Bel Fuse Inc (BELFB) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter earnings results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference Mr. Dan Bernstein, President and CEO of Bel Fuse Inc. Sir, you may begin.

Thank you. I'd like to apologize to everybody on the call. We had a little mix-up with the operator and that's why we're five minutes late, so please accept my apologies.

Before we begin I'd like to have Colin Dunn, our Vice President of Finance, to go over the Safe Harbor statement. Colin?

Good morning, everybody. Thanks Dan.

Except for historical information contained in this call the matters discussed on this call, including the statements regarding potential growth and opportunities to reduce costs and enhance efficiency in the future, are 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 statement will in fact proved 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 press release today.

Now moving on to a discussion about our performance, our fourth-quarter net sales were $135.2 million, down 9% compared with $148.7 million in the fourth quarter of last year. This decline was primarily due to the unfavorable impact of the global business conditions and industry trends which resulted in lower sales.

On a regional basis, sales in North America decreased $5.8 million, or 26% in the fourth quarter of 2015 as compared with the fourth quarter of 2014. Sales in Europe decreased $926,000, or 1%, and sales in Asia decreased $6.7 million, or 13%.

On a product basis magnetic solutions product sales were $41.6 million in the fourth quarter of 2015, a decrease of 5.5% as compared with the fourth quarter of last year. Our interconnect products which include Cinch connectivity solutions product sales were $43.1 million in the fourth quarter of 2015, a decrease of 5.6% as compared with the fourth quarter of 2014. Power solutions protection product sales were $50.7 million in the fourth quarter of 2015, a decrease of 14.3% from the fourth quarter of 2014.

Despite the headwinds from the global industry trends and the resultant decline in sales in the fourth quarter of 2015, we were able to improve our gross profit margin by 40 basis points as compared with the fourth quarter in the prior year. This margin improvement reflects the favorable impact of our operational enhancements and cost reduction activities we achieved during the year.

Turning to selling, general and administrative expenses, in the fourth quarter of 2015, they were $20.6 million, or 15.3% of sales as compared with $24.6 million or 16.5% of net sales last year, reflecting lower professional fees and lower acquisition related costs in the fourth quarter of 2015 as compared with the fourth quarter of 2014. These declines were also due to lower depreciation and amortization expense, primarily due to the timing of assets being fully depreciated last year.

Turning to income from operations, income from operations was $4.2 million in the fourth quarter of 2015 as compared with $2.5 million in the fourth quarter of the prior year, reflecting the favorable impact from improved gross profit margin and lower SG&A expenses. Interest expense was $1.6 million in the fourth quarter of 2015 as compared with $1.9 million in the fourth quarter of the prior year, reflecting the interest on outstanding borrowings during each period.

The income tax provision was $174,000 in the fourth quarter of 2015. This compares to an income tax benefit of $957,000 in the fourth quarter of the prior year. The income tax provision in the fourth quarter of 2015 reflected a shift in the mix of pretax earnings and losses in certain jurisdictions.

The Company's effective tax rate, which is 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 rate.

Earnings per share or EPS for the class A common shares was $0.19 in the fourth quarter of 2015 as compared with $0.14 in the fourth quarter last year. EPS for the Class B common shares was $0.21 in the fourth quarter of 2015 as compared with $0.15 in the fourth quarter of the prior year.

And now I would like to cover some cash flow and balance sheet items. Cash and cash equivalents at December 31, 2015 was $85 million which was an increase of 7.9 from December 31, 2014.

During the year we used cash to reduce our outstanding debt by $45.4 million. Also during the year we used cash for capital expenditures of $9.9 million and made dividend payments of $3.2 million. Cash taxes paid was $580,000 and cash interest paid was $6.2 million.

From a working capital perspective, accounts receivable was $86.3 million at the end of December 2015 as compared with $99.6 million at December 31, 2014. Days sales outstanding was 59 days at December 31, 2015 as compared with 62 days at December 31, 2014.

Inventories was $98.2 million, down $15.4 million from December 31, 2014. Inventory turns were 4.5 times during the year ended December 31, 2015 as compared with 4.3 times in the prior year.

Accounts payable was $49.8 million which decreased $12.1 million from December 31, 2014, reflecting the timing of payments and lower inventory purchased in line with the decline in sales. Bel's outstanding debt as of December 31, 2015 was $187.2 million, down $45.4 million. This reduction was due to the combination of our mandatory payments of debt as well as additional voluntary prepayments made during the year.

Book value per share at December 31, 2015, which is calculated as shareholders' equity divided by our combined A and B classes of common stock outstanding, was $19.59 per share.

