Bel Fuse Inc (BELFB) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Bel's third quarter 2007 results call. During the presentation, all participants are in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Friday, October 26, 2007. It is now my pleasure to turn the conference over to Dan Bernstein, President and Chief Executive Officer, Bel Fuse. Please go ahead, sir.

Thank you, Dave. Welcome to our conference call to review Bel's third quarter 2007 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 will start with the Safe Harbor Statement. Except for historical information contained in today's news release and this conference call, the matters discussed in this conference call, including the company's plan for a plant closing, 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, capacity to supply constraints over difficulties, product development, commercializing of technological difficulties, the regulatory in trade environments, 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 statements will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

Now I will turn to the results. For the third quarter of 2007, our sales were $66.379 million. And this was $6.9 million lower than the record $73.260 in the same quarter of 2006. However, the $66.379 in the third quarter was $4.7 million more than the $61.6 million in June 2007. Sales year-over-year were lower in all product segments except the Modules product group that includes both DC-DC converters and custom modules.

Turning to profits and cost of sales, building of the quarter on a GAAP basis was net after tax earnings of $5.914 million. This compares to the net earnings of $7.7 million for the third quarter of 2006. Labor costs continue to increase in the People's Republic of China due to new labor regulations and a continuing tight labor market. With the product mix increasingly skewed toward high dollar value items where we continue to see good growth potential, our gross profit margins continue at lower levels. The third quarter of 2007, we have pretax income of $1.187 million from the sale of property in Hong Kong and Macau.

Turning to SG&A, there was an increase of $423,000 from the same quarter in 2006. This included lower commissions of $262,000 due to lower sales levels. Despite ongoing high legal expenses related to several legal cases, the overall legal and professional fees were $350,000 lower due to reductions in accounting fees related to auditing and Sarbanes-Oxley work. There was a $300,000 increase in our bad debt provision for the quarter plus some severance costs. Taxes. Our income tax provision of $954,000 was a result of reductions due to the release of an accrual to the expiration of certain statutes of limitations and the finalization of certain tax audits in Asia. These were offset by changes in estimates to the prior year taxes upon finalization of certain 2006 tax returns.

On the balance sheet side, at the end of September 2007, our tax equivalents and securities were $106 million which was $14 million above our December 2006 balance of $92 million. Receivables and payables. Receivables of net of allowances was $48 million on September 30 as compared to $44 million on December 31, 2006. And our accounts payable for the same period, that is the end of September, 2007, is $18.8 million.

Inventories for this September period. Our inventories are $42.5 million which is $3.8 million below December 31, 2006. Some other balance sheet comments. For the three months capital spending was approximately $1.5 million while depreciation and amortization was approximately $2 million.

During the third quarter of 2007 we repurchased 114,100 class-A shares at a cash outlay of $4 million. At a regular meeting of the Bel Board of Directors, a resolution was passed in July to increase the quarterly dividend effective with a dividend payable November 1, 2007. The new quarterly rate for class-A shares is increased by $0.02 from $0.04 to $0.06, and the class-B shares was increased from $0.05 to $0.07. Our book value at September 30, 2007 was approximately $19.84 per share. I will now turn the call back to Dan for some comments.

Thank you, Collin. We continue to rationalize our production's four facilities. In the third quarter, we ceased some manufacturing in our facility in Macau. The remaining production from there was moved to our main facility in China. That building is being sold, as well as associated staff quarters and a warehouse. Also in the fourth quarter, we ceased manufacturing at one of our smaller China facilities. Thus, by the end of the year, we have consolidated four Far East operations into two. We do remain quite active evaluating acquisition opportunities that have potential to increase revenue and profitability for Bel. I would like to now open up the call for any questions, please.

Thank you, sir. (OPERATOR INSTRUCTIONS) One moment, please, for our next question. And our first question comes from the line of Johnny Brown of Stephens, Inc. Please proceed.

Good morning, guys. I see that revenue ticked up pretty significantly after several flat quarters. Can you talk a little bit more, give a little more detail on what drove that growth during the quarter?

Generally, from our Power products, we are seeing growth. And from the value-added modules, the front ends. Once again, both these products, we've been involved with for a long time, and I think, now, we are just starting to get some good momentum with them.

Okay. And correct me if I'm wrong on this, but I think fourth quarter tends to be a seasonally slow quarter. So, with that ,do you expect this growth to continue. or what are you looking at for the fourth quarter?

I think -- We don't make predictions, but we don't see any substantial increase. It's maybe just flat or maybe a little soft. What do you say, Colin?

Cyclicality is -- I don't think there's a seasonality to our sales. We've never been been out of focus on anything. It does float around a little bit. It just really comes back to what -- I think it might be impacted little bit by how early or how late lunar new year is, Chinese New Year, and whether folks start to pull product in December when it's an early Chinese New Year, or sometimes they don't pull product until January if the Chinese New Year is going to be later. I think it might be down a little this year because I don't think we are going to see folks pulling product very early.

Okay. That makes sense. Now, gross margin has kind of remained flat and lower than historical levels. Can you talk a bit more about that? And I think you're getting some pricing pressure in your MagJack products. Is that right?

Well, all our product lines are fairly price-sensitive, As you say, the MagJack belMag product line is more of a commodity product as are our fuses. There is plenty of pressure. There's always pressure, and it's very difficult, when you are the leader in the marketplace in a particular segment, which we are, particularly in the belMag area, to maintain margins because everybody is nipping along around your heels as they bring out products. And the way they get their product in the marketplace is obviously through lower prices. So it is a battle to keep the margins up.

