Bel Fuse Inc (BELFB) 2008 Q4 法說會逐字稿

Ladies and Gentlemen thank you for standing by. Welcome to the Berkman Associates Bel Fuse Inc. fourth quarter results conference call. (Operator Instructions). As a reminder this conference is recorded Thursday, February 12, 2009. I'd like to turn the conference over to Dan Bernstein, President and CEO, go ahead, sir.

Thank you, James, we'd like to welcome you to the conference call to review Bel's fourth quarter and 2008 results. Before we start I'd like to turn it over to Colin Dunn, our Vice President of Finance. Colin?

Good morning everybody, thanks, Dan, I'll start with the forward- looking statement. Except for historical information contained in today's news release and this conference call, matters excused, including statements regarding the impact of price increases, cuts, reductions, acquisitions possibilities, forward- looking statements involve risks and uncertainties.

Among the factors that could cause actual results to different materially from some statements are -- market concerns facing customers, continuing viability of sectors that rely on our products, the effective business and economic conditions, capacity and supply constraints and difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment, risks associated with foreign currencies, uncertainties associated with legal proceedings, the markets' acceptance of the Company's new products and competitive responses to the new products, and the risk factors detailed from from time to time in the Company's SEC reports.

In light of these risks and uncertainties, there can be no assurance forward- looking statements will in fact prove be correct. We undertake no obligation to update or revise forward- looking statements. That's the end of the Safe Harbor statement.

I'll now turn to our results.

Firstly to sales -- the fourth quarter of 2008 our sales $58.1 million. Which was 16% lower than the $69.3 million that we reported in the fourth quarter of 2007 and 13% lower than the $67 million reported in the preceding quarter ended September ,2008. Sales for the fourth quarter 2008, all product groups were lower than the same period in 2007. For the fourth quarter of 2008, versus the third quarter of 2008, sales were also down, all products groups, except for modules. That loss in cost of sales, that will end the quarter with GAAP basis with net after- tax loss of $20.9 million following non-cash re-tax charges of $14.1 million for impairment of goodwill in North America.

Charges related to the closure of our manufacturing facility in Westborough, Massachusetts, included $793,000 for restructuring and $739,000 for impairment of fixed assets and $6.3 million charge primarily related to the other and temporarily impairment of our investment in Power One. Restructuring charges from Westborough severance cost and future lease obligations. These results well below the net earnings $10.3 million for the fourth quarter of 2007. And in that period, it included $3.4 million net of tax, from the sale of property in Macau.

The gross margin percentage of sales during the fourth quarter of 2008 was lower than the same period last year, labor costs have begun to stabilize from the high levels experienced in the third quarter of 2008, primarily due to a major reduction of over time worked during the fourth quarter.

In addition, while the exchange rate of the Renminbi against the US dollar was unfavorable as compared to a year ago, it was relatively stable for the quarter. For a little history; in January 2008, the exchange rate 7.29. On September 1, 2008, it was 6.86 and on December 31, 2008, it was 6.85.

Turning to SG&A. The percentage relationship of selling general and administrative expenses to net sales increased from 12.7% during the three months ended december 31, 2007, to 15.4% during the three months ended December 31, 2008. The increase in the dollar amount of the selling general administrative expenses for the three months ended December 2008 compared to three months ended December 2007, was, approximately, $200,000 and was a result of the following factors. Order fees increased by $600,000 primarily due to adjustment in the fourth quarter of 2007, resulting from a change in the timing of the recognition of expenses which did not recur in 2008.

As a result of the strengthening of the US dollar versus European currencies during the three months ended December 2008, the Company's currency exchange losses increased $400,000. Certain of the Companies European purchases are denominated in US dollars. Sales of marketing expenses decreased by $400,000, and incentive compensation expense decreased by $200,000, consistent with lower sales and a net loss during the fourth quarter of 2008, compared to the same period last year. Decreases in various other expenses totaled $200,000, which were not individually significant.

Turning to interest income, interest income earned on cash and cash equivalents decreases by approximately $700,000 during the three months ended December, 2008, as compared to the comparable period 2007. The decrease due primarily to the significant lower interest rates on invested balances during the periods.

