Bel Fuse Inc.
Q4 2007 Earnings Call Transcript

Published: 19 Feb 2008

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Bel Fuse Fourth Quarter and Results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, the conference is being recorded today, Thursday, February 14, 2008. I would now like to turn the conference over to Dan Bernstein, President. Please go ahead, sir.

[Dan Bernstein:]

Thank you, John. And we like to welcome you to our conference call to review Bel's fourth quarter and 2007 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance. Colin?

[Colin Dunn:]

Good morning everybody and thanks Dan. I will start with the Safe Harbor statement. Except for historical information contained in today's news release and this conference call, the matters discussed including statements regarding certain challenge faced by the company and the evaluation of acquisition possibilities are forward-looking statements that involve risks and uncertainties. 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 effect of business and economic conditions, capacity to supply constraints over difficulties, product development, commercializing or technological difficulties, the regulatory and trade environments, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and the 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 statements will in fact proved to be correct. We undertake no obligation to update or revise any forward-looking statements. Having said that, I will now move on. First talk about sales. For the fourth quarter of 2007 our sales were $69.3 million, which was $8.8 million higher than the $60.6 million in the fourth quarter of 2006. This $69.3 million was $3 million higher than the $66.4 million for the receding quarter ended September 2007. Sales year-over-year were higher than modules product group that includes DC to DC converters and testing modules. The fourth quarter of 2007 was Bel's second highest ever sales quarter. Profits in cost of sales -- Bel under the quarter on a GAAP basis with net after tax earnings of $10,255,000. This compares to the net earnings of $4,697,000 for the fourth quarter of 2006. Labor costs continue to increase in China due to new labor regulations. We have a product mix more skewed towards high-dollar value items where we continue to experience good growth. Our gross profit margins that have been at lower levels in this group have shown some improvement. Including that Q4 operating expenses were approximately $500,000 for the closure of an older manufacturing facility in China and $500,000 additional for bonus due to a change in bonus accrual procedures. This fourth quarter of 2007 we had pretax income of 4,312,000 for the sale of property in Macau. On an after tax basis this amounted to approximately $0.28 per share. G&A, despite an increase of $8.8 million in quarterly sales, the SG&A remained at similar values in the same quarter in 2006. This included high increments of (inaudible) to increase sales level. Although this quarter we had lower ongoing legal expenses related to several ongoing legal cases, our professional fees were lower due to reductions in accounting fees related to auditing and Sarbanes-Oxley work. And a change in the method accrual for year end audit expenses. A charge of (inaudible) was also recognized which related to our write down of the $25 million investment in a cash bank which is being liquidated. Our income tax provision of $1,213,000 million was a result of a reduction due to release of an accrual through the expiration of certain statutes or limitations. It was offset by changes in estimates for prior year taxes upon finalization of certain tax returns. The company is currently undergoing state tax orders for both New Jersey and California. However it does not expect any significant changes in estimates related to these orders. Turning to balance sheet, cash and equivalents, at the end of the December 2007 our cash and equivalents and securities were approximately $114 million, which was $22 million above that December 2006 balance of $92 million. Included in that $114 million number was approximately $23 million in a fund operated by Columbia Bank, which is being liquidated and the assets being helped to maturity, plus $4.5 million escrow growth related to the sale and property in Jersey City in 2007. Receivables, net of allowances was $52.2 million at December 31, 2007, compared to $44 million at December 31, 2006. Although this is an $8 million increase, our day sales outstanding remains constant at 68. Our accounts payable for the same period is $16 million. Inventories for this December period; our inventory's up $39 million, which is $7.2 million below December 31, 2006. During the quarter we saw some stock reduction in both raw material and finished goods. Our balance sheet comments. For the three months capital spending was approximately $2.6 million, while the depreciation and amortization was $1.8 million. During the fourth quarter of 2007, we repurchased 45,933 Class A shares at a cash outlay of $1.6 million. During the full year of 2007, we had [cumulative] Class A repurchases of 160,033 shares at cost of $5.7 million. At the regular meeting of the Bel Board of Directors, a resolution was passed to increase the quarterly dividend affective of the dividend paid November 1, 2007. The new quarterly rate for Class A shares increased by $0.02 from $0.04 to $0.06 and for Class B share it increased from $0.05 to $0.07 per share. Our book value at December 31, 2007 was approximately $20.66 per share. I'll now pass it back to Dan for some general comments.

