Bel Fuse Inc (BELFB) 2024 Q4 法說會逐字稿

Good morning and welcome to Bel Fuse's fourth quarter and full year 2024 earnings call. (Operator Instructions). I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead, Jean.

Thank you and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call, we will make statements relating to our business that will be considered forward-looking statements under Federal Securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2025.

These statements are based on the company's current expectations and reflect the company's views only as of today, and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties, and other factors.

These material risks are summarized in the press release that we issued after the market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K

And our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-gap results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website.

Joining me today on the call is Dan Bernstein, President and CEO, Farouq Tuweiq CFO, and Lynn Hutkin, Vice President of Financial reporting and investor relations. With that, I'd like to turn the call over to Dan. Dan

Thank you, Jeae very much. Okay, we are pleased with our fourth quarter and full year 2024 results, both in terms of our legacy business, as well as the first two months of performance from the recent actors acquired Econ business. Overall, we achieved a 410 basis points improvement in gross margin. For the full year 2024 versus 2023.

Despite the 16% reduction in sales from last year, this was also the second-best year in Bel's history of earnings, EBITDA, and our highest stock price. A focus throughout 2024 was on two core strategies.

The first is the future growth of the company, and the second improve our cost controls. In this regard, we were successful on several fronts. We added two senior level positions focused on sales and strategic procurement that we had not had previously. This is in addition to the other folks across the organization. The acquisition of Enercon, the largest transaction in Bel's history.

As chance fellow's position as a supplier of mission critical components into harsh environment applications. Further, over the past year, we have engaged in two facility con consolidations. One in Glen Rock, Pennsylvania under our connectivity segment and the other related to the transition of a huge product line in China. Within our power segment.

The team continues to make good progress from each of these initiatives in the fourth quarter with the goals to complete both in the first half of 2025. The Majority of the costs associated with these consolidations were already occurred in 2024.

From a core savings perspective in the aggregate, the company realized the savings of $1.5 million in 2024, with more to come in 2025 once these consolidations are completed and a full year cost savings are realized. Further, there are two other properties that have been held for sale in connection with these moves. Each property is currently under contract for sale, and then we expect them to close during the first half of 2025.

Upon completion of these two projects, we have successfully implemented six facility consolidations globally in the past three years, resulting in an annual cost savings solely $11.8 million across all the six projects. These efforts have further allowed us to reduce overhead count by 30% since the beginning of 2023 when we lost these activities.

In closing on 2024, we have demonstrated our ability to maintain our trans margins profile even during a challenging year on top level. These accomplishments of resetting those financial foundation is the result of a full global team pooling together over the past three years on a variety of fronts to improve our underlying business.

When I consider all the work that has been done to position down for long-term success, and when the collaboration with Farouq on the strategy reset, it was the right time for me to transition to the Chairman role and one of the reins to Farouq. Farouq will be the third CEO of the 76-year history and makes the first time the office be held by a person outside the Bernstein family.

I am extremely excited to continue the journey of Peru in a different capacity. I also want to thank our hardworking associates around the world for their dedication and ensuring Bel's commitment, continued commitment to success, resiliency, and ability to change. Farouq

Thank you, Dan. To echo Dan's sentiment, I think the team really pulled through this past year and making marked improvements in the areas which were within our control. We look to continue this momentum into 2025 with new team members around the table. On the team side, our global head of sales who joined Bel in October has been fast at work and assessing the sales and marketing organization as they stand today.

And what the future state should look like out of the gate has already improved upon the sales commission structure we put in place last year. As we head into 2025, the focus this year in this important area will be expanding customer depth and breadth that align well with our capabilities, allowing us to better return on our efforts.

We will also be focused on better opportunity targeting, customer tracking, and installing various efficiency tools to achieve such outcomes. From a cost perspective, there are a few key areas on our radar in 2025. On the positive side, we are excited about our new global head of all things procurement as well, who's taking a fresh look at our cost.

While he has only been in the role for about two quarters, he has already identified a series of upcoming initiatives to streamline our supplier base and take advantage of our consolidated purchasing power across our global entities. While the potential cost savings here are not quantifiable at this moment, we're confident that this effort, his effort will be additive to Bel's financials over the coming years.

As we look to 2025 from an in-market perspective, we see trends as largely favorable in this upcoming year.

