Bel Fuse Inc (BELFB) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Bel Fuse Inc. second-quarter results. Today's call is being recorded. With us today we have Dan Bernstein, President and CEO, and Colin Dunn, Vice President of Finance. At this time I would like to turn the call over to Dan Bernstein. Please go ahead, sir.

Thank you, Sharon, and we'd like to welcome you to our conference call to review Bel's second quarter and year to date 2009 results. Before we start, I would like to hand over to Colin Dunn, our VP of Finance. Colin?

First, I'll start with the Safe Harbor statement. Except for historical information contained in today's news release and in this conference call, the matters discussed in this conference call, including statements regarding a rebound in demand and the Company's repositioning for any such rebound and any statement regarding the bottoming of industry demand 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 and supply constraints or difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment, risks associated with foreign currencies, 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'll move on to discuss our second quarter and year-to-date results. Sales for the second quarter of 2009 were $44.9 million, which was 38% lower than the $72.5 million reported in the second quarter of 2008 but up slightly from the $43.9 million reported in the preceding quarter, ended March 31, 2009. Sales for the second quarter in 2009 in all product groups were lower than the same period in 2008.

Cost of sales and net results -- Bel ended the quarter, on an unaudited GAAP basis with a net after-tax loss of $1.2 million. On a pretax basis the quarter was impacted by $1.6 million of severance and other one-time charges, partially offset by a GAAP gain of $1.1 million on the sale of Power-One stock. These results were lower than the net earnings of $1.8 million for the second quarter 2008, which reflected a pre-tax impairment charge of $2.4 million related to our investment (technical difficulty) [stock].

Gross margin as a percent of sales during the second quarter of 2009 was lower than the same period last year and also lower than the preceding quarter, ended March 31, 2008. Labor inefficiencies and moving expenses related to the consolidation Bel's manufacturing operations in China and severance payments due to headcount reductions depressed margins during the quarter.

To summarize in non-GAAP terms, for the second quarter excluding nonrecurring special items, Bel's after-tax loss would have been $1 million or a loss of $0.08 per share. Excluding the [TOCO] impairment charge, earnings for the same period last year would have been $3.3 million or $0.28 a share. So on a comparable basis, results are down about $4.3 million, a swing of $0.36 per share versus Q2 2008 on a sales decrease of $27.6 million.

Moving to SG&A, the percentage relationship of selling, general and administrative expenses to net sales increased from 12.8% during the three months ended June 30, 2008, to 16.9% during the three months ended during 2009. The dollar amount of selling, general and administrative expenses for the three months ended June 30, 2009 decreased by $1.7 million compared to the same period last year, a drop of $2.6 million excluding severance and other one-time charges. This decrease was a result of several factors, including sales commissions decreased due to the 2009 lower sales volume, travel expenses reduced as management increased travel restrictions during the first quarter of 2009, [D&A] salaries and fringe benefits decreased as a result of staff reductions in various locations. We continued our increased focus on cost containment and reined in spending, and we have not been accruing any bonuses in 2009.

Interest income -- interest income earned on cash and cash equivalents decreased by approximately $500,000 during the three months ended June 30, 2009, as compared to the comparable period in 2008. The decrease, of course, is due primarily to significantly lower interest rates on investment balances during the three months. That's the three months of June compared to the three months of June in 2008.

Taxes -- the Company recorded a benefit of $400,000 from income taxes for the three months ended June 30, 2009, compared to a provision of $300,000 for the three months ended June 30, 2008. The Company's pretax results for the three months ended June 30, 2009, are approximately $3.8 million lower than the same period in 2008. The company's effective tax rate, the income tax benefit or provision as a percentage of loss or earnings before income taxes were 23.6% and 13.9% for the three months ended June 30, 2009, and June 30, 2008, respectively.

The Company's effective tax rate was actually based on a geographic segment in which pre-tax profits are earned. Of the geographic segments in which Bel operates, the US has the highest tax rates. Europe's tax rates are generally lower than US tax rates, and the Far East has the lowest tax rates.

The tax benefit during the three months ended June 30, 2009, as compared to last year, is attributable to losses in the US and foreign tax credit carryback claims, partially offset by losses in the Far East with minimal tax benefit.

