Bel Fuse Inc (BELFB) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bel Fuse fourth quarter end 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) As a reminder, this conference is being recorded, Thursday, February 14, 2008. I would now like to turn the conference over to Dan Bernstein, President. Please go ahead, sir.

Thank you, Don, and we'd like to welcome you to our conference call to review Bel's fourth quarter end 2007 results. Before we start, I'd like to hand it over to Colin Dunn, Vice President of Finance. Colin?

Good morning, everybody. Thanks, Dan. I'll start with a Safe Harbor Statement. Except for historical information contained in today's news release in this conference call, the matters discussed, including statements regarding certain challenges faced by the company and the evaluation of acquisition possibilities, 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 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 the competitors' 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 insurance 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 will now move on and first talk about sales. For the fourth quarter of 2007, our sales was $69.3 million, which was $8.8 million higher than the $60.6 million in the fourth quarter of 2006. This $69.3 million was $3 million higher than the $66.4 million of the preceding quarter ended September 2007.

Sales year over year were higher in the modules product group that includes DC-DC converters and custom modules. The fourth quarter of 2007 was Bel's second highest ever sales quarter.

Profits and cost of sales -- Bel ended the quarter on a GAAP basis with net after-tax earnings of $10,255,000. This compared to the net earnings of $4,697,000 for the fourth quarter of 2006. Labor costs continued to increase in China due to new labor regulations. We have a product mix more skewed towards high-dollar value items where we continue to experience good growth. Our growth profit margins that have been at lower levels in this group have shown some improvement.

Included in our Q4 operating expenses were approximately $500,000 for the quarter due to an older manufacturing facility in China, at $500,000 additional for bonus due to a change in bonus accrual procedures. This fourth quarter 2007, we had pre-tax income of $4,312,000 for the sale of property in Macau. On an after-tax basis, this amounted to approximately $0.28 per share.

G&A -- a slight increase of $8.8 million in quarterly sales. The SG&A remained at similar values in the same quarter in 2006. This included high increments of (inaudible) increased sales level. Over this quarter we had more ongoing legal expenses related to several ongoing legal cases. Our professional fees were lower due to reductions in accounting fees related to auditing and Sarbanes-Oxley work, and a change in the method of accrual for year-end audit expenses. A charge of $293,000 was also recognized, which related to a [write count] of a $25 million investment in a cash bank which is being liquidated.

Our income tax provision of $1,213,000 was a result of reduction due to release of an accrual through the expiration of certain statutes of limitations that was offset by changes and estimates for prior-year taxes upon finalization of certain tax returns. The company is currently undergoing state tax orders for both New Jersey and California; however, it does not expect any significant changes in estimates related to these orders.

Turning to balance sheet, cash and equivalents -- at the end of September 2007 our cash equivalents and securities were approximately $114 million, which was $22 million above our December 2006 balance of $92 million. Included in that $114 million number was approximately $23 million in a fund operated by Columbia Bank, which was being liquidated and the assets being held to maturity, plus $4.5 million in escrow related to the sale of property in Jersey City in 2007.

Receivables, net of allowances was $52.2 million at December 31, 2007, compared to $44 million at December 31, 2006. Although this is an $8 million increase, our days sales outstanding remains constant at 68. Our accounts payable for the same period is $16 million.

Inventories for this December period -- our inventories are $39 million, which is $7.2 million below December 31, 2006. During the quarter, we saw some staff reduction in both raw material and finished goods.

Other balance sheet comments -- for the three months, capital spending was approximately $2.6 million while the depreciation and amortization was $1.8 million.

During the fourth quarter of 2007, we repurchased 45,933 Class A shares at a cash outlay of $1.6 million. During the full year of 2007, we had (inaudible) Class A repurchases of 160,033 shares at a cost of $5.7 million.

At a regular meeting of the Bel Board of Directors, a resolution was passed to increase the quarterly dividends effective with the dividends paid November 1, 2007. The new quarterly rates of Class A shares increased by $0.02, from $0.04 to $0.06, and for Class B shares it increased from $0.05 to $0.07 per share. Our book value on December 31, 2007, was approximately $20.66 per share.

I'll now pass this back to Dan for some general comments.