And now I'd like to turn the call back to Dan and open up the call for questions. Also on this call today we have Frank Scognamiglio who is joining us and may add some additional data. Frank is our -- handles our consolidations and all our internal reporting within the Company.

Thanks, Colin. I appreciate that. We'd like to open up the call now for any questions anybody might have.

(Operator Instructions) Harsh Kumar, Stephens.

Yes, thanks guys. This is Richard in for Harsh.

I wanted to start with a line in the press release said some of the business slipped as overall customer demand slowed. Are you expecting this business to come back as we go throughout the year or how should we think about that slipped business?

We think from everything we see out there we don't see any bright spots in our industry. If we look at people out there that most people are predicting anywhere from a 5% to 8% decrease for the year. We don't think we're going to be any different at this point in time.

We did, Cisco is a driving force for us and they said basically in the last two weeks of January orders just came to a stop for them and they pushed everything back in December. That affected us.

But before it was a wait and see. I think the last quarter now I think people are a lot more pessimistic of how things look going forward.

That's very, very helpful. And then in terms of your power business, where are we in terms of engagement with customers and how should we think about that business going forward?

Again I think the day I die on my tombstone it is going to save Bel is going to -- power group is going to be our driving force. Our sales really took a bad hit. We've done everything right.

We had customers that we were getting dinged on report cards. We were the lowest rated on their report cards.

Now all our customers we are either one or two when it comes to quality. Every customer we have there is not a problem dealing with Bel and before all major our customers were on the verge of walking away from us.

We do it, again, we did miss the cycle of 18 months and those products are out there now. In addition to missing a product lifecycle large OEM customers that had commodity products like Electrolux for a white good product which represented about $8 million of sales we walked away from the business because the margins were too low for us. But I think we're doing everything right but we just don't have the sales to show for it.

And that's somewhat disappointing. We are making a major effort with this data storage people. As you probably know Facebook is a key customer of ours and they are a driving force in open computing and that led us into a lot of other opportunities out there with the data storage people.

So we do think there is as Cisco said one of Cisco's big concerns were they want to evolve more into software because a lot of people are building their own data centers. And for us that's a good opportunity because we're addressing all those customers like Google and Amazon and anybody that's building their own data centers.

Got you. And then in terms of your cost cuts, I think you've talked about an additional million dollars worth of cost cuts from I believe consolidation.

Can you give a little bit more color there? How should we think about the linearity of that as we go throughout the year? And then what areas, COGS or OpEx, do you see that coming from?

Well let me have Frank do our CapEx for you now.

So I guess the question is on the estimated incremental million dollars of savings, okay, so for during the quarter we had additional facility consolidations, one of them being on our Miami facility which we've consolidated into other facilities in the US. Part of that involved terminations as well as equipment movements which caused most of the charge in the quarter.

The million dollars of savings should happen over the year of 2016. I can't point to a particular quarter where we will see that come through.

It's more of an over the course of the year where that should show itself through the P&L. Part of it in cost of sales, I would say about 75% of it in cost of sales, 25% of it in the SG&A section.

Got you. That's extremely helpful. And I will jump back in queue. Thank you.

Sean Hannan, Needham.

Yes, thanks for taking my question here. I have many questions. So first, your overall aggregate business is down 9% year over year.

We've got a clean compare when we consider the Emerson and the Power-One acquisitions which added to your portfolio of products. And I think you guys had expected to prove out, bringing back some quality particularly in the Power-One business to eventually allow for cross-sell and gain some growth.

Secondly, there are some one programs that were in waiting on the Power-One side that were incrementally going to add to growth. Now you don't think that there's a pricing issue within the market and you the comment earlier that you feel you missed some design in cycles, so is that really the key culprit here? I'm trying to understand how to reconcile you guys being down 9% year over year because not all --

No, we're substantially greater down in the Power-One side. Power-One again down substantially greater than the 9%. The problem was when we acquired Power-One mistakes after mistakes after mistakes was accomplished by them.

One of the key mistakes that they have done is before we bought them they banked their future on electric vehicles. And they took a lot of their engineering resources and capabilities of people, instead of focusing on networking and telecom or industrial markets where they were very strong they took those engineering resources to go after this electric motor market.

One of their key customers that when we were looking at them they predicted that [Via] Motors out of Colorado would be a $12 million or $15 million business and that they would use that as a springboard to go with a lot of other electrical vehicles. That never materialized.