Turning to the balance sheet and cash and equivalents, at the end of June 2009 our cash, cash equivalents, short-term investments and securities was $114.8 million, which was $22.1 million higher than our December 2008 balance of $92.7 million and up $8.4 million since March 31, 2009. From pure operating, excluding inventory, accounts receivable and special one-time adjustments, we achieved slightly positive cash flow during the second quarter, an improvement from the negative cash flows we were experiencing during Q1. Our immediate goal is to be cash neutral from pure operations.

In the second quarter of 2009 we did not repurchase any Bel Class A shares.

Receivables and payables -- receivables net of allowances was $32.3 million at June 30 compared to $46 million at December 31, 2008. This is a reduction of $13.7 million. During the second quarter, receivables increased slightly by $1.3 million, mainly due to the increase in sales compared to the first quarter. Our accounts payable at June 20, 2009 -- June 30, 2009, was $10.8 million and remained unchanged from March 31 but down $3.4 million from the prior year end.

Inventories -- at the end of the second quarter 2009, our inventories were $31.6 million, which is down $6.8 million from March 2009 and $14.9 million below December 31, 2008. We are working through stock on hand and carefully managing production in light of the current economic situation. In the next quarter, however, we do expect that inventories will start to increase again.

Other balance sheet comments, for the three months ended June 30, 2009, capital spending was approximately $700,000 (technical difficulty) depreciation and amortization was $1.6 million. While we'll still spend 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 on June 30, 2009, was approximately $18.97 including goodwill and intangibles. Excluding intangibles and goodwill, our per-share value was $17.66.

That ends the financial comments that I have. I will now turn it back to Dan.

At this point, Sharon, we would like to open up the call for any questions anybody might have.

(Operator instructions) Steve Ferranti, Stephens, Inc.

Well, it's nice to see at least what at first blush, what looks like a revenue bottom here. Can you give us some sense for, in the June quarter, did you see revenues start to strengthen as you got into the back half of the June quarter?

We definitely saw the last month be stronger than the two previous months. But, again, we don't know if that's because of the end of the quarter, or people are shipping more out. So it's still -- we have a very limited visibility with our customers at this time. But we still -- we definitely believe, and from everything we read, that we've definitely hit the bottom. Now, how much we increase from quarter to quarter, there's still some uncertainty out there.

And, Dan, were there any other metrics that might support the thesis that this could be a bottom in terms of either order trends picking up or backlog, any other metrics there?

No. Our backlog has been pretty consistent over the past four or five months. I think what we look at is some of our competitors, larger players like someone like (inaudible) and other people out there, and see what they are seeing. I think everybody is seeing strong quarters going forward and that this is rock bottom. And our lead times are starting to stretch out as we see more orders coming in.

Okay, great. And any markets, end markets or maybe product segments that are standing out to you as --

No; I think they're all pretty static.

Do you guys break out your sales through direct versus distributor?

Distributor has always been a slight business of ours, in the 5% to 10% range, so it hasn't been a big factor that overly affects us.

And then, Colin, just the comments on inventory perhaps starting to tick up in the third quarter. Is that just on maybe a little bit better optimism than what we had previously in terms of end market demand?

It's a little bit of optimism. It's also, we are starting to increase production a little bit. We also have a couple of newer [stocking] programs we are going into that will require us to, in effect, finance some inventory, and put some inventory in place. They are the key issues. We are also, as we have been reorganizing our production facilities in southern China, we are going to -- we are going to, in effect, be doubling some inventory just to make sure we've got inventory in place as we shut down certain facilities and ramp up other facilities.

Any sense for a breakdown of the inventory you reported in the second quarter, how much of that, finished goods versus WIP versus raw material?

Let's me just see if I've got it in front of me. Yes; at the end of June, 31% is finished goods, 4% is WIP, and 64% is raw material, and I'm missing a percent there somewhere. That's pretty close.

We'll round off. That's it for me guys. Thanks, and good luck going forward.

(Operator instructions) Sean Hannan, Needham & Company.

So it sounds to me -- I understand visibility remains pretty restricted, but it sounds that September should be a quarter that, if not flat with June, should be incrementally up. Is that a bad --

If I had to make a bet, Sean, I would hope by next quarter our sales would be up, yes.

Okay. Is there a way, if we can talk a little bit around -- you had mentioned that lead times were stretching. Can we talk about what the lead times are, specifically, for the business overall as well as MagJack, and then, separately, what the backlog numbers look like?