[Dan Bernstein:]

Thank you, Colin. As Colin mentioned we are pleased with both our sales for the quarter, our second highest quarter average sales and our strong operating result. Backlog remained strong but as with any new year period, it's always difficult to truly feel comfortable with the backlog. At this time we see no softness from any of our major customers including Cisco. As part of our strategy to consolidate manufacturing to large more efficient facilities, the fourth quarter we ceased manufacturing at a small plant in China and also sold of our property in Macau. Both production was moved to our main facility in China. The net result will be a consolidation of our four facilities in to two. However, at this time, we do remain very active looking at acquisition opportunities that hopefully can stimulate growth and profitability to the company. At this time Don, I would like to open up the call for questions please. Operator?

[Operator:]

Yes.

[Dan Bernstein:]

We'd like to open up the call for questions please.

[Operator:]

Perfect. (Operator Instructions). And our first question comes from the line of Todd Cooper with Stephens. Please proceed with your question.

[Todd Cooper:]

Yes, good morning.

[Colin Dunn:]

Good morning.

[Dan Bernstein:]

Hi, Todd.

[Todd Cooper:]

How much per quarter will the cost saving initiatives cost over the course of the year?

[Colin Dunn:]

It is not a specific number, Todd. You know part of the issue is, we were looking at, here we have other cost going up all the time, and so we didn’t split these assets as a discrete item. But you know, if you think of closing a 46,000 square foot facility which is what the facility was in Macau and a 53,000 square foot facility which was the size of the facility in China, you get a bit of a flavor for what the savings will be even just on the utility side.

[Todd Cooper:]

Okay. I was asking more about the cost of closing those facilities. I think last quarter you said it was approximately $0.5 million. Will it be more in the second half of the year than the first half of the year?

[Dan Bernstein:]

I think that's a good number.

[Colin Dunn:]

Yeah, actually it was just a little less; we came at about 485 I think Todd. I spoke, this morning I said 500,000 just rounding it up but we came in just slightly under that.

[Dan Bernstein:]

I think going forward that's a number we can use for the next 12 months.

[Colin Dunn:]

Yeah, that's not going to change.

[Todd Cooper:]

Okay. Can you describe your employee situation around that Chinese New Year in China?

[Dan Bernstein:]

What generally happens is that as you get closer to Chinese New Year, most of our workers are coming from the north, and some of them do migrate before Chinese New Year, and you saw it losing the workforce. And the problem is it's very difficult to bring workers into your facilities in the September, October, November timeframe to train them and so forth. So what happened was we had a layoff in July and August, and then our backlog started to increase and at that time we went out to look for more labor and it was very difficult to attract the labor. So our backlog was getting pushed out and our lead times were getting pushed out. As that was occurring, we received more orders coming in and that's where we have pretty strong backlog today.

[Todd Cooper:]

Okay.

[Dan Bernstein:]

And once again it's too early - generally, the retention we have coming back from Chinese New Year could go anywhere from 70% to 90%, and historically over the past five years we haven’t been able to come up with an exact figure of where it could lie just in that range, and we won't know the true details of the retention into another week, we have set in many different types of bonuses and recruiting systems to hopefully get that retention rate up to the 85%, 90%

[Todd Cooper:]

Can you give us an idea of kind of what the average headcount has been running versus at the LA what it would be for you?

[Dan Bernstein:]

I think we're looking to be at, I think we're at about 7000 people and we're looking at 9000, 9500. Our goal is to get our lead time down to six or eight weeks if we can.

[Todd Cooper:]

I am sorry, go ahead.

[Dan Bernstein:]

Once again, our major product is the MagJack and it’s a very labor intensive product and I would tell you 75% of our labor is going into that product. Labor doesn’t really affect the other major product groups.

[Todd Cooper:]

You were seeing more competition in that product, because of the labor shortage. Do you feel like you are losing any business or [anything] this year?

[Dan Bernstein:]

I think we don’t -- our biggest problems would be in single source at many customers because we are the market leader and its now taking our competitors amount of time to come into become second and third source. So, I don’t think our problem has been leveraged more being a single source and there is no customer we have in any product we sell that wants to be single source.

[Todd Cooper:]

Okay. Is the lion share of your power supply manufacturing being done in China today?

[Dan Bernstein:]

Yes, all I would say 80% of it's done is in China. And once again, we're using a far less amount of people running that operation because it's mainly running at SMP [ph] facility.