Taxes -- the benefit for income taxes for three months ended December 31, 2008, was $3.3 million compared to $1.2 million revision for the three months ended December 2007. The tax benefit is principally related to the restructuring of US operations. The Company's effective tax rate, income tax, were better for revisions percentage of earnings before revision of income taxes negative 3.8% and 10.6% for the three months ended the year previously. The Company's effective tax rate will fluctuate based on geographic segments in which the pre-tax profits are earned. Of the geographic segments of which the Company operates, the US had the highest tax rates. Europe saturated generally Europe lower than US tax rates and Asia at the lowest tax rates.

Turning to the balance sheet. Cash and equivalents. At the end of December 2008, our cash, cash equivalents, short- term investments and securities were$93.8 million, which was $16.4 million below December 2000 balance - - 2007 balance of $110.2 million.

In the fourth quarter of 2008, we repurchased 10,822 Bel Class A shares at a cost of [$270,000] For the 12 months 2008 we repurchased 361,714 Class A shares of total cost of just over $11 million.

During 2008, Bel paid approximately $3.2 million in dividends and at this time, has no plans to stop or change the dividend payment program.

Receivables and payables -- receivables net of allowances of $46.1 million of December 31, 2008, compared to to $52.2 million at December 31, 2007. This is a reduction of $6.1 million. During the fourth quarter receivables decreased by $1.1 million. There has been some slowdown by certain customers in adhering to established credit terms and we continue to monitor this area very closely. Our accounts payable for the same period is $13.8 million.

During the current global economic crisis, an age we're seeing many vendors attempt to shorten established credit payment terms or eliminate credit completely. During the fourth quarter alone, our payables decreased $5.4 million.

Inventories at the end of the fourth quarter 2008, inventories of $46.5 million, $7.5 million above December 31, 2007. Impacting inventory dollar levels were higher roll material prices and transportation costs, several new modules programs coming online, preparations for 2009 Luna new year production shutdown and delivery dates pushed back by some customers. In the fourth quarter alone, however, our inventories decreased by $2.6 million.

Balance sheet comments -- for the three months ended December 31, 2008, capital spending was approximately $1.6 million and depreciation and amortization $2 million. While we still see spending capital where we see high and quick payback periods in the near term, we will be curtailing most capital spending. Our per share book value December 31, 2008, approximately $18.85, including goodwill and intangibles.

Now, I'll pass it back to Dan.

At this point, we'd like to open up for questions. James? Can you take care of that for us?

Thank you. (Operator Instructions). One moment, please, for the first question. And the first question comes from the line of Todd Cooper; please proceed.

Colin, have you calculated pro forma EPS number to exclude the various one- time type charges?

No, I haven't got - - well, worked on it, I don't have it with me, no.

But would it be slight - - a slight profit?

For the quarter?

Yes.

A slight plus. A slight plus, I think.

Okay. Any comments on backlog? Entering the first quarter, book- to- bill, in the last quarter? As it would relate to revenue guidance for the first part of the year?

Backlogs down from our high down from the average of last year, our backlog is down by 50%. I think we're forecasting 30%? I think that 30% down in sales at this time. Look like down in sales for the first quarter. However, because of Chinese New Year late this year and last year, it is somewhat difficult to really predict for another, I would say, another six weeks until we get a real handle on it.

30% down, is that sequentially, Dan? Year- over- year?

Sequentially, yes.

Sequentially, yeah, Todd.

Okay. And, substantially lower gross margin in the quarter, did that had to do with absorption on the lower revenue?

Yes, absorption and lower through- put, we certainly had most of the months in the quarter had much higher labor rates. With only, really, in the December quarter that we really got away from all of the more - - the worst of overtime, double time and triple time. Also, the other thing that we haven't had really come through yet, which we're looking hopeful it will help us a lot, is that there was still a lot of raw material in both our out vendors and out chain going into the - - throughout the fourth quarter, critically related to copper and steel and other materials that are coming down, have come down on commodity basis but haven't got through into our lower prices yet. So, you know, they are all things that we'll start to see some benefits from in the latter part of the first quarter.

Okay. And, in the - - regarding the power business, are you seeing any different demand trends there from the rest of your business? Or is it all just kind of gloom and doom at this point?

I think it is a ray of light for us. I do believe in the power modular business. Once again, we're such a small player, and if we do see a a lot of opportunities, with our balance sheet strength there are concerns about some of our competitors out there. So we do - - we do seem somewhat positive in the power and the modular arena.

