Bel Fuse Inc (BELFB) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Bel Fuse Inc. second-quarter results conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Daniel Bernstein, President and CEO of Bel Fuse Inc. Sir, you may begin.

Thank you, Sonia. I'd like to welcome everybody to Bel Fuse's second-quarter results. Before we begin I would like Colin Dunn, our VP of Finance, to read the Safe Harbor statement.

Good morning, everybody. Thank you, Dan. Except for the historical information contained in this call or matters discussed on this call including the statements regarding potential growth and opportunities to reduce cost and enhance efficiency in the future our forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties.

Actual results could differ materially from Bel's projections. 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, difficulties associated with integrating recently acquired companies and achieving cost synergies, capacity and supply constraints or difficulties, product development, commercialization 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.

We also may discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our release. Throughout this call I will refer to -- that was the end of the Safe Harbor statement. Just moving on now.

Throughout this call I will refer to the Power Solutions business which was acquired in June 2014 as BPS and the Connectivity Solutions business which was acquired in July and August 2014 as CCS. Collectively these will be referred to as the 2014 acquisitions.

Second-quarter 2015 sales were up $145.7 million -- were $145.7 million, up 46% compared to $99.4 million in the second quarter of 2014. Included in second-quarter 2015 was an incremental $51.2 million of sales from the 2014 acquisitions. Excluding these sales, sales declined $4.9 million due to lower sales volume in Bel's interconnect products and DC to DC converters.

On a regional basis including the sales from the 2014 acquisition, sales in North America increased $41.4 million in the second quarter of 2015 as compared with last year. Sales in Europe increased $7.4 million and sales in Asia decreased $2.6 million.

On a product basis including the sales for the 2014 acquisitions we had, Magnetic Solutions products sales were $46.2 million in the second quarter of 2015 which increased 3.4% as compared with the second-quarter last year reflecting higher sales volumes of our icy and products.

Cinch Connectivity Solutions product sales were $45.6 million in the second quarter of 2015 which is an increase up 41.7% over second quarter last year primarily due to the incremental impact of the acquisition of CCS and partially offset by lower sales volumes at our passive connector and Cinch product lines. Power Solutions and Protection product sales were $53.8 million in the second quarter of 2015, which is an increase of over 100% from the second quarter of last year primarily due to the incremental impact of the acquisition of Bel Power Solutions, partially offset by lower sales volumes of our DC to DC products.

Turning to gross profit, in the second quarter of 2015 reported gross profit was $28.6 million as compared with $17.9 million, an increase of $10.7 million. This increase was principally due to the incremental impacts from the 2014 acquisitions.

SG&A, selling, general and administrative expenses in the second quarter of 2015 was $20.8 million, or 14.3% of sales as compared with the $13.2 million, or 13.3% of net sales. These increases reflect the incremental impact of $9.8 million of SG&A from the 2014 acquisitions. Excluding these incremental expenses SG&A expenses declined $2.3 million from lower acquisition-related costs and professional fees in the second quarter of 2015.

Income from operations was $7.5 million in the second quarter of 2015 which compared with $3.7 million in the second quarter of 2014, reflecting the incremental impact from the 2014 acquisitions as well as lower SG&A expenses and cost synergies realized. Interest expense was $2.4 million in the second quarter of 2015 as compared with $200,000 in the second quarter of 2014 primarily due to the interest on borrowings used to fund the 2014 acquisitions.

Taxes, in the second quarter of 2015 we reported income tax benefit of $587,000. This compares to an income tax provision of $473,000 in the second quarter of 2014. The income tax benefit in the second quarter of 2015 was primarily due to the mix of pretax earnings and losses in certain jurisdictions.

The Company's effective tax rate which is the income tax benefit or provision as a percentage of earnings before income taxes fluctuates based on the geographic segment in which the pretax 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 Asia typically has the lowest tax rates.

And now I would like to cover some cash flow and balance sheet items. Cash and cash equivalents at June 30 of 2015 was $71.4 million which decreased $5.7 million from December 31, 2014. Our cash flow from operations including net proceeds of $9.9 million from the sale of the Network Power Solutions system and related transactions in January which we used as a portion of our total debt repayments of $26.4 million during the year.

