Bel Fuse Inc (BELFB) 2012 Q1 法說會逐字稿

Good day. Welcome to the Bel Fuse first quarter 2012 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce the host of today's conference, Mr. Dan Bernstein. Please go ahead, sir.

Thank you, Carolina. I would like to welcome everybody to our conference call to review Bel's first quarter 2012 results. Before we start, I would like to hand over to Colin Dunn, our Vice President of Finance.

Thank you, Dan. Good morning, everybody. I would like to read the following Safe Harbor statement. Except for historical information contained in this conference call, the matters discussed, including the statements regarding the effects and costs of, and the anticipated results from, Bel's streamlines activities, the time required to implement such streamlining activities. Cinch's place in the aerospace market, anticipated change in product offerings, and the Company's ability to support those more effectively its growing international customer base, 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 effects 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 competitor's responses to those new products; and the risk factors detailed from time to time in the Company's SEC reports. In light of the risk 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, moving on to comments related to our results. First of all, I will deal with sales. Year-over-year for the first quarter of 2012, our sales were $65.6 million, down 8.2% from the $71.4 million that were reported in the first quarter of 2011. Compared to the fourth quarter of 2012, sales declined by 4.5%, as double-digit growth in interconnected [circ] protection product groups were more than offset with decreases in our modules and integrated connect to module product groups.

Although integrated connect to module backlog has increased compared to the fourth quarter of 2012, it remains significantly below the highs we saw in the past. Compared to the fourth quarter of 2012, order backlog coming out of the Lunar New Year has increased from DC-DC, package connecters, and transformer products, and is flat to slightly down across all other major product lines.

Cost of sales and net results. As noted in the previous quarters, although we have seen some moderation in commodity prices recently, higher are costs for commodities, including gold, copper, and petroleum-based plastics. Government mandates for higher minimum wage and overtime requirements in China continue to keep manufacturing costs high in comparison to the prior year.

The shift of our business away from labor intensive magnetic products towards higher material content module products result in lower profit margins than our other product lines. Fixed overhead costs represent a higher percentage of sales due to the continued low end of magnetic production in the China factory. The culmination of these factors more than offset the strong first quarter performance of our Cinch Connector business, and led to an increase in cost of sales from 80% of sales in the three months ended March 31, 2011, to 84.5% of sales in the three months ended March 31, 2012.

On our [on order] to GAAP basis, Bel reported income from operations of $1.4 million, and after tax net earnings of $900,000 for the first quarter of 2012. Last year, we reported income from operations of $4.2 million, and after tax net earnings of $3.2 million for the first quarter of 2011. To state these results on a comparable basis, non-GAAP income from operations for the first quarter of 2012 was $1.8 million, compared to non-GAAP income from operations of $4.3 million for the first quarter of 2001 (sic - see press release).

Restructuring and severance charges, acquisition-related costs, and a loss on disposable property, plant and equipment have been excluded from non-GAAP income from operations for the first quarter of 2012. While severance charges have been excluded from the comparable 2011 non-GAAP income from operations. With increase in first quarter 2012 versus 2011, non-GAAP operating income is attributed to lower sales revenue, and combined with the decrease in gross margins described above. A reconciliation of GAAP to non-GAAP measures is included in our press release today.

Selling, general, and administrative expenses; on a comparable non-GAAP basis, the dollar amount of selling, general, and administrative expenses decreased from $9.9 million during the three month period ended March 31, 2011, to $8.7 million for the first quarter of 2012. SG&A, as a percentage of sales for the first quarter of 2012 was 13.3%, down slightly from the 13.9% of sales during the first quarter of last year.

Taxes. Bel recorded a provision for income tax of $600,000 for the three months ended March 31, 2012, compared to $1 million for the three months ended March 31, 2011. Mainly due to tax and operating profits in the US and Europe, combined with operating losses recorded in Asia with no tangible tax benefit. The Company's effective tax rate, which is the income tax provision's percentage of earnings before income taxes, was 42% for the three months ended March 31, 2012, compared to 24% for the same period of 2011.

The Company's effective tax rate fluctuates based on the geographic segment in which the pretax profits are earned. Other 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 Asia has the lowest tax rates. The Internal Revenue Service ordered our Federal tax returns for the years 2004 through 2009 is nearing completion, and we do not expect to have a material impact on our results.