Once we acquired the company, we said listen, we can't turn our backs on our key customers or our industrial market. We're very strong in Europe, we have to get that engineering down and refocused and back down from the electrical vehicle market at that time.

However, again, for the lifecycle of a product is generally 12 to 18 months in the power area. From first designing once you get the design and get that product into shipments and volumes could take anywhere from a year to 18 months.

And that's where we get dinged pretty heavily. Now with a soft market where things are very flat, the products are not getting introduced as quickly as they have been in the past.

So two things. One, they turned their backs on their key customers and in addition to that they walked away from some high-value dollar business that was marginal and that really compounded the situation.

So again we had to reengage the customer first. Once we had the customer reengaged, then we had to verify that we were a quality house which they didn't believe, then they have six months of them looking at us or a year to finally audit us and understand the changes we made were proper. Now they look at us and so okay, we can give Bel Fuse opportunities so those are really opportunities that we got over the last three or four months.

Would it be fair to characterize this in saying that there are two costs to the challenges of the acquisitions done, one I think you just went through in a fair amount of detail in that they turned their back on a key customer and you're still incrementally getting hit by that because of the timing negatively impacting you with being able to be designed in. So there's effective, not your fault, but there's effective share loss that's occurring right now that you hope to gain back at some point but you're getting hit by that right now because you weren't able to get the design in. Is that fair?

Yes, that's the one hit. And the second hit we got with the low-margin products like an Electrolux or some of these other customers that were low-margin products that they didn't want to go our future products with them and we didn't want to go future products with them also because there was no -- the margins were just too low for us.

Well let me expand on that second thought. It sounds like the mix of what was being brought into your operation through this we had the low-margin stuff as becoming incrementally challenging and that's been an issue. But then also part of that is another aspect of mix for programs that really never materialized.

That was part of the hope and the benefit of looking at this acquisition. I think going to that easy --

Hey, Sean, I think you know me well enough when it came to Via Motors and the electrical vehicle market when I do look like a forecast when we do acquire the company we really very rarely focus on the forecast.

But the problem we have with that, the only problem we have with that is just the energy and resources they put into electrical vehicles that never materialize and that's where we got screwed up. I can give you the best example, when we bought them they took the focus from industrial, and they had a brand-name called Melcher product line which is a very great brand in Europe.

When we acquired the company we only we got five calls from competitors and the only thing they were looking at is buying the Melcher product line because they thought it was such a great brand line. However, when we met the people in Europe to discuss the Melcher product line they said our focus is on electrical vehicles now, we don't think industrial products is the way to go. And once we heard that we put an immediate stop on that type of thinking and really said hey, we have to focus on the rail, we have to focus on the industrial market.

Again we feel the best value in Power-One which we really haven't been able to capitalize on is what we have in Europe, we have a world-class design center in Switzerland second to none in the world. We have manufacturing in low-cost area Slovakia where we do have engineering R&D center there. We do have an R&D center in Italy.

We do have engineering capabilities for modular products in England and we had low cost in China. We feel that the European market should be our best opportunity but we haven't been able to capitalize on it and focus our sales force in that area. And again, that's with Power-One management making certain decisions that we had to stop and do a 180 on.

Okay. All right. So then as we think about all that on the top line and then how we looked at our aggregate SG&A what adjustments should we make here?

Because I was expecting you guys to be able to work your total OpEx down into the high teens, the quarterly dollar expense. You now just reported an OpEx number of declining revenues that was the highest OpEx percentage since the first quarter of 2014 and that's the lowest operating margin since the first-quarter 2014. And so we have some different trends going on here to try to understand how we can better manage this negative leverage that moved against you.

I think we have cranked down our cost. We have raised our margins which we've got up much better mix in place now and all the numbers, our fourth-quarter gross profit margin was 18.9%. I'd still like to get it a little higher but if we start to look at income from operations percentages they keep going up and certainly our year-over-year G&A numbers, 13.8% for the year of 2013 for G&A I think is quite remarkable.

So we haven't given up. And we're going to get some better benefits because some of the things that affect G&A, for example the consolidation of facilities in Europe which only happened in the last part, sorry, in Asia, in Hong Kong specifically that only happened in the last quarter of 2015. So we only get that benefit starting in 2016.

We also had the merging of the two connector facilities, one from the Emerson acquisition and the traditional Cinch one in the Chicago area which was put together also in the fourth quarter of 2015. So we're going to get those benefits in 2016 and as Frank said before the closure of the facility in Miami, the Array facility which is now being marched with no additional headcount or minimal additional headcount only on the production side but into Texas and into Mexico.