Capital expenditures were $5.7 million as well as dividend payments of $1.5 million. Cash taxes paid were $2.7 million in cash interest paid was $3.4 million.

From a working capital perspective, Accounts Receivable was $98.5 million at June 30 of 2015 compared with $99.6 million at December 31, 2014. Days sales outstanding remained at 62 days at June 30, 2015 as compared with December 31, 2014.

Inventories were $111.2 million, down $2.4 million from the December 31, 2014. Inventory turns declined to 4.2 times per year at June 30, 2015 from 4.3 times per year at December 31, 2014.

Accounts payable were $64.8 million which increased $2.9 million from December 31, 2014 just reflecting the timing of payments. The changes in Accounts Receivable, inventories and accounts payable during the first six months of 2015 reflect the seasonality of the business during the first half of the year.

Debt, during the first half of 2015 we made mandatory principal payments of $26.3 million including the net proceeds received from the NPS transaction. We incurred $4.2 million of interest expense during the first half of 2015. Book value per share as of June 30, 2015 which is calculated to shareholders' equity divided by our combined A and B classes of common stock outstanding was $19.29 per share.

Now I will hand it back to Dan.

Thank you, Colin. At this time we would like to open it up for questions. Sonia?

(Operator Instructions) Sean Hannan, Needham.

Yes, thanks for taking the question here and good morning. I'm not sure if I missed the color for the prepared remarks.

Did you provide the explicit segment contributions in terms of Power Connectivity, etc., if there's a way to just get that rehashed if that had been provided somehow I missed it? And then I want to see if I can get a follow-up for your perspective within the Power business, I know that had been an area of optimism, we expect to start growing in the fourth quarter I think about $4 million a quarter, so I want to see if we can get any updated views around that? Thanks.

Okay, we don't break out the product groups or the product segments by profit margins at this time and we don't see probably doing it going forward. There's just too many overheads and structures to break out to give us a good number. Currently --

Sorry, Dan, I was looking for the profit margins, I wasn't sure if I had missed the revenue contributions there thanks.

The revenue contribution (multiple speakers)

Yes, we did. Just let me back up here.

The revenue, Magnetic Solutions was $46.2 million. Cinch Connectivity, the Connectivity group was $45.6 million and the Power Solutions and Protection was $55.8 million.

Okay. And the topic on the Power business, that's been an area of optimism I think in terms of getting some incremental revenues that will start layering in this December quarter, some of which is a consequence of new business that's been won, additional contributions I think coming from requalification of some programs and add some customers after having quality-related issues addressed and being able to move forward there.

So can we get an update on that Power business, the expectations for the fourth quarter in general and moving forward? Thanks.

Okay, so again we do think that the Power group will be the driving engine for our organic growth for Bel going forward. As I said we do hope by the fourth quarter that we do see 5% to 10% growth.

However, when we did acquire the company the backlog was about 47 -- 45 to 47. Our backlog now is running from 35 to 37. So we still haven't seen the bookings improved.

We did have a good booking week last week; however, we like to see our open bookings back to 45 to give us that comfort level. So again we're not at a run rate close anywhere from $165 million to $175 million and we feel a lot more comfortable when we get that run rate above $200 million.

But all signs are still very positive. Again, one of the things that we did in fact when we discussed that some of the products that we did acquire in the Power business were very low margin items that we had to walk away from. We were building a product for a company called everybody knows Electrolux and a year ago that product was running at $16 million, this year it's probably running at $6 million and next year running about $2 million.

So it's tough to pick up those $16 million in sales. However, we think from a profit standpoint we should be able to pick up the profit standpoint because they were such low margin items.

So again I think the point again is yes we're banking the future of the Company on a good portion of it from Power for growth. Again the other segments are we feel very profitable segments but we are market leaders in those segments but when you can draw a big part of the marketshare it's difficult to grow the top line. On Power we're the fourth or fifth player, we see tremendous opportunities to grow the top line.

Okay. And Dan, just to clarify in terms of that bookings comment if our bookings still need to be picking up by about $10 million, in terms of the point in time today to support your expectations of the revenue pickup in December, when do we need to see that bookings number pick up to your expectations --

We will hopefully see that in September, October.