Thank you, Colin. As Colin mentioned, we were very pleased with both our sales for the quarter, our second highest quarter ever in sales, and our strong operating results. Backlog remains strong, but as with any New Year period, it's always difficult to truly feel comfortable with the backlog. At this time we see no softness from any of our major customers, including Cisco.

As part of our strategy to consolidate manufacturing to large, more efficient facilities, the fourth quarter we ceased manufacturing at a small plant in China and also sold our property in Macau. Both production was moved to our main facility in China. The net result will be a consolidation of our four facilities into two. However, at this time we do remain very active looking at acquisition opportunities and hopefully can stimulate growth and profitability to the company.

At this time, Don, I would like to open up the call for questions, please. Operator?

Yes?

We'd like to open up the call for questions, please.

Perfect. (Operator Instructions) And our first question comes from the line of Todd Cooper with Stephens. Please proceed with your question.

Yes, good morning.

Morning, Todd.

Good morning.

How much per quarter will the cost saving initiatives cost over the course of the year?

There's not a specific number, Todd. Bottom of the issue is we're looking at costs going up over time, and so we didn't whip this out just as a discreet item, but if you think of closing a 46,000-square-foot facility, which is what the facility was in Macau, and a 53,000-square-foot facility, which was the size of the facility in China, you get a bit of a flavor for what the savings will be even just on the utilities side.

Okay. Asking more about the cost of closing those facilities -- I think last quarter you said it was approximately $0.5 million. Will it be more in the second half of the year than the first half of the year?

I think that's a good number.

Actually, it was just a little less. We came in at about $485,000 I think, Todd. This morning I said $500,000 just rounding it up, but we came in just slightly under that.

I think, all told, that's a number we can use for the next 12 months.

(inaudible)

Okay. Can you describe your employee situation around the Chinese New Year in China?

What generally happens is that as you get closer to Chinese New Year, most of our workers are coming from the north, and some of them do migrate before Chinese New Year, and you saw it losing the workforce. And the problem is it's very difficult to bring workers into your facilities in the September, October, November timeframe to train them and so forth.

So what happened was we had a layoff in July and August, and then our backlog started to increase at that time. We went out to look for more labor and it was very difficult to attract the labor. So our backlog was getting pushed out and our lead times were getting pushed out. As that was occurring, we received more orders coming in, and that's why we have a pretty strong backlog today.

Once again, it's too early -- generally, the retention we have coming back from Chinese New Year could go anywhere from 70% to 90%, and historically over the past five years we haven't been able to come up with an exact figure of where it could lie -- just in that range. And we won't know the true details of the retention until another week. We have sent in many different types of bonuses and recruiting systems to hopefully get that retention rate up to the 85%, 90%.

Can you give us an idea of kind of what the average head count has been running versus ideally what it would be for you?

I think we're at about 7,000 people and we're looking at 9,000, 9,500. Our goal is to get our lead time down to six or eight weeks if we can and --

Do you know what you -- I'm sorry, go ahead.

Once again, our major product is the MagJack and it's a very labor-intensive product, and I would say 75% of our labor is going into that product. Labor doesn't really affect the other major product groups.

You were saying more competition in that product. Because of the labor shortage, do you feel like you're losing any business or anything else this year?

No, I think -- our biggest problem is we've been the single source at many customers because we are the market leader, and it's now taking our competitors an amount of time to come in to become second and third source. So I don't think our problem has been labor; it's more of being a single source, and there's no customer we have in any product we sell that wants to be single source.

Okay. Is the lion's share of your power supply manufacturing being done in China today?

Yes. I would say 80% of it is done in China. And once again, we're using a far less amount of people running that operation because it's mainly running an SMT facility.

Okay.

And because we're not using that much labor, we protect that product group, we protect the fuse product group, and basically, when we do hire back labor -- because they don't need that many -- they get first shot.

All right. And can you characterize what the demand picture for your products looked like prior to Chinese New Year?

Now to be honest, over the past eight weeks before Chinese New Year, we've seen strong demand on all of our products and [extremely amount of] expedited.

Okay.

So once again, that really makes -- we haven't seen this type of expediting for maybe two years. So now we're really concerned because it's all these opposites, and I think for sure there's definitely going to be a recession because we haven't seen anything that good in a long time.

