Bel Fuse Inc.
Q4 2019 Earnings Call Transcript

Published: 21 Feb 2020

[Operator Good day, and welcome to the Bel Fuse Inc. Fourth Quarter and Fiscal Year 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Dan Bernstein, President and Chief Executive Officer. Please go ahead.Dan Bernstein Thank you, Sanna. 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 to ask Lynn to go over the safe harbor statement. Lynn?Lynn Hutkin Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following safe harbor statement. Except for historical information contained on this call, the matters discussed on this call, such as statements regarding potential sales growth; the anticipated impact of the acquisition of the power assets of CUI, Inc. on Bel sales and EBITDA margin; anticipated cost savings resulting from Bel's global cost structure initiatives; the timing of completion of Bel's ERP implementation; the expected effects of streamlining on Bel's overall profitability; the anticipated impact of the coronavirus outbreak; the extended Lunar New Year holiday break; and the grounding of Boeing 737 MAX; productivity levels at Bel's four manufacturing sites in China; Bel's ability to adjust workload levels at the China site; and an increase in airline maintenance spend on existing aircraft, 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 those 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; the success of efforts to contain and otherwise respond to the coronavirus; 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; the impact of changes to U.S. trade and tariff policies; 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.Dan Bernstein Thank you, Lynn. Before going through the financials, I would like to provide a brief update on how the business did from the operations standpoint this quarter and what we see going forward.The fourth quarter continued to be challenging for us as our customers and distributors work through the excess inventory on hand. Further, the ongoing tariffs have resulted in certain customers finding alternate sources for their product, which impacted our sales in the fourth quarter. In addition, material costs remain high through the end of this year, putting additional pressure on our margins. By the year-end, we've seen an indication of customer inventory levels coming down, and bookings for our cinch and magnetic product groups have started to improve.During the fourth quarter, we closed our office in Shanghai and implemented other indirect headcount reductions in Asia. Overall 2019, a total of $5.7 million of annualized cost savings were implemented. Of this amount, $1.7 million were realized in the second half of 2019, and the incremental $4 million will be realized in 2020.In December, we closed on our acquisition of CUI Power Assets. We are pleased with the results – we have been pleased with the results of this acquisition so far. On Friday, February 14, we filed our 8-K with all the financial and pro forma relating to this acquisition. Historically, the gross margins of this acquired business were approximately 40% with an EBITDA margin of 10%, in down sales years. We look-forward to a full year of contribution from the business in 2020.From what we see today, the first quarter will be very difficult, given the challenges around coronavirus and the grounding of the Boeing 737 MAX. Bel is closely monitoring the coronavirus outbreak and its impact on our operations and supply channels. We can confirm at this point that all four of our manufacturing sites in China have resumed production, and we are currently running at approximately 50% to 60% of our normal run rate.Bel anticipates, at the minimum, we'll see an adverse financial impact as a result of lost sales, profit, incremental labor costs for period of time our associates were unable to work due to travel restrictions or illness. The welfare of our associates continues to be our top priority, and we're working with the local governments to ensure that necessary preparations are made to allow our associates to safely return to work. Lead times have currently been pushed back by four weeks as we continue to assess the overall impact to our supply chain.The continued grounding of the Boeing 737 MAX is also expected to have an unfavorable impact on our comparison throughout 2020. There is currently a pause in the production of aircraft at Boeing. And while we anticipate that this should resume in the coming months, it will likely be at a reduced rate for a period of time. We hope to lessen some of this exposure through comp adjustments to our workforce and to related facilities and the anticipation of strengthening aftermarket sales of products as airlines increase maintenance spend on existing aircraft in their fleet.Our management team is truly capable of responding quickly to changes in this type of circumstances, and we are diligently working with our local teams to minimize effects of these current events.With that, I'd like to turn it over to Craig to go over the financials. Craig?Craig Brosious Thanks, Dan. Before going through the numbers, I want to point out a few changes in our financial statement presentation and reporting disclosures that were implemented during the fourth quarter of 2019.As noted on last quarter's call, our research and development costs were historically included as a component of cost of sales and were therefore a factor in arriving at gross profit. This classification is different than the majority of our peers. Financial statements included in today's earnings release reflect the reclassification of R&D expense outside of cost of sales and is shown as a separate line before gross profit. Prior periods have been recast to reflect this revised presentation.Similarly, foreign exchange gains and losses, which were historically included in our SG&A expense, have been reclassified to the other income and expense line in all periods presented. This change in presentation is also done to conform with the presentation of our peers to measuring profitability for our investors. It also provides better transparency of the SG&A expense related to our day-to-day operations.Lastly, we implemented a change to our reportable segments during the fourth quarter. In the past, our reportable operating segments were geographic in nature