin targets for '04 or what have you.

I think the first quarter was fairly modest. I think we can do a little better as we get a little increase in volume. We certainly expect to get some increase going through the next few quarters. As I said before, I think our G&A should hold in reasonably steady. We have a couple of wildcards out there. One is what's going to happen to the components we buy from our vendors. You know, some of our vendors are pushing out their lead times. And that sort of sets up the stage for increases of prices. I think we have been somewhat fortunate as a Company because when we did add the Insilco operation to our buying clout about 12 months ago, it certainly helped us a lot in the marketplace, because we became much bigger a player, and so we were able to negotiate a lot better with our vendors. But this is a major change in the marketplace, so we're going to have to watch that carefully and see if we can sort of keep those costs under control.

The other area that is still open -- and we are going to add a little bit of expense. As Dan mentioned, we have had to add a lot of people. The labor market has gotten slightly tighter in the areas we operate in China. We have had to enhance the packages a little bit for the employees -- improved meal allowances, improved accommodations and things like that to attract and keep the people we want, some retention bonuses we've put in place right now to get us through this time. And I think that will add a little bit to our costs.

And the other wildcard is what is going to happen to the Chinese currency. That is -- I still think something is going to happen. I just don't know when. And those items will put pressure on costs. However, on the plus side, as volumes go up, our much better absorption of overhead is going to certainly help us pour money onto the bottom line. So we're optimistic about that.

So I have not really answered your question, I know that. But I would think that the base model is probably this first quarter, and some slight improvements as we go through the rest of the year, primarily related to volume.

And lastly, if you can talk about the competitive environment, do you see any share shift? And if so, are you capitalizing on that? And if you can comment specifically against certain product groups?

I think one thing in the magnetics side, I think we are a market leader in most of the products we have there -- in the LAN magnetics, in the telecom magnetics. Once again, we are a player there. Once again, we're not seeing that much price pressure, because the products are mature.

On the MagJack, the integrated connectors, I think we are the market leader. We have the broadest array of products. I think we have -- our new gigabit product has been accepted in the industry. I think we're seeing a lot of -- at this time, once again, we're seeing a lot more concerns on delivery concerns and pricing concerns. So I think at this point -- as time moves along, that might change.

But once again, all our product groups -- our fuse segment, we had substantial increases in our circuit protection, which includes miniature and micro fuses, and we compete against someone like Littelfuse and Bussman, who are substantially bigger than us, but we do maintain our market share and we grow it nicely with new products.

I think, across the board, we're making nice headway. But when it comes to modulars, with the DC-to-DC converter group that we acquired, the APC -- we're sort of concerned that it's not -- even though they are having substantial growth, we feel like they are a lot larger at this point in time. And we are still going through a learning curve, and so I would say, roughly breakeven at this point in time.

So there's a tremendous amount of upside in those acquisitions. But every night (ph), there's always competition, and if you go -- if we go twelve weeks without a price decrease, I would be happy. But I know after that, things are going to get competitive.

So I think, on the other side, Lee, we're not, certainly -- we're not seeing -- or I don't think we're seeing anybody trying to buy (multiple speakers) market share (ph) at this time.

No, you would have to be crazy to buy market share at this point. And I would say four months ago, that might not have been the case.

Understood. Lastly, if you could just talk about end markets and what you're kind of seeing in different end markets, from a demand perspective. Are there any that are, on a relative basis, stronger than others for you?

I think, at this point, everything across the board -- if you look at our backlog, where you have fuses that are heavy into consumer electronics. They are up substantially. You look at our LAN magnetics, telecom magnetics with discrete components, mostly telecom magnetics -- the backlog is up substantially. And then you have the LAN type of product. Everything looks strong, and today we heard from the Wall Street Journal that's the first time that they are hiring more in technology than they are firing. And we just see a lot of positive signs out there regarding our industry. And it's across the board from cellphones to high-definition TV to PCs to everything. So everything looks pretty positive across the board.

Just one last question, and I'll give someone else a turn. With regard to double ordering, that certainly had been a problem in the last cycle --

You had to mention that, didn't you?

Well, hopefully that is not really occurring too much. But maybe you can talk about what measures you guys are taking to get a better sense of how real this strength is, and what steps you are taking against double ordering?

Obviously (ph), it is very difficult. We try to work very closely with our customers. With our leading customers, we have strategic account managers who are there on a daily basis. We hope, because we are there on a daily basis with direct people, that the feedback we're getting from the customer is reliable feedback, and they are not double ordering.

Once again, when you go back to fuses, circuit protection, the only reason I keep bringing that up is it tends to be a more diversified customer base than what we have in our other products. And you wouldn't think you would see double ordering in that product group. And even in product groups like APC, the modulars, and DC-to-DC converter, once again, I would think they would be double ordering, because the numbers are not that great. But that backlog still is doubled.

But we are concerned about it; there's no question that it might be occurring out there. But we're trying to do the best we can, and we're trying to work with our customers regarding lead times to really understand what the situation is. And I think they don't want to be put in a situation where there's a lot of inventory concerns in the industry, because it doesn't do anybody any good. We are hoping we learn from the past, but can I count on it? I don't know.

(OPERATOR INSTRUCTIONS). Todd Cooper, Stephens, Inc.

I hate to follow Lee Zeltser, with his radio voice and intelligent questions and me with my southern twang, but I guess I have to this time. I wanted to ask about the DC/DC converter business and if you're seeing any pickup or improvement. I'll start there (ph).

(multiple speakers). Our backlog is at its highest point it's ever been. It has been growing substantially over the past quarters. Our sales are up. But once again, we were hoping that it would be up substantially more. I think we're making some great inroads in the area, but even in China, for example, our person that runs our China operation is projecting $1 million sales in China for this year, which would really put us -- $1 million in the United States is not a big deal, but in China, to get our name out there and try to be more of a leader in China is something that we really pride ourselves on.

However, am I happy with it? No. But we're still committed to it. A lot of the acquisitions we are looking at is in that area, and we still believe, at this point that it's a viable part of Bel's future growth strategy.

What type of applications or end markets in China are you having success with?

Mostly in the telecommunications arena.

Thank you. Mr. Bernstein, at this time, there are no further questions. I would now like to turn the call back to you. Please continue with your presentation or closing remarks.

Myself and Colin would like to thank everybody for joining us today, and we appreciate your time, and we look forward going forward. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.