But Sean, looking forward I think we have about 96%, 90% of the cost cutting done with from an operational standpoint we're getting close to hitting the bone now. So we don't foresee any major cost and some minor stuff we can do in China but overall I think we're 95% done with all the cost cutting that we were projected to do. And hopefully that should be reflected in our numbers.

Our whole focus for the last 18 months was to get these companies in line, get their overhead down substantially which I think we have accomplished, to streamline the organization and the salesforce and now our total focus is on increasing sales, what can we do to improve sales. Again the last 18 months is operational, going forward for the next 18 months is definitely going to be to focus on their sales and marketing of how we do things better, how do we improve things and how do we support the customer more efficiently than any of our competitors.

Okay, all right, thank you.

Hendi Susanto, Gabelli & Co.

Good morning. First question, how much reinvestment will come from your cost reduction target of $4.5 million in 2016?

Basically you're looking for our CapEx or what we're going to spend?

No, like you cut your operating cost, operating expense and then COGS by $4.5 million. Will part of that go toward reinvestment or will that cost saving go towards your bottom line?

So last quarter we announced that we have activities during the year that would yield $3.5 million of annual savings beginning in 2016. So this quarter we've taken additional actions which would yield an additional $1 million. So from I guess is your question from a run rate perspective what can you expect in 2016?

Yes, what we can expect and then let's say if we take off that $4.5 million, will part of that go toward reinvestment or will the whole amount will go toward your bottom line?

So from a cost savings perspective part of that has come through in the fourth quarter and the remainder is supposed to come through in 2016 throughout the year. From a reinvestment perspective, the cash savings are there to have us at a baseline SG&A and cost of sales perspective, not to use that cash or those savings to increase any additional CapEx that's not maintenance or essential at this point.

Okay --

In summary I think what we're trying to say is that money is projected to go into the bottom line into our EPS. And we never projected now that we have an extra $4 million we're going to buy a new building or buy a capital expenditure or hire 25, 30 more people.

Okay, that helps. And then Dan, you go to China a lot. Would you be able to share what you see in China in terms of business environment, market trends, visibility and --

I think besides being there during the coldest day in the last 60 years in Hong Kong, I think again the government and what are they doing with the people situation you know and how they are controlling their RMB and trying to keep it down and they are so concerned about the pressures they are facing. Just again historically, everybody is worried after the Chinese new year will people come back to work, will they find better jobs and historically over the last two or three years we did a retention rate of 92%, 90% which for us is incredible.

If you go back five or six years ago it was 50%. So again we just think again there's uncertainty of how they are going to control the RMB, how they are looking at things. But again I think they are just as dumbfounded as most people are in North America of what the economy is going to look like going forward.

Again just a lot of uncertainty. And again looking at the stock market where a lot of people were investing in the stock market in China a lot of people got beat up pretty bad. So again they are walking a little bit of a tight rope, that's for sure.

I see. And then Dan, you seem quite cautious about 2016. Is that you are expecting some declines? I believe that that's not the firm expectation as like second half is still far away from today.

I'm a half glass kind of guy. So not half full, half empty. So I tend to be again I think the worst thing I could do is hype up things.

So we tend to historically we always tend to be a little cautious. However, once if we can see some upswing in our backlog or some upswing with any of our customers it doesn't take us, in the power business now, it doesn't take too much to move the barometer to the right side.

So I can assure you if I see anything positive out there I will let our shareholders in the marketplace know about it. But at this time I only -- when I look at my world, my world is only two quarters. I can't look any further ahead with that with the visibility that we're getting from our customers.

Okay, thank you and all the best.

Lenny Dunn, Freedom Investors Corporation.

Good morning and I think you're doing okay in a tough environment. I just want to bring to your attention which -- state the obvious, your book value is $19.15 and that's relatively conservatively presented and the stock is trading a little under $15 which is a substantial discount to book. We are certainly I think not good candidates for repurchasing shares at these prices because I don't think that's the best use of capital.

I think you just gave me a heart attack. Are you positive on that one? I'm sorry.

Listen, I am. I don't think you should repurchase shares at these prices because quite frankly as shareholders we're being very patient and it sounds like we're going to have to be patient for a couple more quarters.

So I'm going to go back to something that I've suggested in the past which is doing a small dividend increase which is not going to really upset your balance sheet and you're repaying your debt in an orderly way and it's at low interest rates and letting your shareholders get paid a little better while they are waiting. I'm not looking for a substantial dividend increase but a small one makes it more palatable to wait.

