Bel Fuse Inc (BELFB) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Bel Fuse fourth quarter and 2009 earnings results conference call. This call is being recorded. With us today from the Company is Bel's President and CEO, Mr. Daniel Bernstein and the Vice President Finance, Mr. Colin Dunn. At this time, I would like to turn the call over to Mr. Daniel Bernstein.

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

Good afternoon, everybody. Thanks, Dan. I'll start with our traditional Safe Harbor statement. Except for historical information contained in today's news release and in this conference call, the matters discussed including statements regarding potential bottom and top line growth, potential benefits arising from the Cinch Connectors acquisition and the potential accretive effect of the Cinch Connectors acquisition, 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 integrating the Cinch Connectors business into the Company's existing business, risks associated with foreign currencies, uncertainties associated with legal proceedings, the market's acceptance of the Company's new products and competitor 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 forward-looking statements will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statement.

With that out of the way, I'll now move to general comments. First of all, looking at sales, for the fourth quarter of 2009 our sales were $48.7 million, which was 16% lower than the $58.1 million that we reported in the fourth quarter of 2008, but up 7.5% from the $45.3 million reported in the preceding quarter ended September 30th. Sales for the fourth quarter of 2009 in our interconnect and protection product groups were flat with the same period last year where sales were lower in our modules and magnetics product groups.

Cost of sales and net results. On an unaudited GAAP basis, Bel ended to fourth quarter of 2009 with after tax earnings of $2.9 million. On a pretax basis, the quarter was impacted by a GAAP gain of $5.5 million on the sale of Power-One stock. These results were higher than our net loss of $20.9 million for the fourth quarter of 2008, which reflected a pretax goodwill impairment charge of $14.1 million, pretax restructuring of fixed asset impairment charges totaling $1.5 million related to the closure of our manufacturing facility in Westborough, Massachusetts. In addition, during the fourth quarter of 2008, Bel recognized a pretax charge of $6.3 million, primarily associated with a write-down of the market value of our reversement in the common stock of Power-One and other investments. Excluding one time charges, gross margin as a percent of sales during the fourth quarter of 2009 was higher than the fourth quarter of the last year and higher than the preceding quarter ended September 30th, resulting from a more favorable mix of products, sales, and higher fixed cost absorption due to higher volume. While the gross margin percentages improved somewhat, low sales volume, labor inefficiencies and labor constraints related to Bel's manufacturing operations in China, continued in China in Q4 2009.

Turning to SG&A. Percentage relationship of selling, general and administrative expenses to net sales increased from 15.4% during the three months ended December 31, 2008, to 16.4% during the three months ended December 2009. The dollar amounts of selling, general and administrative expenses for the three months ended December 31st, 2009 decreased by $1 million, compared to the same period last year. This decrease was a result of several factors including but not limited to our increased focus on cost containment, particularly travel costs, decreased sales commissions due to the 2009 lower sales volume, lower general and administrative salary and fringe benefits as a result of staff reductions in various locations. These decreases were partially offset by higher legal and professional fees incurred in Q4 2009 related to the Cinch acquisition and an increase in bad debt expense during the fourth quarter of 2009. Interest income on cash and cash equivalents decreased by approximately $400,000 during the fourth quarter of 2009, as compared to the comparable quarter in 2008. The decrease is due primarily to significantly lower interest rates on investment balance during the three months ended December 31, 2009, as compared to 2008.

Turning to taxes. Bel recorded income tax expense of $1.8 million for the three months ended December 31, 2009, compared to a benefit of $3.3 million for the three months ended December 31, 2008. The Company's pretax results for the three months ended December 31, 2009 are approximately $28.9 million higher than the same period of 2008. The tax benefit in 2008 was principally related to the restructuring of US operations. The Company's effective tax rate, the income tax provision or benefit as a percentage of earnings before provision for income taxes was 38.4%, and a negative 13.8% for the three months ended December 31, 2009, and December 31, 2008 respectively. The Company's effective tax rate will fluctuate based on the geographic segment in which the pretax profits are earned. Of the geographic segments of which the Company operates, the US has the highest tax rate, Europe's tax rates are generally lower than US tax rates, and Asia has the lowest tax rates. The Cinch acquisition will be primarily US-based income, and so we would expect a general increase in US tax rates related to the Cinch acquisition.

