Bel Fuse Inc.
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good day ladies and gentlemen, and welcome to the Bel Fuse Inc. fourth quarter results conference call. [Operator Instructions] I would now like to introduce your host for today’s program Dan Bernstein, CEO and President, please go ahead.

[Daniel Bernstein:]

Thank you. And I would like to welcome everybody to our conference call to review Bel’s fourth quarter and year end results for 2014. Before we start I’d like to handover to Colin Dunn, our Vice President of Finance. Colin?

[Colin Dunn:]

Thanks Dan, and good morning everybody. I’d like to start by reading the following Safe Harbor statement. Except for the 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 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

[Daniel Bernstein:]

Thank you, Colin. If possible we’d like to open up the call for any questions you might have. [Operator Instructions] And our first question comes from the line of Sean Hannan from Needham & Company, your question please.

[Sean Hannan:]

Yes, thanks for taking my question can you folks hear me.

[Daniel Bernstein:]

Yes.

[Sean Hannan:]

So, just trying to see if I can understand some of the math in the recent acquisitions what you’re contributing today and where we’re with some of these trends and looking if you can help me to validate some of this. I believe Emerson did about 14 million in September, although that was really only two months for it, so if you fully look at that on a quarter basis maybe that was around 20 million to 21 million standalone so that may have been about 7% down at December if we were to think about a clean comp. and then, if I look at some of the other pieces of your business, so the power one business and then legacy Bel Fuse, it looks like both of those were down 9% sequentially in the December quarter, just want to make sure I’ve my math right here before I ask little bit about seasonal trends and how that should be interpreted going forward?

[Daniel Bernstein:]

Okay. On the connectivity, just on the standalone, we were about 19.5 million on sales versus 13 near up to 14 million in the third quarter.

[Sean Hannan:]

Right. So, the third quarter though I believe you only had two months worth of that business under your wood?

[Daniel Bernstein:]

Correct.

[Sean Hannan:]

So, if we were to have a clean comp I believe that was not up quarter-to-quarter but instead it was actually down. Can we get a clean compare on that?

[Daniel Bernstein:]

I can’t give you a clean compare.

[Sean Hannan:]

Okay. Alright, let me shift topics really quick, gross margin movements, so you folks had really strong results I think in September, you did a good job in the December quarter on the SG&A level, but the gross margins really came down a bit quarter-over-quarter so we’re going to see if you can elaborate on that a little bit, the type of direction we should think about this for the current quarter, does that deteriorate more or do we expect some recovery that goes into June and the backend of the year, is that 23.5% you did in September already looks a little bit faraway from where we are. So, I just want to understand what’s moving around within that result, within December as well as how do you think about that moving forward? Thanks.

[Colin Dunn:]

Yes, September was somewhat of a normally, on a non-GAAP basis, we come in 19.6% on a gross profit margin basis. I should point out that we still have the impact of inventory step up going on in the fourth quarter and then so, with that and the - somewhat weaker sales with the approach of the year end with some customers hadn’t sold inventory that had the impact on the margin. So, I do expect the gross profit margin as we move forward into 2015 to move back up, somewhat.

[Sean Hannan:]

So, is that something we expect on an aggregate basis, should be operating more so in the 21%, 22% type of range, I think you folks are at considerably larger scale now and some of the benefits of the recent deals, I think in concept should be able to get you there. I just don’t know if that’s a reality?

[Colin Dunn:]

The first quarter is still going to be a little tough, we’re still operating with the transition services agreements which I think was mentioned in the past whereby, we’ve still got some of the acquisitions operating on the seller’s computer systems and we’re having to pay fairly large amount to maintain those. We do expect that they will be completed the transitions as soon as already across on a lab systems and we do expect that the power line acquisition will be across on our systems moving into the second quarter and at that time we’ll certain cross reactions. So, we will - on the second quarter Sean, I do expect that’s somewhat better improved margins. The other thing is, as we spoke about last time, we’ve been having some quality, we had some quality problems with the - particularly with the power products whereby the quality was not up to our standards and we’ve taken some while to get those under control. We believe we’ve got under control now and moving forward will see the benefits of much better manufacturing processes and not having to take certain expenses related to quality that we inherited.

