Bel Fuse Inc (BELFB) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bel Fuse, Inc., first-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. (OPERATOR INSTRUCTIONS). And as a reminder, this conference is being recorded today, Monday, May 1, 2006.

I would now like to turn the conference over to Dan Bernstein, President, Bel Fuse, Inc. Please go ahead, sir.

Thank you, Michel, and welcome to our conference call to review Bel's first-quarter 2000 (sic) results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance. Colin?

Good morning, everybody. Thanks, Dan. I'd like to start with the Safe Harbor Statement.

Except for historical information contained in this news release, and today's conference call, the matters discussed, including the statements regarding the Company's growth drivers of the timing of resumption of [corporate action] at the Company's Dominican Republic facility, 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 effects 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; [merchandising] or technology 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 product; 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 of any forward-looking statements will [improve] to be correct. We undertake no obligation to update or revise any forward-looking statements.

Now moving on to the comments -- for profits, Bel ended the quarter on a GAAP basis with net after-tax earnings of 3,997,000 or $0.34 per fully diluted share. This is below the net earnings of 4.3 million for the first quarter of 2005 and above the 3.3 million in the previous fourth quarter of 2005.

The major negative impact on our earnings was the loss of underinsured raw materials [per a fire] in our Dominican Republic facility on February 17, 2006, which interrupted the manufacturing and destroyed the warehouse. This facility primarily manufactures 50/60 Hertz electrical transformers that are typically used in industrial machinery, security and alarm systems, and HVAC equipment.

Following the fire, limited manufacturing resumed in parts of the old building while a new manufacturing facility was constructed. Just last week, a new manufacturing line commenced operations in a new building. And we are approximately 55% of proven capacity in the Dominican Republic, with additional capacity being provided by our New York and Far East manufacturing facilities. We expect to be back to near previous production levels in the Dominican Republic by the end of June.

Sales -- for the quarter, our sales were 54.6 million, and 20% higher than the 45.4 million in the first quarter of 2005. This was below the 56.6 million of the preceding quarter ended December 2005.

Typically, first-quarter sales are lower due to the Chinese lunar new year shutdown. Our modular sales are down because we're phasing out of the automotive business. However, going forward, we're optimistic that these sales will be replaced by DC-to-DC and APC-style analog devices.

There were strong sales of interconnect products and MagJacks. Our sales from the APC acquisition are up for analog and custom modules. And backlog has increased substantially over the quarter.

Last year, we had added resources in sales, marketing, and engineering to our interconnect group, and that includes premise wiring. Premise wiring is primarily the cable systems for RJ-45 in RJ-11 connectivity for data and voice transmission in [structured] Category 5, 5E, and 6 cabling systems. We're seeing dividends from this investment.

On March 23, 2005, we completed the acquisition of Galaxy Power, Inc. of Westboro, Mass. And for the quarter, Galaxy contributed 3.4 million of sales, but was only at breakeven exclusive of intangibles amortization due to relatively low sales. For the first quarter of 2005, we booked $158,000 of sales from this facility.

On July 1, we completed the acquisition -- that's July 1 of 2005 -- we completed the acquisition of NetWatch. For the three months in the first quarter 2006, it had sales of $471,000. Excluding 2005 acquisitions, Bel had organic sales increase of 12% for the first quarter on a year-over-year basis.

Cost of sales -- our gross margin for the fourth quarter was 26.8%, and below the 29.4 gross margin for the same period in 2005. This was also below the 28.1% gross margin for the fourth quarter of 2005. The lower margin was primarily due to a less favorable sales mix.

Modular products and some interconnect products are strategic to Bel's growth an important to total earnings. However, they do return lower gross profit percentage margins, as a large percentage of the bills of materials are purchased components. As these sales continue to increase, our average gross profit percentage will decrease.

Other significant margin impacts were amortization expenses from the newly acquired Galaxy Power, and increased prices, particularly for copper and steel, petroleum-based commodities. Also included in cost of sales for the quarter was a pretax goodwill charge of $230,000 for Galaxy.

The Company is paying largely higher wages and benefits to our production workers in China. The increasing sales also have an impact on the accelerated [writeup] of goodwill related to acquisition of E-Power and Current Concepts.

We continue to run duplicate RoHS and non-RoHS production lines -- that's the lead-free operations -- to support our customers as they convert to lead-free products. However, this is inefficient, and requires us to maintain additional equipment. Although we are hopeful that this decrease will happen during the next six months, we know it will not be fully eliminated for many years.

SG&A -- there was an increase of 2.15 million for the same quarter in 2005, when we did not own both Galaxy and NetWatch. SG&A was [17.2%] of sales compared to 15.9 for the same quarter of 2005. Cost increases were primarily selling expenses and shipping expenses of $750,000, which half was commissions tied to the 20% increase in sales, an additional 300,000 for professional fees, and a 381,000 expense for restricted stock awards. These increases were offset by a credit in the Far East for the reversal of bad debt accrual of 180,000. The acquisition of Galaxy and NetWatch added approximately $1 million of SG&A for the quarter.