[Todd Cooper:]

Okay.

[Dan Bernstein:]

Because we're not using that much labor, we protect that product, we protect the Fuse product group and basically what we do hire back labor because they don’t need that many, they get first shot.

[Todd Cooper:]

All right. And can you characterize what the demand picture for your products look like prior to the Chinese New Year?

[Dan Bernstein:]

No, to be honest over the past eight weeks before Chinese New Year, we've seen strong demand in all of our products, and extreme amount of expediting.

[Todd Cooper:]

Okay.

[Dan Bernstein:]

So once again, that really make - we see such a, we haven't seen this type of expediting for maybe two years. So now we're really concerned because it's always opposite and we make sure there's definitely going to be a recession, because we haven't seen anything that good in a long time.

[Todd Cooper:]

Okay, thank you very much.

[Colin Dunn:]

Thanks, Todd

[Operator:]

And our next question comes from the line of Sean Hannan with Needham & company. Please proceed with your question.

[Sean Hannan:]

Great, thank you. Good afternoon.

[Dan Bernstein:]

Good afternoon Sean.

[Sean Hannan:]

So, listen, If I can just -- I just want to make sure I can clarify a couple of things. This is a 12 months programming in consolidating some of these operations, this is -- or the programs that we already have underway, which we've already discussed, we're not talking about anything new and incremental, correct?

[Dan Bernstein:]

No, you know just once again, the major properties, I think the Jersey city's property will be hopefully realized in the first or second quarter.

[Colin Dunn:]

Yeah, we haven't recognized the profit from the sales of Jersey City property yet, we had some just some technical regulatory stuff we're going through at the moment.

[Sean Hannan:]

Okay

[Colin Dunn:]

Although all those property has been sold physically sold and ownership has changed hands, we have not recognized the profit yet.

[Sean Hannan:]

And regarding, while we are going forward we haven't taken out any reserves yet for the program that we are going to implement in the next 12 months or so.

[Colin Dunn:]

No.

[Sean Hannan:]

Okay. And so when I think about that $485,000 charge, this is specific to the fourth quarter, right?

[Dan Bernstein:]

Yes

[Sean Hannan:]

And so this is, is there any reason why just from thinking about your core operations, why this shouldn't be included and really thought of more as a restructuring charge to your COGS line or how should we be thinking about that?

[Colin Dunn:]

Well it was a restructuring charge. If I had my (inaudible) I would've liked to netted it out against the income from Macau, but obviously I can't do that. So it is a one time. Going through in next year we have additional initiatives going on as far as restructuring in Asia, and we will have some expenses. We don't expect them to be outrageous expenses, but we will have some ongoing expenses. Each quarter we expect - not so much in the first quarter but more in the second quarter and third quarter and a little bit in the fourth quarter going forward in Asia.

[Sean Hannan:]

Okay, and with that effectively was embedded in your COGS line?

[Colin Dunn:]

Yes, correct.

[Sean Hannan:]

Yes, okay. Okay and then so you've just mentioning that you were hoping to get your lead time down from four to six weeks. Where are we today?

[Dan Bernstein:]

Sea we are getting trouble here. We are hopping we are currently 14 weeks to 16 weeks we are hoping our first step is to get it eight to twelve weeks and our goal is probably to six to eight weeks but realistically I think we feel comfortable with eight weeks.

[Sean Hannan:]

Okay. And then Cisco they have been a 10% customer for a couple quarters now, how significant were they in the December quarter?

[Dan Bernstein:]

They are over 10%.

[Sean Hannan:]

Okay, have they remained in that 10% to 20% range.

[Dan Bernstein:]

We don't give an exact number we just tell the 10%

[Sean Hannan:]

Okay

[Dan Bernstein:]

But they are definitely substantial customer of ours and it's safe to say, if Cisco goes, Bel will go, with the tip of the tail of the dog and Cisco is definitely the big to (inaudible).

[Sean Hannan:]

Okay. And then lastly, over the last few quarters, a lot of your mixes really been, it seem you are shifting towards modules while some of your magnetic and with your MagJack pricing headwinds being a factor there. I guess what my ultimate question is, when we think about the modules group, perhaps nearing the 30% range for your business overall. can you talk about the sustainability of the growth of that group, as a portion of your mix and then the impacts to your model overall?