[Sean Hannan:]

So, it sounds like this would be operational management as a consequence of improving the acquisitions you did, no variables that might be hidden in there, working against us either on the pricing front or general mix of your input and supply costs, is that correct?

[Daniel Bernstein:]

And is always pricing concerns.

[Sean Hannan:]

Sure, but nothing difference Dan that typical patterns we would typically see in your environment?

[Daniel Bernstein:]

Yes, I agree with you.

[Sean Hannan:]

Okay. And then, last question here, I’ll just jump back in the queue, as you’ve talked about your power business, there are certainly expectations to the back half of the year getting to growth, I think that’s a potential this is from my perspective third quarter and fourth quarter you can do some double digit growth, your comps will get better, but also then you have new programs that are ramping and reestablishing some credibility with customers, I think that you’ve mentioned for a bid as well within your lease. Is that type of growth realistic potential or where should we be directing our thoughts on this specific piece of the business for you? Thanks.

[Daniel Bernstein:]

No again, what we’ve said, no, the business, the power business it looks its turning about 195, 198 over the past 12 months. We do think going forward that starting the end of the third quarter that we should start to see yearly again 10% growth minimum we’re hoping, so we’re talking 20 million, 25 million for the year. And we still think that’s a pretty good growth that we should attain and naturally what’s driving for. But I do think that we might still have some fall out in sales for the first half of the year compared to last year based on some of the problems we had with customers in addition to some of the quality issues that we were stocked with.

[Sean Hannan:]

Okay, very good, thanks for taking my questions.

[Operator:]

Thank you. Our next question comes from the line of [indiscernible] your question please.

[Unidentified Analyst:]

Good morning, Dan and Colin. 2015 seems to be exciting year for you, how should we think of cost synergy, cross sales opportunity back to utilization and their magnitude?

[Colin Dunn:]

Again, we’re seeing some opportunities in cross sales and there are, I think, we’ve already merged the sales and marketing group between Cinch Connectivity and Emerson. We’ve consolidated the operations in England, we’re looking at consolidating the operations in Chicago, so we do have those cost savings yet to come. And then, from a customer standpoint, we just have a lot more critical mass and maybe forced to getting a lot more respect with the customers. With Power One and with Bel we do sell to the same customers, but we’re maintaining two different sales forces at this time, we’re beginning to see some cross selling opportunities, but nothing substantially. Out biggest opportunity is not going to come from cross selling, our biggest opportunity is going to come for turning around the Power One company and reposition it as a quality house, a technology house and that's we’re expecting the major growth overall from the company to come from is from the Power One acquisition.

[Unidentified Analyst:]

Got it and Colin -

[Colin Dunn:]

We’re really retrenching the customers they had, re-engaging them and once again they have within three or four years ago they were doing 450 and we are hoping to getting back a good portion of that business.

[Unidentified Analyst:]

Got it and then Colin, would you be able to provide CapEx estimate for 2015, I am wondering whether we will see like a similar number or?

[Colin Dunn:]

Actually, I am prepared with that. We have at this stage and again, our budget for CapEx is usually zero but we do have some estimates and we get spoken every project on its merit at the time it comes along, but CapEx talking number at the moment is $16.4 million.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Harsh Kumar from Stephens. Your question please.

[Richard Sewell:]

Hi guys this is Richard in for Harsh. Just kind of taking a step back and looking at the market in general, what are you seeing kind of what are you seeing in the market environment right now and then how are you handicapping Chinese New Year and are there any associated costs with that in the upcoming quarter?