Taxes -- in Q4 2005, Bel received a license from the Macau government to commence operating a commercial offshore Company. This company began formal operations in the first quarter of 2006 with the intent to handle all Bel's sales to third-party customers in Asia. We expect that when this company is fully operational, that more stability and predictability will be brought to the quarterly Bel tax rate.

Turning to the balance sheet, cash and equivalents -- at the end of March, our cash, equivalents, and securities were 96.5 million, which -- 7.9 million above the March 31, 2000 (sic - see press release) level of 88.6 million, and 4 million above our December 2005 balance. Included in these balances are approximately 21 million of net of investment banking fees related to our holdings in Artesyn Technologies, which we expect to convert to cash hopefully in May 2006.

Receivables and payables -- receivables net of allowances was 39.9 million at March 31, 2006 compared to 33.9 of March 31, 2005. We continue to get pressure to increase credit terms to customers, particularly in Asia. However, we are trying to hold the line as we move forward. Our accounts payable for the same period is [$17.3] million.

For this [March period], our inventories were 35.7 million which is 4.8 million higher than March 31, 2005, when we did not own both Galaxy and NetWatch and had lower sales. Impacting inventory in addition to increased sales and increasing raw material prices are shortages of certain ICs that's causing us to buy much further ahead than we would normally do.

Other balance sheet comments -- in the quarter, we made substantial construction progress with a newer production facility in China, which we expect to have completed early in 2006. The ground floor of this building is complete, with eight full SMT and one sample line in production. The second floor is in operation for DC-to-DC products. The third floor will be finished the second quarter, and the fourth floor will be completed in the third quarter. Each floor is approximately 22,000 square feet. Included with the addition was a new canteen that would feed approximately 4,500 associates. That works out -- we do three shifts for each meal with 1,500 people at a time.

For the quarter, capital spending was approximately 2.5 million, while depreciation and amortization was 2.3 million. Our book value at March 31, 2006 was approximately $17.79 per share. Now I'll hand it back to Dan.

The market still remains uncertain, and we still continue to have very limited visibility as to the future customer requirements. Backlog is relatively stable, [there is] better labor availability at our factories, and a much higher employee retention rate following Chinese lunar new year than we had expected. We expect to complete the sale of our holdings in Artesyn in the second quarter, and continue to hold position in another potential merger candidate, [where] we currently hold just under 5% of the stock.

I would like to open up the phone now for any calls anybody might have.

(OPERATOR INSTRUCTIONS) Todd Cooper, Bel Fuse, Inc.

I'm with Stephens. Your informal guidance on the last conference call was for revenue to grow slightly on a sequential basis. I know you elaborated a little, but can you elaborate a little more on what caused the weakness?

You know, for us, I wouldn't say the weakness was in the first -- compared to the fourth quarter -- once again, that was just due to the Chinese new year. Compared to the year before, we felt we did have pretty strong sales. Once again, it was 12% of organic growth. So I think overall, in this market, I think we are pretty satisfied with that.

Okay, and there have been some reports of workers not reporting back after the Chinese new year. That was not the case with you guys?

No, this is probably the best retention we've had after Chinese new year for many years. So we were surprisingly happy about it. And I think it's a lot -- we put a lot into our new factory's working conditions, with new canteen, a movie theater, the new factory. So I think that might have had something to do with it also.

Okay. And would you care to give us any guidance on the revenue line for the next quarter?

Colin?

Well, Todd, you have got us all upset now. It is still very uncertain, Todd. At this time, we're not prepared to give any guidance.

Okay, you just leave it up to me, huh?

I'm going to leave it up to you, yes.

That's why you get paid the big bucks, Todd.

Any areas of strength that we should be looking for? The MagJack, obviously -- anything else?

I would think -- once again, the analog devices -- we had an acquisition three years ago of a company called APC and it looks like their backlog is extremely strong compared to how it was historically. And they had a very strong first quarter.

The DC-to-DC productline -- I think internally, our group that we had is doing very well. And I think Galaxy is going to be soft. And then the rest of the products -- we're just waiting to see how they look. If you're looking at specific product groups of fuses, land magnetics, telecom magnetics -- they tend to be a little bit softer than we expected in the first quarter. And we just don't know how that's going to look in the second quarter.

Okay, and if I could move to the acquisition target, is there any movement there regarding the target? Have you made any additional investment? Is it going better so far at this early stage than your negotiations or lack thereof with Artesyn?