This process is already underway, and while these initiatives will take time for realization, the early signs of potential are encouraging. The areas of distribution, networking, and industrial have faced challenges over the past two years due to inventory destocking. We continue to see signs of recovery in each of these areas during the fourth quarter and anticipate these markets to show signs of improvement in 2025 as compared to 2024.

As noted in the past two quarters, our consumer and market continue to struggle, and we anticipate this to persist through much of 2025. If you recall, this was the end market in which the US government placed trading restrictions on one of Bel's suppliers in the PRC. This will result in challenging year over year comparisons for this end market through the first half of 2025 as approximately $6 million of sales related to this supplier in the first half of 2024.

Expanding our lens to the broader geopolitical situation we are in, tariffs are on the headlines all around us. Effective February 4, an additional tariff of 10% was placed on imports into the US from China. As a reminder, we have already been operating in a 25% tariff world imposed on such imports, and an additional 10% will increase this to 35%. On a revenue basis in 2024, we had approximately 12% to 13% of our total revenue subject to tariffs.

Historically, Bel's passed these incremental tariffs on to its customers, and we anticipate that will continue to be the case, resulting in minimal, if any, impact to Bel's financials. This is an overall concern for our customers, and we've been working with them on exploring other manufacturing sites of China. Keep in mind the 12% to 13% noted is for 2024. Obviously with Enercon, that percentage will be a little bit less.

And heading into 2025, as for the tariffs in Mexico and assuming they do go in place barring any last-minute agreements, this would be new and in fact to approximately $20 million of our 2024 revenue representing just under 4% of sales. We expect to handle these in the same way as China, but we'll see how that goes.

Mexico overall is a key manufacturing location for a number of our competitors and us and thus we are wrestling with what is happening. As for Canada tariffs, there's no exposure for us as we neither manufacture nor import export to Canada. In looking at the business as a whole, we believe 2024 was the trough of many of our end markets. Now we're generally optimistic entering into 2025.

As we discussed on the October call, we expect growth across the business with varying degrees. Our largest percentage grower should come from magnetics, led by networking and our key customer recovery. As for connectivity, we expect growth as well but do keep in mind this group has grown nicely over the last three years driven by commercial air defense and space.

So while exciting, any new growth will be comparatively speaking a little bit smaller on a percentage basis. As for power, when assessing year over year growth and excluding the impact of restricted Chinese supplier we discussed previously, we will anticipate that AI and distribution will be leading the way, and we expect that power segment to be a little bit more.

So up on a pre-Enercon basis with Enercon, we expect a stronger performance and the growth as well. I should say that Enercon is expected to be most likely only second to magnetics in terms of percentage of growth.

In closing out on a personal note, I could not be more excited to be taking the helm in May. Dan has done an amazing job in not only building and diversifying Bel over his tenure but encouraging the vast changes that have taken place internally over the past three years. Bel has a very strong foundation today and is well positioned for future growth. With that, I'll turn the call over to Lynn to run through some financials. Lynn.

Thank you for. Before getting into the financial results of the quarter, I wanted to highlight a few changes to the reconciliation tables included in our earnings release. In the fourth quarter of 2024, we modified our presentation of non-GAAP financial measures, including revising our definitions of adjusted EBITDA and non-GAAP EPS to additionally exclude from these non-GAAP measures the following three items.

One stock-based compensation two amortization of intangibles, which primarily relates to the amortization of finite [li], customer relationships, and technologies associated with the company's historical acquisitions, including those associated with the recent acquisition of Enercon. And three, unrealized foreign currency exchange gains and losses.

We believe that change enhances investor insight into our operational performance. We have applied this modified definition of adjusted EBITDA and non-GAAP EPS to all periods presented. Turning to the financial results, sales came in at $149.9 million for the fourth quarter compared to $140 million for the fourth quarter of 2023. Full year 2024 sales came in at $535 million as compared to $640 million in 2023.

The addition of Enercon sales and strengthen our connectivity segment helped to mitigate the continued year after year decline seen in our magnetics and legacy power segments during 2024 versus the 2023 period. Gross margin reached 37.5% in the fourth quarter of 2024, as compared to 36.6% in Q4 '23. Looking at the full year, gross margin was up by 410 basis points in 2024, as compared to 2023.

Margin improvement continued to be led by favorable product mix and the successful execution of a variety of cost reduction and efficiency programs. Now turning to our product groups, sales of power solutions and protection products in Q4 '24 amounted to $78.1 million, a 13.2% growth from the previous year's fourth quarter. The increase from Q4 '23 was attributable to the inclusion of Enercon, which contributed $20.8 million in sales to the power segment during the fourth quarter of 2024.