[Daniel Bernstein:]

So let’s get to the overall market, again I think through last 18 months, it has been a very wait and see market, very limited visibility. We don't hear any positives, we don't hear any negatives, so there is still bit of a uncertainty but again on the overall - but if you look at the overall market it’s still very positive. I can say, we can have companies stop buying their own stock and saw looking at buying equipment in automation I think that will help out a lot. But again, so and again we see the year at this point we have very limited visibility and that's over getting from our customers. Regarding Chinese New Year in the old days where you had a return rate of 40% or 50% then there was substantial amount of training cost and bringing workers back online but now over the last two or three years, our retention rate has been about 92%, 93% for all our operations in China so we don't see any major additional cost. And most of our customers have done a good job putting in some more inventory time this year. Just so by September on any purchase order that we send out to a customer, we note on the purchase order when Chinese New Year is and I think people are having a lot better understanding of that.

[Richard Sewell:]

Great. That's very helpful. And then in terms of your cost cuts in initiatives and the connectivity business can you give us a little bit more color on those and what kind of benefits do you expect from this?

[Colin Dunn:]

Again, we took out the major chunk already for both groups. Again that's when we talk about, we already took the head on combining the operations so when we look at England, I think we already knocked down probably with both companies probably around 7.5 million, 8 million I think even though we put a low number in press release but I think going forward we probably have another million left to do, but it’s pretty much I would say 90% done.

[Richard Sewell:]

That's very helpful as well.

[Colin Dunn:]

We generally move very rapidly when we go into an organization to pull the band date off from the people standpoint and a consolidation standpoint. So, I mean we focused as you have seen in the press release we closed out a couple, already closed facilities took out top management, took out any redundancy so. Again, now it’s just using our purchasing power and things like that to strengthen the company.

[Richard Sewell:]

Got you, and then in terms of your divestiture of the networks power solutions what’s going to be the top line and kind of cost impact of that?

[Daniel Bernstein:]

Well, we closed the sale in 2015 and we still accounting, and the final accounting is still under review. We don't anticipate recognizing a loss on that disposition, we will be continuing to manufacture those products for the company that require for up to two years. So, we don't really expect any significant impact on our P&L.

[Colin Dunn:]

I think what you are going to see is, from the sales standpoint we won’t see an impact, from the gross margins we might see impact because we are basically supporting them very closely on our breakeven. But from the sales standpoint we are only talking about in the $17 million to $20 million range. But it might affect our gross margin because we’re making certain amount of profit and that's substantially reduced with the supply agreement we gave them.

[Richard Sewell:]

Great. Thanks guys.

[Daniel Bernstein:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] our next question is a follow-up from the line of Sean Hannan from Needham & Company. Your question please.

[Sean Hannan:]

Yes thanks. Just to dive back into some of the costs -

[Daniel Bernstein:]

Sean, before you start, to answer that question before on the connectivity. Q3 on the full quarter was 19.9 and Q4 and the full quarter was 19.5. So it’s basically a flat quarter-over-quarter. If we go back and look at the total sales not just the sales under our watch.

[Colin Dunn:]

And again, we do project that Sean that on the next two quarters that we don’t think any substantial growth we’re going to have from the acquisition and again we didn’t see that as a growth driver business, we looked at them as a profitable, very diversified customer base that has hopefully very good cash flow that could help us pay-off the debt for Power One and we really are striving that the growth of the company is going to come from the power side.

[Sean Hannan:]

Okay, that’s helpful. Then to follow on that with some of the original to ask my question just trying to understand, do we have a little bit more perhaps smoothing, not entirely smoothing, there is still some pretty good seasonal cycles that you would experience but there seems to be I think in ’15 the opportunity where March perhaps those not come down as much December does not come down as much on a road of quarter-over-quarter basis, just trying to understand how you think about revenues seasonally progressing through the year?

[Colin Dunn:]

I wouldn’t use seasonal, but I think things are going to be very choppy because of Power One and again do we get a handle, I will give you an example with a major customer that basically kicked out Power One and there must be brought them and we show them our fact and what we’ve done they’ve reengaged us and so we are all right there we are looking at some new product and all of a sudden they had a quality problem. And based on the design that they were buying for three years before they acquired the company and that put this project on hold and if you put future projects on hold. In addition to that we have another quality problem and a major customer that hit us and we weren’t able to ship for the past three months. So that’s my concern is I think until we focus on all these quality problems that are occurring at Power One that we think things are going to be pretty choppy for the next six months and once I think we get a good hand on all that, again starting in the third quarter from a top line sales growth standpoint, I think then we can say hey we can start moving ahead. And again, at this stage I say we just, we are happy where we can go weak and we don’t get a call regarding a quality situation from the Power group. And again that’s all based on previous power history report by other company.