Actually, Todd, the whole modular group, the fourth quarter, we did have a sequentially increase in sales over the third quarter, in the module group. That was the only group we did have an increase in. We were coming off - - we were hit, somewhat, in the fourth quarter of 2007, we were manufacturing very high quantities, a one- time project for a large US computer company. That project was just in 2007 and it didn't continue through 2008. And that's basically it was that program that gave us our second highest- ever sales in December 2007, and in the fourth quarter 2007.

Okay. You expect the sequential decline in that business? As well, though, in the first quarter?

You know, at this point, it is -- I would say on the fence.

Okay. So, that part of your business is holding up?

Again, once again, we're such a small player and we have a lot more opportunities where before, we are on a lot of our other products the market leader, we've been in the business for many years. so we've been in more a mature marketplace.

Okay. In the other parts of your business, are you seeing the proverbial light at the end of the tunnel? With regard to demand picking up at all?

We see no light whatsoever. It is cautiously pessimistic instead of cautiously optimistic.

Okay.

We don't - - at this point, we don't see any - - any light whatsoever. And we - - we're getting no - - you know, no good insight from any of our customers.

Okay. On that cheery note, I'll say thank you and get off the line.

Thanks, Todd, appreciate your help.

Thank you.

(Operator Instructions). The next question from the line of Sean Hannenexe, please proceed.

Yes, good morning.

Good morning.

Good morning, Sean.

Is there a way, if you can provide us a little bit of an update on some of the efforts that you have under way, I think you're trying to pull some costs or continue to try to pull some costs out of your model. Arguably this could require facility shifts further inland. Is there a way, if you could, perhaps, provide us with, maybe, a little bit of a target for when you expect some of these efforts to be completed? At least in light of the current demand environment. And how we should expect to see that in the model?

Okay. First, you know, the closing down of the Westborough facilities will be completed by - - is already completed and that was, how many workers? Colin?

55 workers.

Okay.

We're in - - you know, in the beginning stages of the process of combining our two major manufacturer facilities in Southern China into one facility. We see should start seeing results from that, just in the beginning stages and in the next two or three weeks. We'll hope to complete it, very optimistically, six months, conservatively nine months, that we should be consolidated, the manufacturing to one operation. And the labor intensive jobs, move them to more of the north of China. And, you know, ballpark savings, Colin, you want to touch that?

No.

The problem you have with that, Sean, is, we don't know what any target of - - it's nice to say we do all things, we're very comfortable and profitable, but we just don't have a clear picture on the sales yet. And that's what we're looking at. And these steps we're taking -- another example -- we're looking at, we have implemented for about a month freeze on travel throughout the Company. So think every possible thing to get our cost in line where new sales we're looking at and we're constantly reviewing with our managers throughout the world.

Okay. So, then, in that scenario, is there - - do we have an opportunity to effectively stabilize the gross margin line? At least a percentage level as we look to the March quarter? Is that an opportunity where we look at that, perhaps, as a - - as a trough? For your business? Or is it going to be challenging and prevent this from declining you know, even forward? In the next few quarters?

I - - first quarter - - I'm not particularly optimistic. Going into the second quarter, as we start to stabilize the operation and hopefully, Dan just said, we really have just no insight from the customers. We expect that once we get past the effect of Chinese New Year and the Companies settled down and by the end of, say, March, should be able to start to see some structure to what we got going forward. As I said before, with the more stable operation, lower labor costs, we certainly, not having impact, again, of the [renminbi] like before, it's in place, but it's not getting worse. US dollars aren't getting worse at the moment. If we decide to get the savings from material, and we get a little more steady state, I think we'll be okay.

Over hanging this, of course, is this issue out there, there's certainly plenty of excess capacity in the industry. You know? We're not alone. You know, we're all holding this together. Our customers are in this and our competitors are in this.

Pricing is an issue. It was an issue last year. We never got to pass through all of the cost increases that we had. Certainly lower levels in our factories is not going to help the absorption as much. We've taken additional steps to reduce overheads and consolidate overheads. That will continue. Until we really get a flavor for what the short- term or midterm [effect] is on volume it is going to be very difficult to really predict where it will end up.