Balance sheet, cash, and equivalents. At the end of March 2012, our cash, cash equivalents, and investment securities were $91.9 million, which was $2.1 million and less than our December 2011 balance of $94 million. The decrease in cash resulted primarily from the payment of $2.7 million for the acquisition of GigaCom Interconnect. $1.1 million of capital expenditure, and $800,000 in dividends, primarily offset by earnings and favorable operating cash flows.

Receivables and Payables. Receivables net of allowance were $37 million at March 31, 2012, compared to $39.1 million at December 31, 2011, a decrease of $1.6 million. Our accounts payable at March 31, 2012 were $20.3 million, an increase of $1.8 million from December 31, 2011. Turning to inventories to the end of March 2012, our inventories were $56.8 million, up $3.5 million from the December 2011 level.

Other balance sheet comments. Our capital spending for the three months ended March 31, 2012 was $1.1 million, while depreciation and amortization was $2.1 million. Our per share book value at March 31, 2012 was $18.82. That's including goodwill and intangibles, and excluding intangibles and goodwill after share value, was $17.31. Just a little word about outlook as we proceed into 2012. With relatively short lead time for our products and those of our competitors, we have a tight labor supply and no significant release from commodity prices. We expect to see continued price pressure on those products, which we manufacture in Asia.

On March 8, 2012, we completed the acquisition of 100% of the capital stock of GigaCom Interconnect located in Gothenburg, Sweden from GigaCom holdings for $2.7 million. In addition to streamlining our operations, we have begun to focus our product development efforts on non-commodity products. This major effort will be in the modular product line in both power and value-added products, and the [commercial] aerospace products found in the Interconnect product line. Our acquisition strategy remains focused on companies that produce such products, because we believe they can give us the great opportunity for Bel's long-term growth and profitability. Now, I will hand it back over to Dan.

Just so you know, Colin is in Singapore during this call. Just one point, I think we should clarify. Regarding our outlook for our ICM, which is one of our major product lines, we are seeing lead times being stretched out at the end of the fourth quarter. They were running about 8 weeks to 10 weeks, and now they are into the 18-week range. So on that product line, because it is very labor intensive, we do see lead times being stretched out. At this point, I would like to open up the call for any questions people might have.

Thank you.

(Operator Instructions)

Zack Larkin, Stephens.

Hi, this is Chris Godby in for Zach Larkin at Stephens. Will the restructuring costs that you mentioned on your press release, will those be fairly evenly spread across the next three quarters? Can you give us some color as to how these costs would be spread out, and also, do you expect further costs in '13?

They are not going to be even spread because of the rules and regulations we are dealing with. When we make announcement regarding labor situation, they will fluctuate somewhat. Colin, do you want to add some more flavor to that?

They are going to be back-end loaded, Chris, so certainly going to be more on the third, fourth quarter time frame. We do expect them -- all of the expenses to take place this year. That is our current belief. But there is a possibility it might stretch into next year. But there will -- but the amount we have announced is the total amount for what we have in mind.

It sounds like you anticipate that the program will be fully implemented as of the end of this year. For 2013, is that when you expect to have the full $4.2 million cost savings run rate in place?

That is our goal, and we are doing everything possible to make sure we meet that goal, yes.

Can you give us any color as to what cost savings we might want to expect in 2012? Are you able to give any color there at all?

I think it's -- again, our projection is to get to savings around $4 million, $4.4 million; in that range. Then this would pay for itself within a year. I do not think we really will see cost savings, probably until the fourth quarter, because there is going to be some redundancies in the third and fourth quarter, as we train people and shift production around. We are building up inventories. Also, we are building up a double labor force, so as we wind down one, we build up the other one. So I do not see any of the cost savings -- We did have some early retirement and layoffs in the past quarter. But going forward, I do not see anything that would be one-for-one, that would be that transition period of probably 60 to 90 days.

Then a bit of a housekeeping question. Can you break out the segment revenues for the quarter?

Colin, you want to do that or -- I can do it for you. Okay, so if you look at modulars, it is $16.7 million; magnetics, $19.2 million; interconnect, $27.2 million; fuses, $2.4 million. That should give you roughly about $65.561 million?

Just looking at magnetic, how would you describe the pricing situation right now? Are you seeing any improvement there? Do you anticipate that kind of pressure in pricing will continue over the last --

No, I think what we are seeing now, what we are trying to do, because our lead times are stretching out. With the process now, we are making a concerted effort to focus on products that have high margins. So with products that have good margins, we are trying to keep those lead times within 12 weeks. Products with poor margin, we are hoping can let that stretch out to 16 weeks. Again, I doubt we see any more price decreases, and we should be looking at price increases as lead times stretch out.