Turning to balance sheet, particularly cash and equivalents. At the end of December 2009, our cash, cash equivalents and short-term investments in securities were $124.2 million, which was $31.5 million higher than our December 2008 balance of $92.7 million, and down $2.6 million since September 30th. As you can imagine, this does not reflect the amount we paid to purchase Cinch in 2010. In the fourth quarter of 2009, we did not repurchase any Class A shares.

Receivables and payables. Receivables net of allowances was $34.8 million at December 31, 2009, compared to $46 million at December 31, 2008. This is a reduction of $11.2 million. During the fourth quarter, receivables increased by $4.3 million. Accounts payable at December 31, 2009 was $17.2 million, an increase of $3.2 million from September 30, and $2 million from the prior year end.

Turning to inventories. At the end of this fourth quarter, 2009, our inventories were $31.8 million down some $2 million from September 30, 2009 and $14.7 million below December 31, 2008. Due to increased customer demand, we are currently building products, almost all products for immediate customer delivery.

Other balance sheet comments. For the three months ended December 31, 2009, capital spending was approximately $1 million, while depreciation and amortization was $1.7 million. While we will still spend capital when we see high and quick payback periods, in the continuing near term we will continue to curtail most capital spending. Book value at December 31, 2009 was approximately $17.95 including goodwill and intangibles. Excluding intangibles and goodwill, our per share value was approximately $17.75 per share. That's the end of my financial comments. I'll now turn the call back to Dan.

Christine, can we open up the phone for any questions?

(Operator Instructions). We'll go first to Sean Hannan with Needham & Company.

Good afternoon.

Good afternoon, Sean.

Just some quick questions around Cinch. Now that the deal's closed, can you discuss with us or perhaps how we should be viewing accretion from the deal, how this should really materialize and the level of impact we should see in terms of your margins and also your OpEx?

Dan's looking at me, Sean, so I guess I've got it. It will be -- we will pick up in the first quarter of 2010 sales basically for February and March. We closed on I think the 28th of January and so all sales from that point forward will accrue to Bel. And then obviously for the rest of the year. We had announced I believe that sales for Cinch were approximately $55 million for the prior 2009 year. We do expect not to slip below that. We do not foresee curtailing any business that Cinch currently does. Hopefully we're going to grow the business. We certainly have a mission to do that and certainly to grow the bottom line. At this stage, we're not in a position, though, to provide guidance on what the bottom line might be. But other than to say that we would expect the margins to be no better than our current margins for the majority of our business.

And then perhaps is there a way to share a little color around what we should consider as an add-in on the SG&A line, as least kind of as a normalized quarter?

I don't have that information in front of me, Sean. I guess we'll have to wait until we get to the end of the first quarter when we put out our results. There will be some changes and we're still working on that. Obviously, we did our pro formas and we worked out what we believed the operation will look at but from day one, when we took over the Company, there's been some changes and we haven't as yet gone back and remodeled it. The changes were certainly more favorable than we expected.

Okay. Perhaps I could switch gears for a second. Is there a way I think that you folks usually provide some decent color around your backlog and lead times for the different areas of your business and so was looking to see if we can get a little bit of information around that? And then where some of the changes were more pronounced versus last quarter.

I think, again, the driving force in our backlog is our magnetic group, where it increased substantially, our lead times are out to about 28, 30 weeks now and again, the problem that we do face is that the upsurge came in demand in September and October and as we approach Chinese New Year it's very difficult to hire new workers so the backlog has increased substantially more and we think it will increase in the next two to three weeks and hopefully at the beginning, right after Chinese New Year, we can start working the backlog down and hopefully get our lead times down to about 10 to 12 weeks.

Okay. And so I got a sense that when we came out of last quarter you were looking to hire about 4500 workers. Now you're targeting about 2800.

I don't want to mislead you. 2800 workers are our direct workers that we hire. We also do have suppliers that build one of our components for us and these suppliers also have to hire a total of about 3,000 workers. So we're looking roughly now at 5800 workers we need to hire.

Okay. So what I was trying to figure out was in terms of the delta, what had been resolved in terms of your hiring efforts.

Not much.

Not much. Right. But at the same time, are you in a state where you actually kind of a like for like scenario, are you in a scenario where you now actually have to hire more than -- I mean, it sounds like on that straight number for 5800 it would be and I just wanted to get a reality check around that.