Okay. So from a timing standpoint and we're still just for us to keep the right perspective around this from a timing standpoint it's nothing that should be sending up yellow flags. We still have a few months and we would expect those bookings to materialize at that point?

Yes. I'm hoping.

Okay, fair enough. All right. Then in terms of the Connectivity business you had some commentary within the press release for some wins that you acquired there and expecting incremental bookings and revenues in September quarter.

Just trying to get the right perspective around that. Would this in some manner allow us to think about the incremental growth factors within Connectivity or is this simply an offset to whatever natural headwinds might materialize period to period in the sub areas of Connectivity where you participate and at least thinking of that segment as being able to at least stay a lower growth profile or maintaining revenues, how do I think about that in the perspective of --

Again when we bought Cinch Connectivity Solutions their sales were dropping by about 5% to 8%. Our goal going forward is again get to 0% to 5% growth.

If we can get 5% growth I would be extremely pleased with the group and that's our goal and if it's below 0% I won't be too happy so that's the benchmark we put for them. So again from a profit standpoint because they have so much of their sales go through distribution, also they do a lot through the military aerospace where price is not as important a factor as in the networking community and telecommunication we still expect good profits from those groups.

Okay. So it sounds like the perspective is that the wins that were cited allow us to still consider --

Hopefully turn the tide from negative to positive.

Okay. But is that --

It's not going to be 8% or 10%.

Right, okay, that's helpful. Last question here in terms of cost savings, you also in the press release referenced a $3 million to $4 million savings opportunity and as I think about some of the commentary we got from you on the last call there was a reference point to the potential of being able to realize about $10 million in savings through cost controls, integration, synergies from some of the recent deals, etc., is the $3 million to $4 million --

These are additional.

Okay. So this is in addition, where are we in the whole grand scheme of then the aggregate $13 million to $14 million? How much has been realized and when do you expect the full achievement then of that full run rate?

Do you want to take that one -- how much we've knocked out so far?

So we've realized I would say $4 million last year and --

Again I think we're pretty much there. Again it was our goal, my goal I stated numerous times I hopefully could get everything cleaned up by this quarter and that's why we put out the additional $1 million that is going to be needed. Again you see opportunities and it's tough to pass up opportunities when you get a payback within a year or six months you have to pull the plug on it.

We're very pleased that our GAAP and non-GAAP was so close together this quarter, only had a $0.03 difference. Probably next quarter you are going to see a $0.10 difference.

But I think we still have down the road I don't think anything more than $1 million. So again things happen and we act on it quickly. I don't think that answered your question or did it, Sean?

Let me try this -- let me angle it a little differently.

On the $14 million we projected I think we're about 95% there.

Okay. I think that addresses the question then. I would expect then that the remaining 5% is completed then this quarter.

Between the next two quarters because of -- we have a lot more constraints now with reporting, regarding when you can take write-offs in the old days when you made the announcement you can take the whole write-off at one time. Now when the employee leaves, when the employee doesn't, so that's why we're -- we can't make it as black and white as we could in the past.

Okay. I will hop back in the queue. Thank you.

Harsh Kumar, Stephens.

Hey, Dan and Colin, good quarter. You guys are now a global Company, selling into different geographies, different products. We hear a lot of stuff about Asia.

I was curious if I could pick your brains on what you're seeing in the Asian market. Do you feel all the consternation there is short term in nature or do you think this business can bounce back in a meaningful way once you get past the short-term timeframe?

Even though we're a worldwide Company and we do have Chinese customers the majority of customers we have in China are subcontractors building from multinational American companies. So again even though Foxconn/Hon Hai, the Taiwanese company that is probably the largest employer in China, mostly all our products that we build for them are for the Ciscos, the Junipers, the HPs of the world.

So we really are not addressing, we do a little bit with Huawei and some of the Chinese companies like UTStarcom, so we really don't get a good feel. But again any time the stock market takes a dip anywhere in the world it's not a good sign for business. And that does concern us.

Sure. Okay and then on the last call, Dan, I think you went through some detail about perhaps what was wrong with Power-One, some of the things that you had done in terms of factory audits to get your customers back. But I think there was maybe one, maybe two that you had to still do some work on to get them back in a meaningful way. I'm curious where that stands and if you --

We're extremely pleased one of our top three customers audited our facility for four days, eight hours a day and once the audit was done gave us the highest grade of all our competitors from a factory standpoint. So I think we made tremendous strides and I think our factories now can compete with anybody in the world. We could not say that before we bought the company.