Personally being one of the large shareholders of Bel Fuse I think that's one of the best ideas I've ever heard. However, when we had a Board meeting yesterday we did discuss with these low prices should we be buying back stock, should we be increasing the dividend? And I think our major concern is really the debt and the debt ratio we're facing and because of this down market we're very concerned about our debt ratio and getting maybe hit with a higher interest rate.

So we're doing everything we can to make sure that we maintain our low, very low interest rate with the banks. And I think that's -- and I think again anything we can do to pay down this debt I think is substantially more beneficial to our shareholders than increasing the dividend. So hopefully -- I think that's the position the Board has and I think they are taking a pretty strong position on that.

Well you know let's -- I'm not opposed to paying down the debt. I would encourage you to pay that down as rapidly as possible because this has always been a Company that had a clean balance sheet.

So I'm not opposed to that at all. But if you paid another penny a share quarterly to shareholders it will be a nice symbolic move. It would also wouldn't hurt our pocketbooks and I don't think it would really affect your ability to pay down the debt.

Again I'm all for it. Trust me, nothing would make me or my wife happier than increasing the dividend. But the Board --

Substantial increase you got with --

I will take $0.05. You can give me anything. I don't care.

But again I'm all for it. As I said I tried to push it with the Board and again I'd be glad to push it with the Board again, you have my promise on that. But again --

Less than 12 million shares, so what it's going to -- $0.04 a year or more would really not be a substantial difference in your cash flows.

I understand your position and I will present it to the Board again.

I would appreciate it and maybe you can be a little more aggressive. Because we're going to have to sit here and wait and the discount to book value is terrible but at the same time the float is so small right now that that's the only reason I wouldn't suggest buying back shares. Because we really don't have much of a float to start with and I don't know that we want to decrease it at this point, unless you intend to go private which I don't think you are.

So okay, well that's my $0.04 worth. A penny a quarter.

(Operator Instructions) [Anthony J. Gulu], private investor.

Hi Dan. Thank you for taking the call. I think the performance is rather good considering the environment that we're in and I do appreciate all your due diligence and efforts in the Company.

I have just a couple of questions. First off, do you look at oil, the price of oil as any kind of correlation vis-a-vis with your business? Do you see that as something to gauge your backlog or whatever?

From a pricing standpoint we use very little oil in the products we buy, in some plastics but not a material effect whatsoever at all. We have made a major effort like everybody else three years ago to look at the oil and gas market for opportunities to sell our products, like the [Shermlers], and the people out of Houston, Texas, all the major manufacturers.

We have opportunities there for some of our connector products. However, we haven't really obtained any substantial sales there even though they are testing our products. But at that point it would represent maybe less than 5% of our corporate sales.

So again oil and gas is not a really good barometer to us. If you're looking at two of the best barometers for us it's probably you look at Boeing who is a major customer of ours or Cisco and the open computing are like good barometers. So open computing or Cisco is doing well or Boeing that really has a much bigger effect on our bottom line.

I have another question. With reference to your effective tax rate, you seem to have wide variations, for example in this particular quarter you're 6.7%, for the year we were 25.5% and then for 2014 we were at 11.9%. There seems to be wide gaps in the effective tax rate and I was wondering if you could explain that.

Sure. I would have Frank explain that for you I think.

Hi, Anthony. Sure. So I think the main thing to focus on when we are looking at the effective tax rate is the region in which our profits or losses are generated. As Colin indicated in the script and as you may know, Asia has a low tax rate.

Europe is a little bit higher and US is one of the highest in the world. So a lot of our profits or the ETR is determined by where those profits are generated. So if you look on a comparative basis in 2015 put simply we had more profits in the US than anywhere else in the world which generated a higher effective tax rate.

I see. One final question, when you list your liabilities you have other liabilities and it's a big part of the total liabilities and I was wondering what other means? Why is it separated like you have it?

Well, sure. So we're talking about the long-term liabilities on the balance sheet I think it's around $70 million. A little bit more detail on that is basically we have our pension plan liability which is in there.

That's around $12 million. And the bulk of the differences are deferred taxes and our FIN 48 which are other taxes liabilities of the reserve for taxes. That's pretty much the bulk of the other liabilities.

Okay, thank you so much. I appreciate everything. Thank you.

I'm showing no further questions at this time. I would now like to turn it back over to management for any closing remarks.

Again, thank you for joining this call today. We do apologize for the five-minute delay. Hopefully next time we are right on time.

Thank you and looking forward to hopefully a better quarter this coming quarter. Bye.

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

You may now disconnect. Everyone have a great day.