I'm sorry compared to the heyday?

Compared to coming out of the September quarter. Are you now more pressed to hire an even more significant number of workers?

It's kind of misleading because of Chinese new year. I would say that the number is pretty in the ballpark. So I don't -- I look more at the first quarter where we were a year ago, we were in the same process of hiring 6,000 people and I guess that's where we are now. So I think, again, that's our target number.

Okay.

So we haven't made a dent from the third quarter to the fourth quarter if that helps you out more, Sean.

That's helpful. Do you have a sense in terms of how much revenue was foregone in December if you would have achieved the labor hiring goals?

I think Charles said 6 million for them, right?

[ LAUGHTER ]

Probably be the same for us.

[ LAUGHTER ] Okay. I have some more questions but I will step back into the queue.

Okay.

All right. Thank you.

(Operator Instructions). We'll go next to Steve Ferranti with Stephens.

Hi, guys.

Hi, Steve.

Can you give us a profile of Cinch's revenue base, maybe by end market? In other words, maybe give us -- maybe not down to the exact percentage but just kind of a broad picture of markets they serve.

They break it up into four markets, military, aerospace, transportation and computing, performance computing and we tend to think that the -- this is like for ballpark number now. We're using like military and aerospace as roughly about 60%, and then hard computing and telecommunication about 30% and transportation, 10%.

Okay. And then in the computing and telecom and transportation markets, any overlap in potential revenue synergies there with some of your existing businesses?

Yes, I think -- I came up with a new term for them. Mack, military, aerospace, transportation. That's an area we don't know much about. That's an area that we can't help them much with. High performance computing and telecommunication and I think there's a lot of inroads we can work, helping each other out with synergistic sales and that's what we'll be looking at. I would think that's what we're going to focus a lot of our attention on once we get over this initial hump in the beginning.

Okay. That's helpful. And I guess I understand that we're too early to really provide any guidance around the acquisition, but maybe just sort of qualitatively you could speak to the potential at least for any sort of cost savings associated, cost synergies, I should say, associated with the deal.

We did have a small restructuring from day one and we have slightly modified the management team and so there's been some savings there. We will be providing on a shared basis out of our corporate office some treasury functions, a lot of functions that they were paying (inaudible), who owned them previously to do. I believe that most of the services that we will provide will be on a much lower cost basis. So we do expect to pull in the range of $2 million to $3 million out of there fairly quickly in expense, overhead expense.

Okay. And then I guess just turning back to the discussion of ramping up production workers, just to sort of I guess take that one step further, you've got sort of a backlog of workers you need to bring on-board. There is a training period associated with new workers, right, so we might be several weeks from a point when we might see some of that backlog really get -- start to get converted into revenue and start to get worked down. Is that fair?

We have two problems, Steve. One is the turning on the workers on this, most sophisticated products on OCMs. The training takes anywhere from eight to 12 weeks so it's a little longer than I think you might have thought to get to around 90% efficiency. In addition to that, the other major problem we have, because it's a very tedious, difficult job to do, have you a very high turnover rate initially. For example, for us to get 500 workers we almost have to hire 700 workers. That's what really concerns us, in the first quarter, can we get the efficiencies and everything up quick enough to offset the training cost and the learning curve from the worker.

Understand. And then just last one from me. Maybe you can just talk a little bit about pricing and maybe --

That one's easy, Steve. [ LAUGHTER ] I didn't have to get my MBA to say I have a 30 week lead time, all my customers are yelling at me for product, do you think it might be a good time to increase price? I think at this point I could have retired the last three months if I was allowed to take kickbacks from all the people that wanted to buy from us that were willing to pay premium to get parts out the door.

Got you. Well, then the second part of my question was I guess in terms of gross profit, I mean obviously we're in a territory where pricing it favorable for you but the COGS situation is maybe not quite as favorable and so how do you think it all nets out?

We've been seeing gross margins increase. Our as reported gross profit margin was up to 14.7%. We want to get that up nearer the 20% mark. We've got a pretty good handle on G&A and we certainly look like we're out of these one-time charges going forward. We looking at cost factors within the industry, the Chinese government just announced a couple weeks ago that they were about to increase the minimum wage in China and put in some other pension portability issues and some things like that which on the face of it could raise wages a little bit more again. However, as we currently pay well above minimum wage, probably double minimum wage, we're hopeful that's not going to impact us too much.

