Bel Fuse Inc (BELFB) 2017 Q3 法說會逐字稿

Good day, and welcome to the Bel Fuse Incorporated Third Quarter 2017 Results Conference Call. At this time, I'd like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. As a reminder this conference is being recorded. Please go ahead, sir.

Thank you, [April]. Joining me on the call today is Craig Brosious, our Vice President of Finance; and Lynn Hutkin, our Director of Financial Reporting. Before we begin the call I'd like Lynn to go over the safe harbor statement. Lynn?

Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following safe harbor statements. Except for historical information contained on this call, the matters discussed on this call, including such statements regarding the impact of growth with our distribution partners, the introduction of an Internet of Things application into the consumer marketplace, orders volumes for recent customer wins, the contribution of specific products and the impact of the NPS divestiture. 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 those projections. Among the factors that could cause the actual results to differ materially from such statements are the market concerns facing our customers, the continuing viability of factors that rely on our products, the effects of business and economic conditions, difficulties associated with integrating recently acquired companies, 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, 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.

I would now like to turn the call back to Dan for a general business update.

Thank you, Lynn. Before going through the financials, I would like to provide a brief update on how the businesses did from an operation standpoint this quarter, and how we see things going forward. Overall, we are pleased with the year-over-year growth with our Connectivity Solutions and Magnetic Solution product groups this quarter, which allowed us to maintain a strong gross profit margin on slightly lower consolidated sales. On a consolidated basis, our backlog at the end of the third quarter was $144 million, which is up 20% compared to the same time last year. Revenue of Connectivity Solutions grew up almost 3% in the third quarter compared to last year, despite a $1.3 million decline in passive connectors sales. The growth was led by Cinch sales to the military and aerospace markets, as well as sales growth within our distribution channels. Our Connector products continue to find applications in the U.S. defense program, such as Joint Strike Fighter and the Patriot Missile. With anticipated increase in military spend in 2018, we see this segment as an area growth in future periods. On the commercial aerospace side, where the major customers has recently increased the aircraft build rates and we strengthened the revenue stream in this market for us. With our connectivity distribution channels increased order volumes through our catalog distribution in recent quarters has translated into growth with our broad line distributors in the third quarter. A healthy flow of orders booked during the quarter, at least this grew well positioned as we enter the fourth quarter. Sales in our Magnetic group increased by 6.2% from last year's third quarter reaching a new 2-year high quarterly sales. This was due in a large part to a new product introduction at one of our large OEM customers earlier this year. We continue to be a share leader for our integrated connector modules and are actively participating in opportunities with new ICM development and products with major customers. Within our Power Solutions and Protection Group, continue year-over-year declines in the acquired Power Solution business have overshadowed positive growth that we've seen in other areas. AC to DC converter sales at our Power group in Italy were up $1.7 million in the third quarter compared to last year, and also has been steady growth within our circuit protection group for 4 consecutive quarters, as they gain traction in our distribution channels. If you recall, we sold our Network Power Solutions business in 2015 for $9 million and has since been operating under a manufacturing service agreement, as this service agreement comes to an end, we continue to see year-over-year sales decline related to this product line as further detailed in our press release. However, this should have no -- however, this should have a positive effect on our gross margins. Our Power Solutions business had many recent design wins, but currently it remains challenging at the top line. It's difficult to predict the timing of when these products will move into production. In the meantime, we are faced with evaluating our core structure as low level revenues, while being mindful of the future anticipated sales growth. Today, we have implementing measures that result [analyze] core savings to approximately $1 million. We are confident that we are taking appropriate steps within the Power Solution business, which enable this group to improve its conditions to our bottom line, while remaining well position for future growth. As we approach 2018, we are encouraged by a healthy backlog and positive book-to-bill ratio for our major product lines and we'll continue our efforts to build up our pipeline on future sales.

And with that, I'd like to turn the call over to Craig to go over the financials. Craig?