We are not seeing any real relief on material prices. Material is fairly stable at the moment compared to where we were with price increases going up. And we are continuing, however, to have additional labor costs which are not fully reflected yet in the quarters we've gone through. And I don't know if we mentioned this last time, but new labor regulations came in in the areas we are in, whereby not only was there a wage increase in China, but there was also a shortening of the official workweek from 60 hours to 40 hours. So, where in the past, we paid overtime once we got to 60 hours in a week. Now we pay overtime when we get to 40 hours in a week. So, those are the sorts of things that push things up. And labor still is in short supply, so we are having to pay somewhat fairly hefty premium at the moment for our labor. And we are not seeing dramatic quarter-over-quarter price decreases because I think there's not a lot of margin that anybody is making on the products at the moment. So that's not as vicious as we probably saw a couple of years ago, but there certainly is a little bit of pressure on the prices.

Okay. And then also to your operating expenses, I think, obviously, closing down of facilities and consolidating will help improve those. But in the fourth quarter, do you see that offset by the cost of moving production, et cetera?

No, we have very minimal cost to move production. We will obviously offset the shutdown costs against the profits from the sale of the properties. But what's really going to happen, I think, is the economies, from having fewer facilities, are really going to go to a certain extent to offset that increased labor costs that are coming in from the shortage of labor and the change in regulations in China.

Okay. Well, thanks a lot, gentlemen.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of John Harnon of Needham & Company. Please proceed.

Great. Thank you. Good morning. If I can just follow up and make sure that I heard you correctly, did you say MagJack -- you are seeing MagJack really becoming more of a commodity product?

You know, we did have sales growth in the product. What happened was that we are the market leader, having the market leader for many years leader. When we are consolidating and acquired Steward Connector, Stewart Connector was probably three in this product line, and we were one. So, there was -- Over the years we have been, on certain items, single source at customers. It's only in the last 12 to 18 months that we are starting to see a lot more competition, and we are seeing a lot more second and third sources of our product. And two, new technology breaks out like Power over Ethernet so we do see margins getting affected in this product line.

If you were to look within your Magnetics group overall and where MagJack is from a margin profile, is this now becoming a headwind within your Magnetics group, or is it just kind of coming down to the group norm?

I would say coming down to the group norm.

Okay. All right. That's helpful. So, just in terms of the quarter overall, did you continue to have just one 10% customer in the quarter?

I think so, yes.

Okay. And if so -- Well, given that, can you share just generally how that customer performed sequentially?

Once again, I think everybody is pretty aware that that customer is Cisco, and I think when John Chambers last spoke publicly, he was suggesting that he believes Cisco can have a 20% growth. I think that's pretty ambitious. But once again, if he sees that substantial growth, hopefully we can ride the wave with them. And once again, we are not just selling MagJacks to say Cisco, we sell them every product we make, a whole breadth of different products from all four product groups.

Okay. I guess, though, if I can -- Maybe I can reword that. Were they up for you in the quarter? Did that help contribute to --

I think they were probably slightly up, yes.

Okay. All right. So getting back to MagJack, and its had its share of headwinds at Cisco in terms of the sourcing scenario, is there an opportunity where the MagJack line can possibly regain a little momentum, and tap some new opportunities, or is there any meaningful opportunity outside of networking products you can talk about?

I think it all depends on the new technology, the new speed. I think , well, now we are doing a tremendous amount of work on Power over Ethernet and how well that product is being accepted. Then have you ten, 40, ten gigabit, 40 gigabit, 100 gigabit. Once again, we are looking at two years, three years down the road. Once again, that's how it is. New technologies, when do they get accepted? Home PNA, we've done a tremendous amount of work in. We just don't know at what point certain products take off and other products drop out. We know as we go with faster and faster speed, there's a lot more technology involved in the connector. And hopefully that's beneficial to us. Because we tends to be the

Okay. That's helpful. And if I could just ask one more question. This is really more specific to the model. If I look at your SG&A for this past quarter and look at it versus the June quarter, it declined a good bit while your sales improved. I know, Colin, you went through year-over-year comparisons. Can you talk about what occurred here sequentially because I --

Yes, sequentially, the items, we had a pickup in accounting and order fees. We did have a little bit of a reduction. We had some additional bad debt reserve. We had also -- What else? There were some severance costs we had with a couple people that left us in the G&A area. But I would think, if for modeling purposes, the G&A for the second quarter would be more of a normalized rate as opposed to the third quarter.

Okay. Is there anything that -- so there's really no material impact to SG&A? Everything is in COGS with these two facility moves over in China?

Yes. Both of these facilities were manufacturing facilities.

Okay. Any specific products?

We had -- They were mainly -- We had some hybrid-type operations and some molding operations. It had gotten quite small. And that's been readily absorbed. That's already done that. That closure and transfer is already done. In the other facility in China, they are mainly transformer, older transformer products, very little equipment and technology, more manual operations. And that will be fairly easy to move because there's not really any equipment, limited equipment to move there. So we don't see any problems there.

Okay. That's all very helpful. That's it for me. Thanks so much.

Thank you.

Gentlemen, there are no further questions in queue at present time.

Once again, we would like to thank everybody for joining us today and hope everybody has a nice weekend.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your lines. Thanks once again for participating, and have a great day.