Well, I think historically, we're trying to be a nicer [general] Bel Fuse with regard to looking at these acquisitions. So I think what we are attempting to do is -- we have a conversation with the company and try to open up dialogue as much as possible. And as long as the companies we're looking at are willing to talk to us and progress going forward, then I don't think there's a need to cross the 5% barrier. However, if going forward, if they become overly defensive, then I think we would take somewhat more aggressive approach.

But so far, there is dialogue on both sides?

Yes, there has been -- a matter of fact, they came to visit our factory in the Far East last week.

And any timeline we should keep an eye on with regards to this [intel] acquisition?

I would say once again, we are going to move a lot slower than we have in the past. But I would tend to think that either in three or four months or five months, either we're going to go with a 5% mark or we're going to have a lot more further discussions.

[Jerry Heffernan], Lord Abbett.

On a background note here, I was not aware of there being issues on an annual basis post the Chinese new year. Could you just review what goes on there?

It just -- once again, you are almost basically shutting down your factories. Most of -- a majority of our work has come down from the north, and they live in dormitories. So [besides] -- you have two factors. One is February is a shorter month, and then ramping down the factory, and then ramping up the factory.

That part I understand. I thought you were talking about the workers and workers not reporting back to work. And you said we had one of the best retention years --

Because generally, what happens -- most workers come for two or three years to build up a dowry. And then when they go back up north, if there's factories closer by their house or better conditions, because we are extremely far south, and more companies are moving up north. So last Chinese new year and the year before, we thought that a lot of these new factories were taking our workers, providing them (multiple speakers)

So you had to create (multiple speakers) improve the working environment to make them want to come back?

Also having retention bonuses and looking at our pay structure, things like that.

And do they give you any idea as to whether they are coming back or not, or is this just a pretty transient workforce that doesn't (multiple speakers)

We are dealing with a workforce of about 8,000 people in China. So it's very difficult to get a straight story, I would say.

Okay. I guess, Colin, if we could switch over to you on SG&A. SG&A was up 2.1 million year to year. Galaxy and NetWatch added 1 million. But you also -- we had a reversal of a bad debt of 180K.

Yes, 180K.

Okay, can we just account for the other 1 million? I know that in the press release, we mentioned energy, raw materials, transportation, direct labor costs, if we --

(multiple speakers) cost of sales, yes. (multiple speakers) There were selling expenses of about 540. Professional was 306. And we had 123(R), which is the expensing of stock options, of 381.

Okay what were the professional expenses? What's that (multiple speakers) -- the audit fees and --?

It's mainly audit. There was little bit of legal. We have got a couple of lawsuits we are dealing with at the moment. But the bulk of it was audit -- Sarbanes-Oxley stuff.

Okay. And what was that number again for professional expenses?

308 -- 306 actually.

Okay, get that to the exact 2000 mark there.

Well, we have got to get it right.

Very good. And can we review the Dominican Republic situation? It was a lease facility. The manufacturing was taken down. What is going up in its place? Is this an opportunity to (multiple speakers) attack the whole manufacturing from a clean slate?

What happened is that -- we're in an industrial park. A lot of the tenants are like U.S. companies like Johnson & Johnson and Corning and Baxter, folks like that -- a lot of medical stuff goes on in that facility. And it's basically an industrial park that has a lot of individual buildings throughout the park.

There was a fire in a transformer that caused this fire at the main switch. The building went down. Well, part of the building went down anyway -- a large part of the building went down. As it so happened, within the industrial park, the owner of the industrial park had started on spec to put up a new building, and had the floor in and was just starting to put some of the walls up -- steel up for the walls when this happened. And so immediately, the fire happening made that building available, and within a week, started to put a roof on the building, and since then, has added one more segment to the building, and will add a third segment. So in effect, not all that far from where our old building was, we'll have this new building.

The first segment of that building has commenced operations and passed quality -- had to go through a quality order -- actually, the quality order just finished last Friday. And so we are up and manufacturing with a whole new clean slate in the Dominican Republic.

Certainly an unfortunate situation; however, what is done is done. The means of setting up a manufacturing plant now -- often, when you are running a manufacturing plant, several years into it, you have the Monday morning quarterback knowledge of saying, boy, if I had this to do all over again, I would do it like this. (multiple speakers) Is there any positives out of this? Do you expect to have this plant running better than what we had before?

I would go -- it should be a little bit more efficient factory, but not that much more efficient. The problem that we had with the factory that -- this product group is more a custom house. So a run for them are like 1,000 to 5,000 pieces. So there's a lot of hand involved with it. So it is not really conducive to [really lay out] an efficient factory like we do in mainland China. When we laid out our factories in China, we gained substantial amount of efficiencies on how we moved materials for the factories and how we lined up people. But in this operation, because the runs are just so small, it is difficult to come up with efficiencies. (multiple speakers) we had a nicer factory, but not enough to say, hey, it's going to be able to help a lot on the bottom line (multiple speakers)

So other than [equipment] --

(multiple speakers) got the jobs here. We have -- in the middle of this, we did move a couple of marginal jobs that may could have been done in the Dominican Republic or China. We have moved them to China, and a couple of the jobs will stay in China going forward.