Thanks, Dan. Starting with sales, our third quarter net sales were $126.4 million, down 1.9% from the third quarter of 2016. On product basis, sales of our Connectivity Solutions products were $42.8 million in the third quarter of 2017, an increase of 2.8% as compared to the third quarter of 2016. Sales of our Power Solutions and Protection products were $39.5 million in the third quarter of 2017, a decrease of 13.5% as compared with the third quarter of 2016. Sales of Magnetic Solutions products were $44 million in the third quarter of 2017, an increase of 6.2% as compared with the third quarter of 2016. On a regional basis, sales in Europe increased $2.6 million or 14.3% in the third quarter of 2017 as compared with the same quarter of last year. Sales in North America were down by $3.8 million or 6%, and sales in Asia were lower by $1.3 million or 2.7%. Gross profit margin increased to 21.9% in the third quarter of 2017 as compared with 20.6% in the third quarter of 2016, due to several factors. The shift in product mix towards higher margin connector and magnetic products had a favorable impact on our margins during the third quarter of 2017. We also recognized a $500,000 gain on the sale of our interest in a Chinese joint venture during the third quarter, which had a favorable impact on our gross margin. Our selling, general and administrative expenses were $20.9 million or 16.5% of sales as compared with $19.4 million or 15% of sales on the third quarter of 2016. The $1.5 million increase in SG&A costs from last year's third quarter resulted from several factors. We incurred $400,000 in consulting cost related to our ERP implementation in the third quarter of 2017, and legal and professional fees were $600,000 higher due to the timing of our annual audit work and consulting activities incurred later -- incurred related to the implementation of a new revenue recognition standard. Foreign exchange losses in the third quarter of 2017 were just under $600,000 up from $200,000 the same quarter last year. Lastly, the shift in product mix resulted in higher overall sales commissions, as commissions vary by product group. On a go-forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near term [barring] any significant fluctuations in foreign currencies. As a result of these factors, we generated income from operations of $6.5 million in the third quarter of 2017 as compared to $9.3 million in the third quarter of 2016. Income from operations in the third quarter of 2016 included a $2.1 million gain on the sale of property in Hong Kong, which had a favorable effect on last year's operating income. Interest expense was $1.5 million in the third quarter of 2017, down slightly from the same period last year to a lower debt balance in 2017, partially offset by an increase in interest rates. Our effective tax rate for the third quarter of 2017 was a provision of 1.2% compared to a benefit of 21.2% during last year's third quarter. The change in effective tax rate was primarily attributable to higher foreign taxes compared to the prior year. In 2016, we were able to utilize NOL carryforwards that had valuation allowances on them. There was also an increase in accruals related to uncertain tax position in the third quarter of 2017 as compared to the same period of 2016.

Earnings per share for Class A common shares was $0.40 per share in the third quarter of 2017 as compared with $0.78 per share in the third quarter of 2016. Earnings per share of a Class B common shares was $0.42 per share in the third quarter of 2017 as compared with $0.82 per share in the third quarter of 2016. On a non-GAAP basis, which excludes certain unusual or other non-recurring items, EPS for Class A shares was $0.42 per share in the third quarter of 2017 as compared with $0.63 per share in the third quarter of 2016. On a non-GAAP basis, EPS for Class B shares was $0.44 per share in the third quarter of 2017 as compared with $0.66 per share in the third quarter of 2016.

And now, I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at September 30, 2017 was $62.1 million, a decrease of $11.3 million from December 31, 2016. During the first 9 months of 2017, we've made net payments of $21.2 million towards our outstanding debt balance. We also used cash for capital expenditures of $3.8 million, dividend payments of $2.3 million and interest payments of $3.5 million. Accounts receivable was $83.6 million at September 30, 2017 as compared with $74.4 million at December 31, 2016. Days sales outstanding increased to 60 days at September 30, 2017. The increase in our cash receivable balance was largely due to higher sales volume in the third quarter of 2017 as compared to the fourth quarter of 2016. The increase in DSO was primarily a function of higher sales in our Asia segment in the third quarter of 2017 where payment terms are longer than our other regions.

Inventories were $104.5 million at September 30, 2017, up $5.7 million from December 31, 2016. The increase was seen mostly work in progress and finished goods to accommodate the increase in bookings during 2017. Accounts payable was $45.5 million at September 30, 2017, down $1.7 million from December 31, 2016 due to timing of payments. Bel's total outstanding debt as of September 30, 2017 was $122.6 million excluding deferred financing costs. This represents a net decrease of $21.2 million from our year-end debt level. Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of stock, was $14.80 per share at September 30, 2017, up from $13.17 per share at December 31, 2016.