I think, again, because January, Chinese New Year fell last year in February. This year it fell in January. So, you know, we're hoping from a midterm point of view where we have to be is looking at March from a backlog standpoint and a sales standpoint, it really should give us a clear picture of where we stand on the P&L - - and hopefully get an idea on the steps we're taking going to keep us above water for March. If not, we'll have to take a lot more drastic steps. I think for us, March will be a telling month for us.

So, at this point, you know, as the savings will ultimately be a function of your revenue levels, maybe in approaching it from another angle, is there a way to provide a little bit of color around what you might be targeting for revenue breakeven either from a model standpoint or from a cash standpoint, once you gotten through the efforts?

What I - - immediate objective is to breakeven from a cash flow point of view. And I - - from a Company objective, what we've set ourselves to manage to, over the next six, nine months. And it is - - that's going to be a function of if we're not managing to neutral cash, and - - or better down side is neutral cash, then we will continue to make caps to our organization. We don't want to ruin it for the future. That's obviously a thing we're trying to avoid. But, you know if we don't see any upturn in the going past the next six months, then, that's what we're going to have to do. But, our objective - - so, it is not necessarily going to come from the - -

The top line.

- - the top line - -

It -

- or the gross profit a function of number of things.

We don't want the concept, Sean, okay $18 million the goal for the top line number and cut the pricing 15% to 20% and end up losing a lot more money. So I think at this point you really - - we're really focused more than anything else on cash- positive and that's the primary goal that we're really striving for.

Okay. All right.

We're not - - [ OVERLAPPING SPEAKERS ]

- - perhaps ask a little bit around the current environment. You made a comment just a little bit earlier, I think as it related to last year, regarding pricing. But is there a way to comment whether you've seen any irrational behavior and whether this has been specific to any of the product lines? Or any color there might be helpful. At this point, you know, surprisingly so, we think, our competitors have all been very rational, come to pricing. And I think that they've learned from the Internet boom, again, that you cut pricing, the only thing you do is kill the margins for people that need pricing. So at this point in time, we really have not seen people go out to buy business.

However, you know, again it, could change any day. But at this point in time, we have not seen that at all. We have seen people be very rational. Customers are being a little irrational; looking for a 4% or 5% price reduction and everybody in the industry is losing money, that's not a rational approach to take if you want a viable vendor base. Again, is - - everything looks pretty stable. You know things can change rapidly. One guy does it, all of a sudden, everybody is jumping on the bandwagon.

Okay. That's helpful. So, in the context of this current demand environment, and you're - - your comments for March, is there a way, when you look at your four business segments, can you provide us, perhaps, a rank order of where you see the greatest headwinds? How should we be thinking about the greatest headwinds are affecting your business?

I think where we're somewhat, as Dan said before, somewhat more comfortable with the module business in total. You know, that's, we feel, is probable - - that's - - we've had a tough run in the circuit protection business of late. So we would think that that can only go improve a little bit.

We're not positive.

We're not positive. We've had real price pressure out of Korea on some lower end fuses. And that's affected the sales.

And the connective business we think is soft and will remain soft.

That's the premise - - including premise wiring. You know? But we think if there's stimulation to the economy, through some of the packages and data senders start to build out again and we can get some traction going there.

And the final group is magnetics, where we think maybe somewhat down. The big hits, we think look like in the fourth quarter were circuit protection, and was the connector group, the magnetic group was down. So, we're really concerned about circuit connection and connectors going forward and we're keeping a watchful eye on the magnetic group and, hopefully, again, that the power and module group can be a little bit of a shining light for us.

Okay. And then, lastly, that is helpful, thank you. Lastly, if you can help whether there were any 10% customers in the quarter? Or were there two?

I think there's still two. One?

Still the one. One. One and maybe two. Ha, ha. I was just looking at that last night. I think it is still just the one, still.

I believe you had two in the prior quarter?

Because of the major project we discussed in the power arena. With the one customer? and I don't - - and they didn't have any sales, substantial sales last year.

Okay.

But, we'll know in the next - - well, we know what it is. I don't have it in front of me. But I think it is just one at the moment, so.

All right. Thanks very much.

Thanks, Sean.

There are no further questions from the phone lines at this time.

Okay. Once again, like to thank everybody for joining us today. Hopefully we have more positive results to talk about in the next quarter. And we're looking forward to speaking to you then.

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