Bel Fuse Inc (BELFB) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Bel Fuse Inc. 3rd quarter results conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. [OPERATORS INSTRUCTIONS] As a reminder, this conference is being recorded today, Wednesday, October 26, 2005. Your speakers for today are Dan Bernstein and Colin Dunn, Vice President of Finance. I would now like to turn the conference over to Mr. Dan Bernstein, President and CEO of Bel Fuse. Please go ahead sir.

Thank you Tamika and welcome to Bel’s conference call to review the Bell 3rd quarter 2005 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance. Colin.

Good morning everybody. Except for historical information contained in this news release today the matters discussed including the statement regarding future synergies 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 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 will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements. And that’s the forward-looking statement Safe Harbor.

Now let me proceed and discuss our results for the quarter. Bel ended the quarter on a GAAP basis with a net after tax earnings of $5,986,000, or $0.52 per fully diluted share. This is somewhat below the net earnings of $6,894,000 for the 3rd quarter in 2004. And slightly below the $6,669,000 in the previous, that's the 2nd quarter of 2005, where we had 2% higher sales levels.

Sales. For the quarter our sales were $56,248,000, which was 12% above the $49,986,000 in the 3rd quarter of 2004. And this was slightly below the $57,545,000 in the preceding quarter ended June 2005. Sales gains above Q3 2004 were made in magnetics group plus the marginal segment.

Within the marginal segment we had improvements in the power group with a drop in the analog in custom modules. On March 23, we completed the acquisition of Galaxy Power Inc. in Westside, Massachusetts. And for the quarter, Galaxy contributed $2,691,000 in sales, but negative earnings due to these rivalry [indiscernible] sales levels.   Turning to cost of sales. Our gross margins for the 3rd quarter was 28.1%, which was below the 30% gross margin for the same period of 2004. This was also slightly below the 29.3% growth margin for the 2nd quarter of 2005. The lower margins were primarily due to less favorable sales mix but the addition of [Inaudible] sales for raw materials had increased prices particularly for copper and steel. In addition to Q2 2004 we had the benefit from reversal of reserves for raw material obsolescence.   Turning to SG&A. There was an increase of $794,000 from the same quarter in 2004 when we did not own both Galaxy and NetWatch. SG&A was 15.6% of sales in the quarter compared to 16% in the same quarter of 2004. [The customary] increases primarily for the retention bonuses of Galaxy and accrual with insurance and additional selling expenses and commissions due to what we had was a 12% increase in sales year-over-year. And these were offset with lower costs primarily for our professional fees.

Our taxes for Q3 2005 are significantly higher due to an accrual of the Far East taxes. Recent developments in Hong Kong suggest the authorities are buying different status in their treatment of offshore income. Also in Q3 2004 we had the benefit of an R&D tax program and we took those credits and we’ve now institutionalized that going forward so we don’t get that as a one-time benefit.   Turning to the balance sheet. Cash and equivalents, at the end of September, our cash equivalents and securities were $82.5 million. This was slightly below the December 31, 2004 level of $94 million but we have paid back in July $8 million of the—approximately $19 million that we’ve borrowed of the required approximately $19 million. The $8 million we had borrowed to complete the Galaxy acquisition. In addition to cash from profits for the quarter we increased net inventories split roughly 50/50 between raw materials and finished goods by a total of $1.8 million. The [single] extent of allowances at the end of September was $39.7 million, compared to $33.2 at December 2004. Our accounts payable for the same period is $14.5 million dollars.

Specifically turning to inventories for this September period, our inventories were $34.8 million, which was some $5.7 million higher then December 2004, when we did not own both Galaxy and NetWatch.

Our balance sheet [comments], in the quarter we made substantial construction progress with another new production facility in China, which we expect to have completed in early 2006. Year-to-date we have spent approximately $3.9 million on capital projects. And if we look our D&A, depreciating and amortization, for the 9-month period, it's running just slightly less then $7 million. Our book value as of September 30, 2005 was approximately $16.86 per share.

That’s the comments I have for the moment on our performance. Now I’m going to turn the phone back to Dan Bernstein for some general comments.

The market remains uncertain and we still have very limited visibility as to future customer requirements. Backlog is relatively stable at this time. We are currently holding on to our investment at Artysen. At this point in time, Tamika, I’d like to open up the call for questions.

Thank you. [OPERATOR’S INSTRUCTIONS] Our first question is from the line of Todd Cooper with Stevens Incorporated. Please go ahead.

Colin, can you remind us what Galaxy’s revenue contribution was last quarter?

Yes, just one second. Last quarter it was approximately $4.5 million.

And it’s $2.6 this quarter? What--

It’s 2.7 actually, yeah.

What accounted for the big drop off?

We had some projects go into the light and we had a couple of project squish out and another project we moved out of there to the Far East and it's still ramping up. But we knew that this was going to happen it wasn’t a surprise to us internally. We expect it to start to stabilize somewhat in the 4th quarter. And next year, we expect to be for the full year – we would expect that we will have Galaxy back on a run rate of about $18 million a year which was where it was running when we acquired it.