Regarding the leadtime issues, again, I think we've always focused on MagJacks because our other products are pretty much automated. MagJacks is very labor-intensive, so if we have to ramp up production, we have to hire workers. And that's where it takes a longer process. So it's a lot easier just running a machine for two hours than going out and hiring 500 or 1000 workers to train them. So currently, I think our backlog is hovering around eight to 10 weeks, and we're getting up to 12 to 14 weeks as we try to bring on more labor.

Regarding backlog, Colin, do you want to touch that?

It's moved up slightly. I think our book to bill went to 1.1, I think it was, during the quarter. So we are making some gain, but I'd prefer not to -- well, I'm not going to give an absolute number.

Is there a way, if we could get a sense in terms of the general run rate of the power business that you have today?

We can just amortize the sales for the year (inaudible) right?

Yes; just a minute, we'll just grab the [ticker player].

Well, while you're finding that, a question on the severance and other one-time charges that you took in the quarter, it's about $1.6 million. How much of this is actually tied to see COGS versus SG&A?

It's about -- I think COGS is -- we had more SG&A in this quarter because there were a number of folks in North America, so we had more G&A folks this time around. If I was guessing, it was probably about half and half. It wouldn't be quite accurate, but in that ballpark. We still have some folks, particularly in the middle management level in Asia, that fell into that category in the second quarter. Most of those folks are in cost of sales.

So you've moved forward with a lot of cost actions over the last couple of months and quarters. Should we expect that there will be more costs coming out from here, or are we looking more to a scenario where we need to see some revenue scale that now needs to happen?

I think where we're going to get hurt is basically as we consolidate, move out of our one factory in southern China, move that into our two operations, and getting more labor up and running in different areas that we're looking at. It starts off, the training period takes anywhere from eight to 12 weeks before we get up to 85% efficiency. So I think, until we get the worker -- and we're trying to look at getting our workforce up to 1000 people in different areas. So that's going to affect our efficiency over the next quarter.

One thing we did in the quarter, just about a month ago, we acquired a small contract operation in China, and we have taken over full management of that. That particular facility today has about 550 workers, and that one we'll ramp up to -- by the end of the year, we'll have like 1000 people there. The new workers come in at about a 30% productivity rate. It will take quite a while to ramp it up. The workers that are already there are up into the -- getting up close to 60% productivity at this stage. So it is a rather slow process.

On the power, for the six months year to date, the sales were $14.5 million.

And for the next six months, we would hope that that would be --

Be higher than that, yes.

Yes.

So, based on that hope, is there anything that you can talk about in terms of new developments, either in the power business, whether there may have been some program shifts from a timing perspective or new activity overall?

I think, once again, as we are the new player in the area, we are looking at stronger inroads into some of our major customers and moving up from just a second-tier supplier to a preferred supplier. So that's our goal, at some of our key accounts. A major hit we got was with the power group was the IBM Blue Jean project, which was pushed back. And that resulted in substantial dollars for us, and that's probably the major decline they had.

So overall, from the business that we -- from the Galaxy business, that's where we got hit pretty good with the IBM.

With our other business, our internal business, it's up slightly, maybe $500,000 (technical difficulty) first six months. So we still are very pleased with the power business, and we are thinking that we are making strong inroads with our key customers.

Lastly, if you can talk a little bit around the pricing environment and then how many 10% customers did you have in the quarter.

Again, with pricing -- we don't see much price pressure out at this time. When you are losing substantial dollars, it's very difficult to give price decreases. And I think our customers understand that.

Regarding customers over 10%, we have two.

(Operator instructions) Sean Hannan, Needham & Co.

You had mentioned the goal of working toward cash-neutral from a pure operational standpoint. Are we still in a position where this is achievable in September, or is that going to be a little bit more difficult, based on the training you just alluded to, where we get some inefficiencies at the newer facility?

No; we were cash-neutral in the second --

We were cash positive from pure operations in the second quarter, and we expect to remain there.

Okay, I had misunderstood; I thought that you had excluded a number of scenarios -- or, a number of contributors, Colin, when you had provided that number. And so, from a pure cash from operations standpoint --

I think primarily what we take out -- I don't include, when I'm trying to get to cash-neutral, I don't include reductions in accounts receivables, accounts payables or inventories. So I'm just looking at just from the pure, pure operations point of view, we were cash positive in the quarter.

And with no further questions in the queue, gentlemen, I would like to turn the call back over to you for any additional or closing remarks.

Once again, thank you for joining us, and hopefully we'll have better results to go over in the next quarter.

And, once again, that does conclude today's conference. We thank you for your participation.