Thinking about margins a little bit; I know quarter-over-quarter, we did see some pick-up there. For the remainder of the year, are we likely to see margins similar to what we saw in the first quarter?

Colin, I will let you address that one.

Yes, quarter-over-quarter, we did have a 1.1 point improvement in margin. A lot of it is going to depend on where we are with the labor. Hopefully, if volumes pick up a little bit, too, which we also think will happen, that will help us with our overheads and get some of our costs down. There is very little we can do now. Our SG&A, we are fairly bottomed out on that. So yes, we think there might be a little bit of margin. The big kicker is really going to be related to mix at the end of the day. We have been very fortunate with the mix we have had just recently since it has been doing a little -- somewhat better than the rest of the business, as we said. While their margins tend to be higher, obviously, their taxes are a lot higher, too. From a gross profit point of view, our margins are showing fairly good gains. (multiple speakers)

Not to mislead anybody, we are committed to grow the modular business, and the modular business does affect our overall margins, because the building materials are so high. And this past quarter, for certain reasons, the modular sales of one of our major customers was down. I think that is, again, if that picks back up, it does affect our margins.

Sean Hannan, Needham & Company.

Dan, just to follow up on some of the comments you started on for the module business, can you elaborate on the business levels and the demand flowing through there? I think your main customer is more of a smart grid customer that is working through business that is a bit more project-oriented. Are we seeing any change or -- (multiple speakers).

Yes, I think we see things pretty stable going forward, until we get some new business. We know that last year was stronger than this year, but we are still waiting to see how well does the other customers he has really affects us. But if you look at the quarter, I think he looks like he was down $266,000 to the previous -- to last year from quarter-to-quarter. I am sorry, from quarter-to-quarter, I apologize, that is from last year quarter one. Last year to this year, he is down $266,000, but from the fourth quarter to this quarter, he is down $1.6. But that is only 25% of our modules, so --

I understood him to be one of the largest pieces of your module business, though.

But again, he represents 21% of it.

The remainder is fairly distributed amongst many customers, or what is the --

The DC-DC business, we have one customer that probably accounts for 30%, 40%. And then we have another major customer in the modular group that accounts for about 9%. If you look at -- I would say maybe, probably 50% is with three customers.

On the interconnect side, it sounds like the way you have talked about your focus on better margin products, versus lower margin products, and the lead times associated with them, historically, that has led to better pricing. Doesn't sound like --

Well, not better pricing. You know, this --

Your portfolio, right? That will be managed to this?

Okay, let's just go back. For whatever reason, we put the interconnect, the MagJack, under magnetics. The term, interconnect modular, or ICM, or MagJack, falls under magnetics. Under that product, within the last 8 weeks, our backlog went from $14 million to about -- from last quarter to this quarter, went from $14 million to $24 million. So again, it has grown pretty rapidly, and as that happens, our lead time is getting stretched out, as labor gets more difficult to hire, as we get further away from Chinese New Year. What we are trying to do, before we can implement any pricing, because a lot of our pricing is based on contracts. On the lead times, make sure that parts of that long lead times or parts that have bad margin, and if we get parts out the door, maintain the 12-week lead time for the parts with greater margins.

On a blended basis, as you look at that portfolio of products, you are able to effectively mix up?

Yes, we are hoping to. We are in the process of trying to accomplish that goal.

On the M&A front, in the area of interest that you have spoken to in the past, could we see some activity in the near term that might be larger than GigaCom, whether --

I am the boy that cried wolf, Sean (laughter). Again, you look at it. My dream was Power-One, my dream was Pulse, my dream was Artisan. At this time, every moment we have for acquisitions, and it has really been surprising that maybe out of 20 acquisitions that we get on our table, 18 of them are less than $25 million. It looks like we are not getting many opportunities above $25 million. So I think our sweet spot would be to have an acquisition to get critical mass of $75 million to $100 million into the Company, but we just have not come across any of those opportunities.

How many are you active on today?

Today, we are active on four companies. Two, we are down to the final bid, and then one, we are the only bid doing final due diligence. Those three companies are under $15 million, and we are looking at another company with sales around $70 million, and that process has just begun. The biggest problem we have is, I would say 90% of the companies that come across our desk now are below $25 million.