Okay. Thank you very much.

Thanks, Todd.

And our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.

Great. Thank you. Good afternoon.

Good afternoon, Sean.

I just want to make sure I can clarify a couple things. The 12-month program in consolidating some of these operations -- this is the program that we already have under way which we've already discussed. We're not talking about anything new and incremental, correct?

No. Once again, the major properties -- I think the Jersey City property will be hopefully realized in the first or second quarter.

Yes, we haven't recognized the profit from the sale of the Jersey City property yet. We have just some technical regulatory stuff we're going through at the moment. Although the property has been sold, physically sold, and ownership has changed hands, we have not recognized the profit yet.

And regarding where we're going forward, we haven't taken out any reserves yet for the program that we're going to implement over the next four months also.

Okay. And so when I think about that $485,000 charge, this is specific to the fourth quarter, right?

Yes.

And so is there any reason why -- just from thinking about your core operations, why this shouldn't be included and really thought of more as a restructuring charge to your COGS line? Or how should we be thinking about that?

Well, it was a restructuring charge. If I had (inaudible) I would've liked to know that it obligates the income from Macau, but obviously I can't do that, so yes, it is a one-time. Going through it next year -- we have additional initiatives going on as far as restructuring in Asia, and we will have some expenses. We don't expect them to be outrageous expenses, but we will have some ongoing expenses each quarter, we expect -- not so much in the first quarter but more in the second and third quarter and a little bit in the fourth quarter going forward in Asia.

Okay. But that effectively was embedded in your COGS line?

Yes, correct.

Yes. Okay. So you had just mentioned that you were hoping to get your lead time to four to six weeks. Where are we today?

No, no, no. Sean, don't get me in trouble here. We're at currently 14 weeks to 16 weeks. We're hoping our first step is to get it to eight to 12 weeks, and our goal is probably the six to eight weeks, but realistically I think we feel comfortable with eight weeks.

Okay. And then Cisco -- they've been a 10% customer for a couple of quarters now. How significant were they in the December quarter?

They were over 10%.

Okay. Have they remained in that 10 to 20% range?

We don't give an exact number. We just say over 10%, but they're definitely a substantial customer of ours, and it's safe to say, as Cisco goes, Bel will go. We're the tip of the tail of the dog, and Cisco's definitely the big dog.

Okay. And then lastly, over the last few quarters, a lot of your mix has really been, it seems, shifting toward modules, while some of your magnetics and with your MagJack pricing headwinds being a factor there. I guess what my ultimate question is, is -- when we think about the modules group perhaps nearing the 30% range for your business overall, can you talk about the sustainability of the growth of that group as a portion of your mix and then the impacts to your model overall?

I'll discuss the sales growth. Once again, regarding the MagJack integrated connector modules, which is part of magnetics, we took this product line from basically $10 million to $120 million over a three-year period. And it looks to us that now it's leveling off and it's flat -- basically based on price pressure. We knew -- that's why we got into power, and I think that power running around 40 million -- it runs right about 40 million. And we're hoping to see 20% growth or more till we get to about $100 million, $120 million. Once again, there's no question that the power and the module group are our strongest growth opportunities over the next three years, without an acquisition in other areas.

Okay. So from a growth standpoint today, so think of the power modules group in a 20%-ish range, annually?

Yes. And all of the groups are probably 0% to 5%. Once again, a lot of it depends on unit price, but a lot of times the units are going up but the prices are going down quicker than that.

Okay. And so with those types of year-over-year growth rates, that's basically how we should be thinking about the March quarter in the absence of any specific guidance?

Yes. Chinese New Year does mess things up a little bit and throws things out of whack. We do have one major customer in the DC-DC area who did push out some production in January and to push it out one month. And that could have a slight impact -- will have an impact, I think, in the first quarter, but there's no cancellation. It's just a slight push-out on their program. But that's the only thing that I can think of, Sean.

Okay. But that push-out was from the first quarter to the second quarter then?

Well, actually, it was a one-month push-out, so it will impact -- instead of by getting three months of deliveries in the first quarter, one might get close to get two months of delivery, and that volume will roll into the second quarter.

Okay, that's helpful. Thanks very much.

Thanks, Sean.