And now, let's turn the call back to Dan and open the call for questions. Dan?

Hey, [April], can you please open up the call for questions?

Yes. Thank you. (Operator Instructions) We'll take our first question from Sean Hannan with Needham & Company.

(technical difficulty) Alright. Let me see if I can try here and otherwise I'll jump back in the queue. So we've been waiting for Power to ramp back up for a period. It seems that at this point, it's happening a little bit slower today than your hopes maybe a few months ago although -- maybe at this momentum based on how much you guys provided in the release, it seems to finally be happening. Is that accurate? And then, are the identified programs that you folks hit on in terms of the networking solution into the data center, your mobility CORD, are these really the line share of the programs you folks have specifically targeted to get that Power business moving or there are others that you really focusing on here?

Okay. I think about your point, we are extremely disappointed since the acquisition of the sales of the Power group. And historically, we thought we have this thing uptick 18 months ago, and we haven't been able to do it. And every time we think we've got a one step forward, we get two steps back either from a quality problem or a design push out, so at this point, we just are taking a very -- we will say pessimistic view than more of a latency view. Our focus has been in the data centers going forward, our focus has been on HEV and industrial, and we see some nice in-roads. Again, one of our major customers, which we thought we can have a run rate of $4 million a quarter, just incurred a quality problem. So now again [dinged] on that. We don't know when that's going to be back up and running. So at this point in time, we realized that we had to cut back, get the cost in line. We took out another [$1] million of cost this quarter. However, really not touching the R&D centers we have throughout the world. But I feel like when it comes to Power [the boy that cried wolf]. So until we really get some positive signs from more than 3 or 4 customers, I think at this time, we're just going to be wait and see.

On those comments, the quality related issue, was that tied to you folks at all?

The quality issue was tied to us and it was a software glitch.

And then if we do in fact get moving at least with -- again going to these programs reference within the release, the networking eMobility CORD, are those key to moving this forward, I'm still not clear if that really puts a fair amount of scale to accelerate your revenues in that segment?

Hey, Sean, our sales are so low, it's not going to take too much to move the needle. You know what I'm saying? So again, we have projects now -- some of these projects could be -- it could be $8 million or $10 million in a year. But again, it will be nothing. Again, you look at -- people that building their own data centers, like in Amazon or Google or Facebook, they probably all spending about $40 million or $50 million on power supplies in a year. Now, if we can tap into that market, you're talking again $5 million or $10 million. So there is some big opportunities, we're working on. And the [Modular] group were working on an opportunity in the lighting that just got released -- [people used to run that]. So yes, there is a lot of these products are not singles alone, it could be doubles and triples.

And then moving to connectivity, you folks sounded and encouraged or you sound encouraged in talking about this space, it's down a little bit quarter-on-quarter, I think the segment is down for the 9 months thus far this year versus similar time last year. So just trying to see if you can maybe help me to better understand whether there's something here that's turning upward or just help me to close the gap in terms of the interpretation on the sentiments there?

Well. The problem was we had Stewart Connector, which is a passive connector group that really supports in housing market and there has been consolidation of 2 major customers, and we lost a good chunk of business there about $4 million, $5 million. However, when we look at Cinch to military aerospace side of it, that's very strong. And so, in this last quarter, we've done a great job with the military and we still haven't seen the upsurge and what Boeing is predicting out there. Boeing [slightly] go from 42 -- 737's up to 52, and we have a good portion of the connector business on the 737's. So that's why we are very optimistic and we see strong growth in that area. But on the Stewart side we get [dinged] on that. So maybe we should move Stewart over to the downside.

So at this point should we then, you feel that we're going to start seeing some growth acceleration within connectivity or is it still going to take a few quarters for that to -- shake out before that actually could occur?

Again, it's just that the Stewart [connector] sales affecting the positive sales in the military, aerospace and so forth. Lynn, you would add something.

So Sean, I believe the third quarter is the last year-over-year decline that we will see related to that Stewart product line, it first took a dip in Q4 last year. So we will have that (inaudible) starting in Q4 this year.

And I think -- on the military side of things, military specifically I think we are seeing increases in the volumes of the releases of certain programs that we're involved in, so we are fairly optimistic that the military side of that business will grow a bit in the next few quarters.