At a full year basis, the power segments showed a decrease of 21.8% compared to 2023, landing at $245.6 million in sales for 2024. The decline for the full year was mainly driven by lower sales of our front-end power products of $45.3 million and board mount power products of $9.5 million, both of which serve our networking and market. Sales [RCUY] products were down $21.2 million in 2024.

As compared to 2023, due to the trade restriction placed on one of our suppliers in the PRC as we discussed previously. Sales of our immobility and market decreased by $12.9 million in 2024 as compared to 2023. These declines were partially offset by an increase in sales of our rail products of $11.8 million, an increase in sales of used products by $2.6 million as compared to 2023.

And the previously mentioned sales contribution of $20.8 million from Enercon. As a reference for full year activity, rail sales for $41.9 million for 2024, up 39% from 2023, and e-mobility sales for $15 million for the full year, down 46% from the 2023 level. The gross margin for the power segment was 40.6% for the fourth quarter of 2024, representing a 40 basis points improvement from Q4 '23.

On a full year basis, the gross margin increased by 430 basis points to 42.4% in 2024 as compared to 38.1% for 2023. These increases were primarily driven by the acquisition of Enercon, pricing actions, favorable effects from the Chinese remedy, and a favorable shift in product mix. Our connectivity Solutions Group achieved sales of $52.5 million during the fourth quarter of 2024, an increase of 4% compared to Q4 '23.

On a full year basis, 2024 connectivity sales amounted to $220 million, an increase of almost 5% versus 2023. This improvement was due to the continued growth in the defense and aerospace industries. In 2024, we also experienced an increased volume of connectivity products sold through our distribution channels.

For full year 2024, sales of products into the commercial aerospace and market amounted to $56.9 million, an increase of 7% from the 2023 level. Products sold into defense applications totaled $47 million for full year 2024, up 5% from 2023. Sales into space applications total to $8 million for the full year of 2024. Products sold through distribution channels totaled to $82 million for the full year of 2024, up 2.9% from 2023.

The gross margin for this group was 36.6% in the fourth quarter of 2024, up 730 basis points from 29.3% in the same quarter of 2023. On a full year basis, the gross margin improved by 290 basis points to 37.1% compared to 34.2% in 2023. Gross margins for the 2024 periods were favorably impacted by the higher overall sales volume, favorable fluctuation in exchange rates between the US dollar and the Mexican peso in 2024.

And operational efficiencies implemented during 2023, partially offset by higher wage rates in Mexico in 2024, as compared to 2023. Lastly, our magnetic solutions group sales declined by 6% from Q4 '23 levels. To $19.2 million for the fourth quarter of 2024. This resulted in full year 2024 sales for the magnetic segment of $58.9 million as compared to $115 million in 2023.

This segment has a large concentration of sales in the networking and market and is largely tied to the ordering patterns and demand of a few large customers within that space. While quarterly sales within the segment remained at significantly depressed levels throughout 2024, volumes have stabilized and have been on a rebound since the second quarter of 2024.

The gross margin for the magnetic segment was 29.1% for Q4 '24, a 1,200 basis points improvement from the 17.1% gross margin in Q423. On a full year basis, magnetic gross margin was 25.3% in 2024, as compared to 22% in 2023. The recent facility consolidations in China and related elimination of the dual. The cost structure that was in place during the 2023 transition were the primary drivers for the improved margin profile of this segment.

At the consolidated level across all product segments, our backlog of orders totaled $382 million. This is comprised of $263 million of Legacy Bel backlog and $119 million of intercom backlog at December 31, 2024. Selling general and administrative expenses for the fourth quarter of 2024 for $34.8 million, up by $9.9 million. From $24.9 million in Q4 '23. On a year-to-date basis, SG&A increased by $11.5 million during 2024.

The primary drivers for the increases in SG&A during the 2024. Period related to the acquisition of Enercon. Non-recurring acquisition related costs amounted to $8.6 million during the fourth quarter and $12.9 million for the full year of 2024, and the majority of these were included in SG&A. in addition, incremental amortization expense of approximately $1.3 million was recorded during the fourth quarter of 2024 in SG&A related to the evaluation of customer relationships acquired.