(OPERATOR INSTRUCTIONS) Chris McDonald, Kennedy Capital.

Just a couple of questions. One, with mix kind of hurting margins a little bit, I'm just curious on where you stand on that progression towards MagJack products, and if there's kind of a timeline for when you have an optimal mix, or the future mix will stabilize those margins?

Colin?

The mix is always going to be changing. Part of it is the mix. One of the things that happens is that when we've got these rising material prices, it's basically impossible to go back to our customers and get significant price increases into existing products that are already out on the marketplace. So really to move our cost increases through, we have really got to put it in the new products as they come out. And so a lot of the margin is really dependent on the rate that the new products tend to come out. And we're doing okay on that, but it just takes a while to flush through the system. And that is probably where we will get the better margin pickup as opposed to the mix. The mix is going to continue to move around a little bit from job to job, and from quarter to quarter, it will be variable. But it's going to be just one of these factors of time -- I would say more likely six months to get it stable.

And did you guys give an estimate of maybe lost revenue due to the fire? Have you tried to (multiple speakers)

Well, no, we didn't, because as it so happened in the -- we originally said in our press release what the percentage was that facility produced. However in the first quarter, the good news was that due to some fancy footwork and the fact that we already had some inventory -- what happens is the Dominican Republic feeds the material back up to a facility we have in New York just near Kennedy Airport, and the goods get distributed from there.

We also keep -- as Dan said a few minutes ago, some of this is very small production runs, and a lot of them are small sales runs. So we tend to keep quite a bit of it in inventory. The good news was that we basically had no sales degradation in this quarter from the fire. We will expect to have a little bit of sales drop in the second quarter, but not a huge amount.

Maybe -- I would say anywhere from 0.5 million to $1 million in sales.

Off in the second quarter.

Yes.

That helps. And then last question -- in the past, you guys have talked about different scenarios where you might combine the A and the B stock. And I was wondering if you could review what your thoughts are on that and kind of the likelihood there?

Once again, when we had conversation with Artesyn, and they said one of the roadblocks was the A and B two-tier stock, we told them it's not a concern, and that we would merge both stocks. And so we are looking at a lot of acquisitions. So at this point, we feel if the right acquisition comes through where it makes sense that we would combine it. We're not that -- it's not something that we're going to do in the short term. But it's something that we do talk about at every Board meeting, and we decide what is best or not to do.

Okay, just curious if you have progressed with the acquisition that we talked about earlier in the call -- if you have progressed to the point where something like that may have come up in your discussions?

I would tend to think that we are spending a tremendous amount of time looking at acquisitions over the 100 million mark. And even in revenues of 300 million or 350 million, I think if that situation -- that we would merge the A and B.

And so, once again -- the problem we had a lot -- one of the concerns that we do have the A and B stock is -- occasionally, look for a company where there is a spinoff or a family controls a good portion. And if we bought them with Bel stock, the people that we acquired the company would end up acquiring us. And that's one of the concerns we had.

That was the last question gentlemen.

Colin?

(indiscernible)

Actually, another question just popped up. Did you want to take it?

Sure.

Jerry Heffernan, Lord Abbett.

Thanks for that last-minute [hand raise] there. Colin, I believe you said something about phasing out of the automotive business. This has been discussed before. I apologize; I missed it. If you could just review what is going on there?

We had been for many years doing the manufacturing for a company that made lighting -- basically the lights that go into automotive. And we were doing the ballasts and the transformers. And over the last -- and we've been doing it for probably -- fairly close to 10 years, about eight or nine years. Over the last few years, they internally were starting to move some of the responsibilities for some of that work to Europe, and also trying to do a little bit more of it in house. It got to the stage that for us, with all the push ins and pull outs that it just wasn't profitable for us to keep manufacturing for them. And I think we decided between the two parties that divorce was probably the best thing to happen. And so that is what has been going on with -- delivered all our commitments to them, and we're just doing a little bit of follow-up work. But that will be the end of that business.

I think the sales last year were about 4 million, Colin?

That's correct.

Okay, and on a quarterly run rate -- by the third quarter, it should be zero?

It may be even closer than that (multiple speakers) let me tell you, too -- you haven't -- if you want it, I would say -- let me see what we did this quarter. For example, this quarter, we did about 95,000. And last year, we did about 1.3 million. So it's pretty much wind-down.

Thank you, and that was the last question.

Once again, I want to thank everybody for joining us today. We hope it was informative. And we'll see you next quarter.

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.