(Operator Instructions) And our next question comes from the line of Bill [DeLuca] with [DeLuca] Associates. Please proceed with your question.

Good morning.

Good morning, Bill.

Good morning.

Yes, I've noticed that the stock prices -- it's fairly depressed and it continues to go down. What, if anything, have you done to increase shareholder value for the last quarter or so?

Once again, we don't look at quarter-to-quarter increased shareholder value, so that's one that we won't address. We look to organic, long-term and how we can grow the company. Once again, I think if you look at the whole industry, there's been a downturn in most everybody else with stock.

However, from our standpoint, for us to get the company where we want it to be, we feel that with our war chest of $113 million that acquisitions had a better way to do it, and we're spending a tremendous amount of time looking at acquisition opportunities. But that's not going to be from a quarter-to-quarter standpoint.

However, as we did state before, we are streamlining the operation as much as possible. We have got back a lot of redundancies that we got eliminated. If you look at our profitability, it's one of our best profit quarters that we've ever had. It's our second best sales quarter, so I don't think -- from our products we have in our basket, I don't think we could've done a much better job than we did do in our last quarter.

I noticed that you've been purchasing the A shares. Could you comment on why you're only purchasing the A shares? I did some rough math, and I guess the average prices of your purchases were around $35. Has that ended now or is that going to continue, and when was your last purchase of the A shares?

I think our last purchase was about two weeks ago, and once again, we just go in -- Colin, you want to address it?

Yes. We go in and out, Bill. We go in and out of the market at different times. For strategic reasons, we go in and go out. Sometimes we don't think it's appropriate, when we're getting these earnings, to be in the market and so we come out for a while.

But you're right. The average price was round about that. I think it is a $35 mark. Typically, when we're in the market, we buy it around maximum allowable, buy it every day. Sometimes we don't get it but we still feel that -- if you look at the opportunities for shareholder value, share buyback is certainly the best way to add shareholder value vis a vis having the money sitting in the bank (inaudible) about that.

And why are you just purchasing A shares, and how much is last that the board authorized for repurchase?

I don't have the number in front of me. We're nowhere near -- I think we've got quite a ways we can go yet. Sorry, I don't have the number. I'll have to look it up. It'll be on the annual report.

We think A is a smarter move for us -- to repurchase A. There's a smaller float out there. We don't want to screw up the float in the B. People know there's a small float in A and there's not as much trading in A, so it makes more sense for us to be dealing in that area. The B -- there's a much larger float and we want to continue to make that attractive for folks out there who want to participate in Bel's future.

Also, Bill, as the float of the A goes 10% below the B, then both shares are combined together. I don't know if you knew that.

No, I didn't know that. Interesting. Also, just one last question. I was wondering if you can just comment on any progress of any acquisition or acquisition strategy that you might have.

Once again, the last two companies we looked at -- I won't give you names but I can tell you one company had sales of $30 million and an EBITDA of $15 million, and our bid was $50 million, and they said they had a bid of $120 million. Last company we looked at about a week ago, we walked out again. They had sales of $25 million, an EBITDA of $6 million, the highest EBITDA that they ever had, and our bid was $42 million, and the bid that they said they had on the table was $45 million. And both times we walked out to equity funds, or hedge funds.

So once again, we're just not going to buy to buy, and we really can't understand how these companies -- we can bring a lot of synergies and a lot of growth potential for these type of companies, which these funds can't do it, but they are still -- we still see a lot of -- even though you hear a lot of things out there negative about hedge funds and not having money and not having [volume] we haven't come across that yet.

Well, you've still remained fairly active in that. That's good to know.

Yes, but once again, we thought at this point it'd be a lot more difficult for people to raise money, and we haven't seen that yet. But if there is a recession, we do feel that it's an ideal time for us to really go in there with our war chest, take advantage of it.

Fair enough. Thank you.

Bill, we have the authority to buy up to 10% of the outstanding shares, so we've got a ways to go yet.

That's the A and B, right, or just --?

Yes, A and B combined.

Yes.

And the total quote is what, Colin?

The total quote was over 12 million.

So 1.2 million.

Thank you.

And there appears to be no further questions from the phone lines.

Thank you very much for joining us today, and hopefully we'll speak to you next quarter. That's it.

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.