Other SG&A expenses related to Enercon amounted to $2.5 million during the fourth quarter. Excalating these items related to Enercon, Legacy Bel SG&A expenses showed a decline of $3.6 million during the full year of 2024 versus 2023. This decrease was the result of reductions in incentive compensation, sales commissions, and business promotion expenses.

Turning to our balance sheet and cash flow, we closed the year with $69 million in cash and securities, down $58 million from the $127 million we had at the end of 2023. This was primarily due to the utilization of $86 million in cash to fund the Enercon acquisition during the fourth quarter. During the full year of 2024, we generated cash flows from operating activities of $77.7 million.

From a debt perspective, our outstanding balance increased to $287.5 million. At the end of the year, largely due to the new debt of $240 million related to the Enercon acquisition.

And taking into account our swap agreements, the weighted average interest rate on our debt balance at December 31, 2024, was 5.5%. As a reminder, our credit facility expires in September 2026, and as a result, we will be looking to refinance the facility during the summer of 2025, to ensure a new agreement is in place prior to the Current facility going into a current liability classification.

Now turning to Enercon, while we've touched upon this in pieces throughout our commentary today, we thought it would be helpful to highlight some of the financial impacts related to the acquisition. At first, we utilize the $86 million of cash and $240 million of new borrowings under our credit facility to finance the acquisition.

Next, the current run rate of interest expenses at the current interest rates and at our December 31 outstanding debt balance. It's approximately $4 million per quarter. At December 31, our net leverage ratio in accordance with the calculation outlined in our credit agreement with 2.1 times. Keep in mind our credit facility leverage ratio only nets out foreign cash. If netting out global cash, we were under the two times mark at December 31.

As Bel acquired 80% of Enercon, the Enercon financials are fully consolidated into Bel's financials. The 20% of net earnings attributable to the non-controlling interest is shown at the bottom of our P&L. Enercon contributed $20.8 million of revenue to Bel's Financials during the two months in 2024.

For modeling purposes, Intercom's annual R&D expenses are approximately $6.5 million, and its annual SG&A expenses are approximately $13.5 million. Intercom's blended tax rate is approximately 17%. The last item I'd like to touch upon is related to the redeemable non-controlling interest, which is a new line item on our balance sheet.

This relates to the 20% of Enercon that Bel currently does not own, but for which there are put and call options, which may be exercised in early 2027. Upon the acquisition of Enercon in November 2024, the fair value of the NCI was determined to be $72.3 million.

In accordance with GAAP accounting and the various policy elections the company made related to NCI accounting, the redeemable NCI in the balance sheet was remeasured to its redemption value at December 31. This led to a $7.7 million increase in the NCI amount on the balance sheet, with the offset being attributable to the non-controlling interests at the bottom of our P&L.

This in turn reduced the net earnings amount attributable to Bel shareholders. This item is included as a non-GAAP adjustment in our non-GAAP EPS reconciliation table. We wanted to highlight this one-time adjustment. From fair value to redemption value, as this resulted in reporting a net loss on a GAAP basis during the fourth quarter.

I would now like to turn the call back to the operator to open the call for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)

The first question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Hey, good morning, congrats on closing Enercon. I just wanted to connect the dots from some of the third quarter orders momentum you talked about, for PSP and for magnetics, saw a nice counter seasonal corp PSP sales increase ex-Enercon.

Not the case for magnetic, but you had pointed out longer lead times there. So just want to, revisit that contrast and lead times and also if the orders turn, was, pretty sticky relative to what you saw in the third quarter, versus maybe some continued intermittency.

Yeah, so. Hey Chris, nice to nice to connect here. On magnetics, it's seasonal and generally we think of magnetics and largely power as having Q2 Q3 being the strongest quarters, and Q1 usually being the weakest and Q4 somewhere in the middle. So that's kind of I say what's kind of expected on the magnetic side. On the power side, we did see some maybe more robust pull-ins.

And that led us to be a little bit north of the midpoint of our previous guided range just for the Bel based business. We think some of the pull-ins that did come in was to get out ahead of some of the tariffs that were potentially coming in Q1. But outside of that, I think, everything kind of went and landed as we thought it would, given the seasonality within both ESPN magnetics.

Okay great and I think last quarter you expected you know growth in all segments in 2025 I think you're referred more to Flattish Outlook for PSP for '25 if you could verify if I heard that correctly and also maybe get, go down a layer or two on the puts and takes to kind of defer growth recovery for PSP.