[Sean Hannan:]

Okay, that’s helpful perspective. On the cost reductions Dan, I think when you talk about pulling out 7.5 million although putting 5 million in the press release, is that 2.5 million delta is that something that you’re guessing as kind of more of a less tangible sort of cost reductions you thing you may be able to get the benefit of here or is that including may be actions here in March and kind of thinking forward?

[Daniel Bernstein:]

I think you can, to see from March standpoint, even though we made, like for example, we can look at combining all the facilities in Chelmsford, right? So we had the hit, we had seen the cost savings but really doesn’t come in now until we get of the taxes of the two different sides. The heating, the oil, the receptionist all those type of costs. So that’s why I added, we took 5 million, like if I get rid of 10 people there is a direct cost of 10 million and that’s why we are showing the $5 million and then the answer to your cost is what we are coming up when we say $2.5 million to $8 million. Does that clarify or not clarify it?

[Sean Hannan:]

Yes, that’s helpful.

[Daniel Bernstein:]

So we have really good hardcore course regarding the people issue that we have taken out of the company and not going and the least is in Chelmsford but again the taxes, air-conditionings that type of stuff.

[Sean Hannan:]

Yes, okay. Now, then last question here, the current port issues out on the West Coast there, is that having any impact on your business, can you provide a little bit of perspective around either we are seeing?

[Daniel Bernstein:]

We haven’t had any problems so far whatsoever and then again you should note that a good portion of our products to go into subcontract is throughout far east Asia.

[Sean Hannan:]

Sure.

[Daniel Bernstein:]

I’m not saying it hasn’t been a problem. I’m not saying it will be a problem going forward, but at this point we haven’t been shipping anything from here and we haven’t heard any customer complaints.

[Sean Hannan:]

Very good. Okay, thank you.

[Operator:]

Thank you. Your next question comes from the line of Lenny Dunn from Freedom Investors, your question please.

[Lenny Dunn:]

Good morning. I guess my question is I have, we seen the last of the quarters that are hard to read with the recent -

[Daniel Bernstein:]

Nope, nope, nope. That’s my dream is to have a GAAP, non-GAAP the saying, but it looks like again our goal initially was, the fourth quarter I think and the first quarter we’re 90% there, 92% there, but I think we might have some hangover in the second quarter. The problem we do have is that we’re seeing a situation that we can’t move on from a cost saving standpoint because we’re just not ready doing it and then we’re facing, that we pick it in the second quarter, so really helps the bottom line or we saying hey let’s just forget about it for six months or a year makes things look as clean as possible to keep you happy. And that’s what the way we have entirely. It is our goal to get away from these onetime charges as much as possible. And I don’t know we are going to reach that goal or not, but it’s definitely goal of ours.

[Lenny Dunn:]

Yes, I’m glad it is and obviously the sooner the better and I assume that as whatever the maximum amount of free cash whether you can allocate depending on debt that is your intention?

[Colin Dunn:]

Nothing will make me happier than getting along the debt off my balance sheet and then I could buy back stock, which I knew I think you’re happy also.

[Lenny Dunn:]

Yes, yes it would but I don’t want to do that while you are carrying so much debt as you currently carrying. Not a good choice. Okay, well. Thank you very much.

[Daniel Bernstein:]

Thank you and appreciate your question.

[Operator:]

Thank you. [Operator Instructions] And this does conclude the question-and-answer Session of today’s program. I would like to hand the program back to management for any further remarks.

[Daniel Bernstein:]

I appreciate everybody’s time on the call and thank you for your questions and looking forward to speaking to you in April.

[Operator:]

Thank you ladies and gentlemen for your participation in today’s conference, this does conclude the program, you may now disconnect. Good day.