And at the 2.6 or 7 you lost money, what’s the quarterly revenue break-even point for Galaxy?

Actually on a gross profit basis, we made money. It’s just when we picked up all the overheads, we went into a loss situation. It’ll make [volume] about $3.5 in sales.

Okay. And looking at 3rd quarter last year versus 3rd quarter this year. Revenue was up year-over-year, gross margins were down; I know you added Galaxy, but can you help us understand the margin movement?

Well we had some – quite a bit of variation in inventory reserves. We also have had – we really – the pricing has been pretty tough recently. We’re going through a period, I think, within the industry of – it’s taken us a little while to get here, but we are getting socked pretty hard with copper price increases, we’ve had a difficult quarter related to energy prices and that’s effected our – particularly our utility costs, primarily electricity. We use a lot of electricity, particularly during the summer period in China, which we have just gone through—by the nature of the products we make, we have to be very aware of possible damage due to corrosion and so we use a lot of air conditioning. And we’ve also obviously been hurt a little bit, not to any great extent, but little factors like the reevaluation of the [wand] and pressure on – there is still a shortage of labor in China. We’ve had to enhance somewhat the wage package and the benefits package for our workers in China to keep the retention rates up and also improve the living facility somewhat. So this isn't a number of minor expenses that are run through there.

And this--listening to you, I don’t see much of that changing in the near term.

No. They’re pretty much – well the electricity, the utility should go down in this quarter because we’re starting to move out of the summer and that will help us a lot. I don’t think we’re going to see much of an improvement in the copper prices. What we will see however, Todd, is that as the – as the new – One thing you run into, it's very difficult to raise prices on products that are already in the marketplace. However as new products come out, we can incorporate these higher costs into our selling prices and improve our margins that way. So I think it will level its self out as we move forward. But you’re right; we can’t go back and do anything on the products that are already out there.

Right. But what’s kind of your target gross margin? In the 30% range?

Oh yeah, I’d like to be in the – around – 30% is not bad, we can-- we could live with 30%, so-- we really want to move it up another point or so.

Okay, let me get Dan involved by asking him--so far we’re seeing relatively weak guidance for the 4th quarter from the contract manufacturers and component suppliers that are heavily dependent on the communications equipment market. What’s your guys take on that market going into the 4th quarter?

That was for Colin, wasn’t it, Todd? Yeah, once again, they drive up so we've – if they’re not going to be a real boss, then we’re not going to be a real boss, but, we, I think, our feelings is that the second 4th quarter is going to be similar to the 3rd quarter.

Yeah, we’re not seeing a lot of fall back. The problem becomes you don’t know until mid-December which way these guys are going to go. We are getting the benefit of some right now, some business particularly in the – that goes into consumer applications where people are rushing to get the product out to year-end. And that will continue on some hot products and that will continue, we think, well into--most of the way through the quarter. But different contract manufacturers have different financial date when they – some are on a calendar year and some are not. So what we’re seeing traditionally is some of these guys start to play a little cute as they try to manage their balance sheets at year end, and you’re just never to sure if they’re going to drive everything for sales or if they are going to try and drive everything to get a good looking balance sheet. And so it’s – it somewhat gets out of our hands and we really won’t know until mid-December what it’s going to end up looking like.

Okay. Thank you guys, very much.

[OPERATOR INSTRUCTIONS] And our next question is from the line of [Redsa Cleave] with Nelson Partners. Please go ahead.

Hi. Good morning. Dalton Partners. I guess bearing in mind that you guys still hold a stake in Artysen shares. Could you just take this opportunity to clarify to the public what is your position at this point with the company?

Our position is [either] we have tried to have a conversation with them. Basically, our position is our offer is out on the table, with our stocks about two days ago we're selling at a premium to out—to their shares and we felt very strongly that if they want us to up our offer, we would have to sit down, see the synergies and see why the offers better and have the – for the dialogue. They have not shown us any information whatsoever, very limited communication with us on how or why we should increase our price. And once again, we started this about a year and a half ago and the stock keeps going lower. So at this point and time, we know that Jenna Partners has taken a pretty big position in the company and we’re waiting – playing a wait and see game with them to see how things are going to evolve. But we’re not going to increase our bid when we’re the only ones with a bid out there.

I hear you. When you say communication, albeit limited, interesting communication, but is that more recently or is that--

Very limited – we kept asking if there’s going to be a book or what are they going to do? Can they sit down and talk to us? And they keep coming back with, if your offers like this we can’t talk to you or we won’t accept A and B stock and we’re saying we don’t think A and B is a show stopper and we would combine both shares but they’re just not happy with the bid that we have out there.

I hear you. Okay. Thank you very much.

Thank you. [OPERATOR’S INSTURCTIONS] There are no further questions at this time, Mr. Bernstein. I will now turn the conference back to you to continue with your presentation.

Well thank you for your time and we’ll speak to you in February. Good-bye.

Ladies and gentleman, that does conclude our conference call for today and we thank you for your participation and ask that you please disconnect your lines.