Yeah, so, on the PSP comments here I'm going to give obviously excluding Enercon. So a couple of things happened there throughout 2024. one is the Chinese supplier that we've talked about, and we had roughly, let's call it $5 million of pull in that happened in Q4. Which we were not expecting. So when we look at the amalgamation of those two just year over year comparison becomes a little bit harder for PSP given both of those were largely impacting PSP.

So when looking at that, it kind of gives us this, let's call it, maybe flattish. Could it be, more, yes, I think we just need to see kind of how the world plays out from the market perspective and some of the issues going on. So, given that, call it, optics harder comparison that will happen with the Chinese supplier and Poland, that's kind of what, give us a guide that as we try to match expectations here.

Okay, great and congrats on the transitions Dan and Farouk across the company and in the CEO role in particular.

Thank you.

Thank you. Next question comes on the line of Bobby Brooks with Northland Capital Markets. Please go ahead.

Hey, good morning guys, thank you for taking my question. I guess I just want to first start on the 12 sales guide. Could you maybe just give us a sense of how much of that, is attributable strictly from Enercon business?

Yeah, so I think, going forward by we'll be blending them here. I think directionally when we do look at it, we guided PSP to roughly, from a Q1 perspective year over year and given the pull in a slightly down.

And also remember Q1 last year had the Chinese supplier in it, right? So you have the Chinese supplier going against you coupled with some of the point. So PSP on a base level will be down to Q1 '25 over Q1 '24. Obviously, and our kind would be additive to that.

Okay, I appreciate that and then.

I don't think we've talked about this before, but just wanted to kind of circle back on it now that you've had intercom under your own ownership is how quickly do you think it'll take for real cross selling opportunities to begin to begin a merge here just trying to get a sense of how, just trying to get a sense of that.

Yeah, I think it's similar to anybody touching defense. It's it's a slow-moving environment in terms of either unseating an incumbent or new designs, and I think that generally holds globally true, whether it be European defense, American defense or or Israeli defense. So my guess is we probably are not going to see much, if any, in 2025 on the cross sell. But we could see it, right?

It's just going to really depends, but to manage expectations here, I think what's important for us though is one, are there opportunities out there for cross pollination and bringing the resources of Bel to bear to customers? The answer is yes. Two is ensuring that our teams are talking together with the proper incentives.

To really motivate people to jointly go out there and tackle the world and we've done that on the process and people incentive side of it. So I'll leave it at that, but generally defense is a slow-moving existence.

Fair enough, and then maybe this kind of ties into that last point that you made there, but so your new global head of sales, you had some time now to get adjusted into the sea.

You talked about it a little bit some of the stuff that you know he's already implemented and you kind of touched on it there right in the previous answer, but could you maybe just dive a little bit deeper and highlight some of the initiatives he's he's kicked off or changes he's made and maybe just compare that to what. Kind of previously was the case.

Yeah, so I appreciate that question there, Bobby. As I tend to think about things like, I tend to say to myself, people process performance on the people side of it, we have, maybe moved some things around a little bit in terms of responsibility and reporting structure and making sure that we are better aligned as a team, so that's on the people side of it. I'm going to leave it at that.

On the process side of it, it's really a question of Where are we going to sell? Who are we targeting the selling, right? So how do we establish further breadth and depth within the customers and new customers? So, we spent a fair amount of time with [UA] really understanding where do we go deeper with certain customers and where is the parallel pathways for us to grow.

So we'll be, kind of, really thinking a little bit harder, especially on the parallel, or competitors that we should be going after inside lanes. And the performance piece of it is making sure if your people are performing enabled by the process that there's recognition on the performance side of and measuring performance.

So that's to my earlier commentary on the commission structure changes that we have implemented, and we've added more [bels and whistles] than we did last year. We've also established a structure whereby we reward, let's call it cross selling between our connectivity segments and Enercon. And then making sure we measure it and compensate for. That's how we tend to think about it is from a well-rounded perspective.

And just to add a little bit to that, fruit came from a very strong e-commerce distributor. So for us as we move forward, we know more and more sales in the past were direct sales between our people, perhaps, and engineering communities. As we move forward, we know the future engineers don't want to talk to people. They want to get their product as quick as possible off the internet either from us or from digit emails or these e-commerce distributors.