We are still having issues over gold prices, although we've done a lot of things to mitigate the cost of gold per port, particularly in the ICM side of it. There have been a little bit of a pushback continued from our suppliers on some of the metal products and that seems to be stabilizing just a little bit now. There are big issues related to particularly ICs, which is sort of a worldwide shortage and although prices seems pretty obvious, the IC guys are trying to push up prices, the bigger concerns for us there tend to be delivery as opposed to pricing, but there are some pricing issues there although particularly on ICs, most of those are a little easier to pass through to the customer who tends to be a little more sophisticated in that area. So we do have some pricing pressures still but certainly at this time as we put in the price increases, which are pretty much effective now as we speak, these are price increases that quite frankly the industry should have been able to put into place in the last 12 months or 12 months ago and we've run the business now for 12 months with no profit and that's just not a viable long-term business plan for anybody and everybody in the industry's been the same way. We had to get put in price increases to get to just a reasonable profit and hopefully going forward we can get the efficiencies from the labor and get ourselves back to running a viable business.

Great. Appreciate the color and good luck going forward, guys.

Thanks, Steve.

We'll take a follow-up from Sean Hannan with Needham & Company.

Yes. Thank you. So, question. Have you begun to see any order flow coming from the partnership that you set up with -- that you entered into with ambient?

No, we just basically -- I think we're seeing most of that business just working for Ambient and being their manufacturing arm.

Was the question have we started selling product?

Yes.

Yes, we have.

Sorry.

Okay. So when did that actually come through and then how should we think about that incrementally for the March or June quarters?

We had our first sales in the fourth quarter, just nominal sales and we see continuing sales, fairly steady sales through 2010.

Okay. So correct me if I'm wrong, the way I'm interpreting that is that as we enter -- as we neared the end of the fourth quarter, some of that order flow started to come through. It has continued and it appears to be on a consistent basis.

I think we're projected to do maybe $8 million to $10 million this year with them.

Okay. That's helpful. All right. That's helpful. Thank you so much.

You got me in trouble maybe, Sean.

[ LAUGHTER ]

I'm kicking him under the table. [ LAUGHTER ]

(Operator Instructions). We'll go next to Pat McCullen with Armadillo Capital.

If I look at this quarter, you guys are down 33% from your peak quarter. It seems like that's probably 15% to 20% below kind of comparable type period numbers. Can you talk a little bit about, is that all the magnetic business do you think and do you expect that you will or have lost share and if not, when do you expect to recapture that?

All our products, in the downturn, all our products were hit pretty bad, anywhere -- I would say the average for all our products was anywhere from 27% to 35%. I think the concern now is with the magnetics, it's so labor intensive, it's very difficult to ramp back up production and that's why our backlog is getting so spread out.

So your products are more economically sensitive than like a little fuse or -- ?

Well, we do make fuses and some of our products are very highly automated. However, our largest product group is what we call magnetics which represents about 48% of our sales and those products tend to be very, very labor intensive. So again, for us to increase production by, say, 10%, we have to hire 500 people and we're in the process now I think of increasing our production by 200%.

With 30 weeks of lead time, though, you don't expect that customers will be able to find another alternative.

If they could, they would. I think the only problem that we fare is all our competitors are in the same -- roughly the same situation we are and are our customers are double ordering. And that's what we can't get a good handle on. They tell us they're not double ordering but I don't know if I believe them or not.

But you think you could get 15% to 20% type of growth sometime combined over the next few quarters as you get lead times back in on top of what business normally does?

Yes, I would think so. We're coming from such a trough and so low, so yes, we think we should do it. So we really should get a good read on the situation around four or five weeks after Chinese New Year and then we can give you a lot better clarity of the situation. We just don't have a real good understanding of -- even though we've been in the far east for over 40 years, what's going to happen after Chinese New Year, how many workers want to come back to the south and how quickly we can ramp up. I mean, there's a big difference. Historically we had a 70% retention rate. And if some how we can get a 80% retention rate, that would make a drastic effect in how much sales we can pump out in February and March.

Thank you.

At this time, we have no further questions in the queue.

Thank everybody for joining us and we will be glad to speak to you next quarter. Thank you.

This concludes today's conference. Thank you for your participation.