The only thing we do have, we do have a very big factory in Europe that manufactures power products. Now our attention is focused on them to see if we can get them to the same level we have in China. But I think from a production standpoint, a core standpoint we're hitting on all cylinders now.

Our focus really going forward is how we penetrate our sales organization and put a lot more heat on our salespeople throughout the Company saying that, hey guys, you [expletive] about our factory, you [expletive] about our price, all these things. Now we have all those things in place, no more excuses, we need to grow the top line and we're going to hold you accountable for growing the top line. So I think going forward from an operation standpoint we're there, from a sale standpoint is where we're going to focus our attention over the next year.

Got it. And I think you may have touched upon the next question that I'm asking, you know most of the integration looks like it's complete. You touched upon the sales aspect that you want to drive home with some of the newer products that you acquired. Is there any other glaring area that you feel that needs to be addressed before you feel like the integration is fully complete?

No, no I think we're there. I think from a core standpoint, I think from every standpoint we're there.

Just are we making the right relationships at the decision-makings of these companies, are we dealing with the engineers properly, are our pricing, are we giving them the proper pricing? So I think again we have no excuses.

Got it. Okay, thanks fellows. Thank you.

(Operator Instructions) Anthony (inaudible), Independent.

Good morning, gentlemen. Thank you very much for a very nice quarter. I just have a couple of quick questions.

In terms of goodwill $213 million, how is that actually derived and are you comfortable with that, do you feel that is a conservative figure? Also in terms of quality control your global Company, how do you continue to monitor your quality given the situation with language differences in different standards? And in terms of the product itself, do you just take your cue from the standards from the end-user or do you actually innovate and design your own connectors and equipment? And thank you so much.

All right. From a goodwill standpoint I will let Colin address that.

Our goodwill goodwill is a function obviously of the purchase price and what doesn't get allocated to fixed assets and employment contracts and the rest of it. We analyze our informally analyze our goodwill every quarter which we're required to do and make sure that in effect the goodwill can be supported by the profitability of the businesses on a geographical basis. And then every year annually we have an independent outside firm come and do a much more detailed analysis to make sure that the goodwill on the books can be supported by our operations.

It's the same as every company does, it's a very formalized process that's in place. If the goodwill can't be supported on a geographical basis by the profitability, then we have to write that goodwill down.

But unless that happens there is no basis for us to write down goodwill, we're just not allowed to do it. It has to sit on the books.

From a quality standpoint I think we take a different approach than maybe some people. For example when we acquired Power-One they had a very big quality group based out of San Jose. However, in San Jose they had no production, no factory.

What we did is we basically decimated that group of maybe eight or nine people and got it down to one person or two people and we took those dollars and moved them into the factory. We are a very big believer that the factory has to be responsible for quality and quality just can't be a group of people in the backroom looking at data all day. Quality has to go from everybody in the organization and it has to be a team approach from the general manager down and that we have really done a very good job throughout all our organizations that we have a hands-on approach to quality where our management spend a lot of time on the floor working with people to solve problems, improve quality and so forth.

From a language barrier I have to say most of our people in our Company worldwide do speak English so that never tends to be a problem. Of course you do have quality problems pop up and you try to manage them the best you can.

Regarding product development we've done Bel's organically and what we preach to everybody, our success has always been not to outthink the market or the customer. We very rarely will come up with a widget and say hey, guys, this is the best widget in the world, come buy it.

What we do a tremendous job throughout our lifetime at Bel is work very closely with engineers, see what problems they have, work with them closely, come up with a solution. And hopefully when we do come up with that solution we can do it a lot faster than our competitors. And if we can come up with a product quicker than our competitors then we're okay from a price standpoint.

So we make a major push for our engineers to deal with the customer engineers as much as possible and build up those strong relationships. And that's how we develop a lot of our new product.

Thank you so much. I appreciate it.

(Operator Instructions) I am showing no further questions at this time. I would like to --

Sorry, Sonia. I'd like to thank everybody for joining our call today and we look forward to speaking to you in October. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program.

You may now disconnect. Everyone have a great day.