And his focus is really what we do well, is on the key customers, the Ciscos of the world and the Honeywell and Boeing people. What we need help is really addressing the second tier, third tier, fourth tier accounts, and building those relationships. And I think the other problem is we have been historically very siloed in our approach to. Sales and how we combine our total sales force to work as efficient as possible.

It might be two salesforces, it might be one sales force, but he's really taking a hard look at how we go to market and what's the best strategy to make sure that we cover all the bases. So far we're very pleased in the direction we're moving and we're moving a lot quicker than we thought.

That's terrific caller. I appreciate it guys and congrats Dan on the great career and Farouq on the step up CEO. I'll return to the queue.

Thank you

Thank you

Thank you. Next question comes on the line of James Ricchiuti with Needham & Co. Please go ahead.

All right, thanks. Good morning. So I'll echo, my congratulations, to both of you. Looks like it's going to be a smooth transition, and I wish you both the best. So first question just, relates to Enercon. I know you've only had the business for what, about three months or so, but I, I'm wondering as you, Had discussions with your colleagues there. What, what's your sense as to, the business outlook,

I think you said it, next to magnetics. I think he said it was going to be the second strongest growing business. Is this, is there an element of replenishment in the business in Israel? Are you seeing, tell us about the activity you're seeing outside Israel in terms of, I know they have a fair amount of exposure, in North America as well.

Yes, I would say I think the messaging is really the same, whether it be on the US or Israeli side, and obviously some, as a reminder, roughly 40% of their sales is Israel, 50% US, and 10% various UK, India, and the like. And I think the message is, and this was kind of our one of our investment theses in defense. We think that it'll be a multi-year, kind of good tailwinds for that and market.

There will be a replenishment cycle, obviously with some of the issues with Ukraine and the war in Israel, there is a natural replenishment cycle after a period of conflict, so that will be additive. We also think that the global posture around defense and defense spending has changed, and we're seeing more investment going.

Whether it be into new technologies or just increasing overall spending and we see some of this commentary running through the news. So between replenishment, rearmament, and stepping up defense spending, all that is additive. The other thing we're seeing, and I think there's a fair amount of coverage on this coming out is in Israel specifically, where we're seeing the export side of that defense sector really expanding.

So as we look at all these factors, increased spending, the defense postures, increase investment, new technologies, all that is additive to Enercon. And obviously also they do sell into commercial air and as we think about just that commercial air tailwinds, we also think it's additive, but also as a reminder, defense is around 93% of their business and 7% of commercial air.

Yes, that's helpful. Yeah, you mentioned AI several times, this morning, and yeah, I'm wondering as we think about the opportunity, where are you seeing the biggest impact from that, and are you in a position yet where you could actually quantify how much of the revenues that could be AI driven in in some of the business units?

So in terms of AI, our biggest beneficiary across our segments is in the power group. So I think it's safe to say when we say AI that's the large main driver and as we talked about before, Jam.

We know where our product is going. AI so when we say AI, that's a direct line from us to an AI type application. But we also do know that we have some other products that go through our customers or intermediary customers that end up in AI that becomes a little bit harder for us to track. But when we say AI, we're talking about a hard line.

I would say we're, and also just as a reminder from AI we're generally not selling to the hyper scalers given the cost pressures there and just, our business doesn't lend itself for a competitive side of things. So we tend to do non-hyper scales. We get to them through our networking customers and director. Terms of the AI growth and we talked about this on our October call.

As we started heading into Q4 so back in the September, October time frame we started some of the business that we've been chasing for a fair amount of time started to turn some nice orders for us. So I would say as we start heading into Q4, that's when we really start seeing AI. AI, I would say is for 2024 and we're just starting that climb is around [7ish] million for us out of power. And we expect that number to grow, let's call it, definitely very nicely into 2025.

Thanks that's helpful. Last question for me, just, as it relates to what you're seeing at the distributor level. Where do we stand at relative to the stocking at some of your major distributors is that in the rearview mirror, or are we still working through some of that in certain areas of the business?

We were with a major distributor, one of the top two. They felt that, in January they hit bottom and that things should start improving, but again, I think we heard that song for the past 18 months. So we're keeping our fingers crossed that we have hit the bottom. We're starting to see improvement. If you look at our circuit protection.

They're the first ones that we started because they're low cost items, they order people order them first and they're using to order, so we start to see some backlog increases there, so hopefully that's a good sign. So we should, I'd be surprised if we don't see improvement in distribution this year. And we should see it start coming, the end of this first quarter.

Got it. Thanks, and again, congratulations on the announcements and the results.