But Sean, what's the problem with the military, it's very -- the way they book orders, the way they ship orders really it's -- whether or not (inaudible) that might drive a reason, when these programs (inaudible) when they shipped. So for example we have one sales -- we had 300% growth for the quarter in sales, but a net of 300 bookings. So you just, it's very difficult to really get a hand on how these programs come and when they shipped and so forth. While most of our other product -- non military is a lot easier to come up with better projections about things move forward.

So if I step back here, how do you feel about the businesses where -- as we're heading into the fourth quarter now, clearly, there are some puts and takes. Do you feel that at least we're operating at a similar cadence as to what we'd seen within September or is there potentially another lag down before we get the opportunity for -- suppose the right pieces of momentum to start driving the story forward a little bit more consistently?

I think again -- that I'm happy, because we are still very profitable in my eyes, we're still making good profits. Again, when I think this company is really going to take off is when we can get consistent sales growth out of the Power group. And once we can do that, if and when we can do that then I mean dancing in the streets until then there's a battle for us to get what we want to have to be.

Yes. I think in the fourth quarter Sean, the -- just kind of go by product group, the connectivity group I think will be pretty consistent with Q3, the Magnetics group -- we typically see a bit of a dip in the fourth quarter seasonally related to our Magnetic product.

Judgment of the inventory for our major OEM customers, they kind of get inventory as low as possible during the fourth quarter.

So we do expect a typical seasonal downward trend from Q3 to Q4 guidance. And then on the Power side, I think we see one quality issue that Dan mentioned will have an impact in the fourth quarter. And we also are still running down the NPS business, and that would reflect about a $2.9 million decline year-over-year in Q4. We have those declines --

What would that be on quarter-on-quarter?

Over the next couple of quarters we project it to be about $2 million.

Yes, it's --

And that's just really have one business that we're manufacturing for a company that we spun-off the group from.

So then what was it in the third quarter, just to get a preference point?

Okay. So the NPS on a year-on-year basis we know that, that's kind of working down and moving away, but on a quarter-on-quarter basis, marginally down shouldn't be necessarily all that disruptive at least coming off of where the September results were.

Right. So I think I have answered your question, Sean. In Q3 '16 those NPS sales were $3.5 million. And in Q3 '17 they were $1.4 million and then it's relatively down at this point, we'll have a very small amount of volume in Q4 and little of anything in 2018.

So compared to last year what is that?

Last year's Q4 was $3.3 million, so it could be now around $3 million in Q4.

Okay. All right. Thanks so much for all the detail folks, and good luck, I'll see if I can held back into the queue here.

Thanks, Sean.

(Operator Instructions) We'll take a follow-up question from Sean Hannan with Needham & Company.

So I just wanted to circle up on the profitability front. Dan, I think you make a great point in terms of what you folks are able to generated down at these revenue levels. So at this point it seems that even with -- even if we were to maintain this type of revenue rate based on some of the mix that continues to change within the business and some of the cost elements, we should continue to see at least to some degree some margin expansion from here. Is that accurate? Is that fair?

These sales level, Sean, I'm not sure it's going to move much. I mean, the mix element will be the driver, if we see our (inaudible) sales outpaced for Magnetic sales, then you might see a little uptick, but it's not going to move that much at these levels.

I think we really need an increase in the overall sales volume to see -- any further margin expansion at this point.

And when we think about the power businesses that starts to, let's say in theory that starts to work in 6 to 9 months from now, driving the revenues, I mean you're going to get the benefit of some operating leverage, but I believe inherently we are getting into some products that might be a little bit lower margin at the gross line versus where you're coming in on a blended corporate level, is that true or how do we think about that as an influence?

I think it's true, because the material costs for power supply is substantially greater than anything else we're manufacturing.

Yeah. I think that's true, Sean. You'll see the margin percentage probably go down a little bit, but obviously will be absorbing fixed costs on the increased volumes. So I think you've seen the overall percentage go, but the dollars will improve.

So it's going to be a balancing act, but basically we might end up 12 months from now. It kind of more in a 20% to 22% range versus something higher than where we'd be at this 22% level we had in September.

I think that's fair. Yes.

It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Dan Bernstein for any additional or closing remarks. .

Thank you and appreciate everybody joining the call, and hope you have a nice weekend.

This concludes today's presentation. We thank you for your participation. You may now disconnect.