(Operator Instructions)

Mike Cikos, Sidoti & Company.

I wanted to ask you -- and I apologize, I am new to the Company, but the sales decline that we are seeing currently, is it in relation to the markets, the replacement cycle? Or what is driving that?

I think the big thing is a lot of our business is the networking, telecommunication. So you have people like HP, Cisco, Alcatel, and even though Cisco is very profitable, we are seeing that things are leveling off at the first quarter. So our decline has really come from the Bel standing product, across all of our product groups. We have seen slight decreases in sales, and the biggest decrease was in the MagJack, the magnetic group.

Can you delve into the streamlining operations that you are going to be going through? Just provide some more color on what, exactly, you are going to be doing?

I wish I could, but because of the new laws and how we make announcements to people, I can't really say anything until the announcement is made. Before we -- we need to make the announcement to the people first, and at that point, we can lay out exactly where it is coming from, and the operations and so forth. So our hands are kind of -- in the old days, we could take the reserve when you made the announcement, but now it is a little more difficult. Colin, you want to add some more on that?

No, I think that is it. We just can't say at this time, but we are hopeful that, within a quarter, anyway, we are going to be able to get it out there. When we do make the announcement, everybody will be on the page at the same time.

Ted Moreau, Knight Capital Group.

Colin, and maybe for Dan, just kind of getting back to an earlier question that was raised about the product cycles, and product introductions. And other initiatives that might be forthcoming here that could conceivably benefit margins as we go ahead, in addition to the cost increases. What might be the road map or timing of something like that? I know that it is going to be sort of a migration, but just want to get an idea. We are out to 2013, when we might see some impact there?

Our goal is to try to clean up the Company as much as we can this year. Again, the big point was trying to refocus. Looking at where do we want to be going forward, and we believe very strongly that whatever we do, we have to be a little bit more customer orientated. We have to have a better idea that our products will not be commoditized very quickly. That is why we are spending more time focusing on the new aerospace business than we have ever before. The companies that we are looking at are companies that can offer that. Also in the modular group, focusing on AC to DC companies, that would be a perfect fit for our DC companies. Buying the GigaCom allows us to get into fiber that we can present to our military customers, and to our aerospace customers.

The only problem that we do have is when we do talk about aerospace and military, is that the gestation period there is two to three years, generally for new products. While like Cisco, that is generally, six to nine months. That is why it is somewhat difficult to say how long this road will take us, but we are confident that we are planting the proper seed and doing the right things. Regarding the network, the big thing is when is 10 gigabit going to take off. Now, we are starting to see a lot more interest in it, but we just do not know when the big boys are really going to use it or not. I think from a networking standpoint, that will be our big next push. And it's not a big push from a sales standpoint, but a greater push from profitability. Anytime new technology is introduced, then you have a lot better chance for greater margins.

I assume this will be sort of an evolution and a gradual migration, rather than some major trade show coming up, whether it be some major product introduction or technology initiative in the industry. Is that --

What we have been trying to do, since my father founded the Company, I think our greatest strength has been to work with engineers and key product groups. And focus on what their needs are, and trying to get them product faster than anybody else. I think if you go back through our history, from RCA to IBM to DECK to 3Com, today to Cisco. And winning awards we win with Cisco, we do have a great history of accomplishing that goal. Now the question is, can we apply that type of responsiveness to Cinch, and to Boeing, and to Airbus, and to the customers that support that industry. I think if we can do that, we are going to have, hopefully, long-term success.

Are there any major trade shows that come up? Sometimes there is international ones every couple of years?

We participate in a lot. We always participate in electronic, but for the military aerospace, I think there are three or four aerospace shows. We went to the one in India, we attended the one in China. So we are looking at not just Europe and United States, but really also, understanding very clearly that the future growth is going to be in India and going to be in China, and we are really trying to position ourselves. We do a good job of networking in consumer electronics, but how do we position ourselves for aerospace and those growing companies?

I am showing no other questions at this time. I would like to return the call back over to management for any closing comments.

I appreciate everybody coming today. We are sorry for the confusion. I assure you that Colin will be sitting next to me on our next conference call. Thank you for your support. Have a good day.

Ladies and gentlemen, thanks for your participation in today's conference call. This does conclude the program, and you may now disconnect. Thank you, and have a wonderful day.