Thanks, James.

Thank you, Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Dan Bernstein for closing comments.

So once again thank you very much for joining the call today.

This is the operator. Just want to take the next in line that is, Theodore R. O'Neill with Litchfield Hills Research. Please go ahead.

Thanks very much. Congratulations on the quarter. I was, I just want to follow up on the previous question about AI. Is that application primarily in data centers?

Yes.

And given the contribution from Enercon in the quarter, does that change the potential earn out or the timing for acquiring the remaining 20%?

No, nothing that's been discussed as of right now, and we put this in the filings that we have in terms of the contract right now it stipulates we're going to measure end of 2026 and kind of put call option it early in 2027. If there was any kind of, there's no accelerators built in, so to speak, if we, if there was an acceleration to occur, it would have to be an agreement between the two parties.

But as of right now, there is no such accelerators in there.

Okay, and my last question is if Europe decides it needs to dramatically increase defense spending, would this be a particularly positive for Enercon?

I would say, as I said earlier, roughly 10% of Enercon sales is not Israel, not the US, and kind of spread out between the Europeans and from India. So overall spending increase would be additive to Enercon, obviously just given European defense manufacturing is a little bit less overall, it's additive for sure. I would also benefit from that on the connectivity side.

More spending from the Europeans, the question also becomes where did they buy it from, right? Are they import it from places like Israel around the US which will be added or is it all local? So just kind of depends a little bit where they're buying it from.

Okay, thanks very much

Yeah.

Thank you. Next question comes from the line of Christopher Glenn with Oppenheimer. Please go ahead.

Thanks, just a housekeeping question on modeling. We have, a different, so, algorithms calculate adjusted EPS. So just like, maybe, level set quantity what we could use the intangibles amortization and stock comp I backs, per quarter or annualized going forward.

Yes. On the stock comp. We're estimating it will be a fairly similar level to what we had in in 2023, maybe up a little bit. So for modeling, maybe call it around $4 million or so, maybe a little higher than that. And then on the amortization of intangibles, the, we had two months' worth of incremental amortization in the 2024 numbers. So that's That can be used as a proxy for going forward, that should be pretty straight lines.

Great. Thank you.

Thank you. Next question comes from the line of Hendi Susanto with Gabelli Funds. Please go ahead.

Good morning and congratulations, Dan, Congratulations Farouq

Thank you very much.

Thank you

Two questions for me, would you remind us, areas that may be impacted by such say like global tariffs and potential areas of mitigation, and would you remind us about China for China?

Yeah, so I would say it's a little bit of a moving target, right? I think for us, China, and as we think especially, specifically the US China revenue, we talked about 12% to 13% of 2024 was tariff, and then roughly a little bit, under 4% Mexico exposure. I would say if that's kind of, that things are coming to the US, we do send some stuff from Europe to the US and some from the UK as well.

So if that becomes more of a thing that it'd be obviously it'll be a headwind. Generally, we manufacture around where our customers are, so a lot of, for example, our magnetics. Which is manufactured in China stays within Asia, right? So it's either getting sent out to CMs in the Philippines and in India, or stays in China, so generally more localized manufacturing.

And I think that's one of the nice things of our business. I think in Europe product flows within Europe. I think we feel pretty decent about product flows within Asia, seemingly pretty decent. It's really when you touch the US, right, given that we're the ones trying to institute these policies.

So is it a concern and a headwind, of course, tariffs are just generally not additive, and I think the bigger concern is it's more of a moving target. It seems every day we get a new target. And I think that's the issue and the challenge that we have, but ultimately our process is the same. We work with our customers and trying to be cost effective and efficient and then also where we can pass it on, that's the goal.

Yeah, and then second question, how should we think about your, M&A capacity for the acquisition of Enercon?

Yes, so I think, similar to our discussion we talked about it when we did announce Enercon we appreciate that we have more leverage today than we did. I would say we are open for business, more selective both on quality and size, but we are open for business.

We understand where some of the, let's call it, lack of tolerance or red lines are. But ultimately, there are things. So it's a higher hurdle. If we're going to have someone in the family, I think we're going to make sure that it's additive, some capacity at the right circumstance.

Okay, thank you.

Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Dan Bernstein for closing comments.

Okay, thank you for joining us today and we look forward to speaking to you in April. Have a good day.

Thank you. This concludes at today's teleconference. You may disconnect your lines at this time.

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