[Dan Bernstein:]

I will discuss the sales growth. Once again regarding the MagJack integrated connector module which is part of magnetics, we took this product line from basically $10 million to $120 million over a three year period, and it looks now right now, its leveling off and its flat basically based on price pressure. We knew that where we got in to power, I think our power running around $40 million or run rate about 40 million. And we’re hoping that, we were hoping to see 20% growth or more till we get to about $100 million, $120 million. Once again, we -- there is no question either the power or the module group are strongest growth opportunities over the next three years without an acquisition in other area.

[Sean Hannan:]

Okay. So, from a growth standpoint today to think of the power modules group, in its 20 percentageish range?

[Dan Bernstein:]

Yes. And all other goods are probably 0% to 5%. I think once again a lot depends on the unit price. But a lot of times, the units are going up but the prices are going down quicker than that.

[Sean Hannan:]

Okay. So with those types of year-over-year growth rates, that's basically how we should be thinking about the March quarter in the absence of any specific guidance?

[Colin Dunn:]

Yes, good, Chinese New Year has messed things up a little bit, and so things are on a wreck. We do have one major customer in the DC to DC area who did push out some productions in January and to push it out one month and that could have a wide impact, will have an impact I think in the first quarter, but there is no cancellation, just a slight push out on their program. But, that's the only thing I can think of, Sean.

[Sean Hannan:]

Okay, and that push out was from the first quarter to the second quarter then?

[Colin Dunn:]

Well actually, it was a one month push out, so it will impact instead of getting three months of deliveries in the first quarter basically we get two months of delivery and that volume will roll into the second quarter.

[Sean Hannan:]

Okay, that’s helpful. Thanks very much

[Dan Bernstein:]

Thanks Sean

[Operator:]

(Operator Instructions) And our next question comes the line of Bill [Falesia with Falesia associates]. Please proceed with your question.

[Bill Falesia:]

Good Morning.

[Dan Bernstein:]

Good Morning, Bill.

[Bill Falesia:]

Yeah, I've noticed that the stock prices, it's fairly depressed and it continues to go down. What if anything have you done to increase shareholder value for the last quarter or so?

[Colin Dunn:]

Once again we don't look at quarter-to-quarter increase shareholder value. So that's something that we won't address. And what we look to for again in the long-term is how we can grow the company. Once again I think if you look at all industry there has been a downturn in most everybody out to start. However from our standpoint, for us to get the company where we want it be, we feel that, with our war chest of $113 million the acquisitions is going to be a better way to do it and we are spending a tremendous amount of time looking at acquisition opportunities. But that's not going to be from a quarter-to-quarter standpoint, however as we did say before we are streamlining the operations as much as possible, we have got that about redundancies we got eliminated and if you look at our probabilities, one of our best profit quarters that we ever had, this is our second best sales quarter. So I don't think from our products we have in our basket, I don't we could have done so much better job and we did do in the last quarter.

[Bill Falesia:]

Now I noticed that you've been purchasing the A shares, could you comments on why are you only purchasing the A shares and I did some rough math and I guess the average prices of your purchases were around $35, is that ended now or is that going to continue and when was your last purchase of A shares?

[Dan Bernstein:]

I think our last purchase was about two weeks ago and once again we just go in got it addressing.

[Colin Dunn:]

We are going (inaudible) Bill we are going in and out of the market at different times. In terms -- if for strategic reasons we go in and go out, sometimes we don't think it's appropriate when we are getting these earnings to be in the market and so we come out for a while but you are right the average price was round about that, I think at the $35 mark. We buy, typically when we are in the market we buy at around maximum level by everyday. Sometimes we don’t get it. But we still feel that, if you look at the opportunities for shareholder value. share buyback is certainly the best way to add shareholder value of vis-à-vis having the money sitting in the bank, there is no doubt about that.

[Bill Falesia:]

And why you are just purchasing A shares and how much is left that the Board authorized to repurchase?

[Colin Dunn:]

I don’t have the number in front of me. We're no where near, I think we got a quite a ways we can go yet. Sorry, I don’t have the number, I'll have to look at it afterwards, it will be in the annual report. We think A is a smarter move for us to repurchase A, there is smaller slowdown there. We don’t want to screw up the float in the B. People know there is small floating A, and there is not as much trading in A, so it makes more sense for us to be dealing in that area. The B that's the much larger float, we want to make -- continue to make that attractive through folks out there, who want to participate in Bel's future.

[Dan Bernstein:]

Also the [float] A goes 10% below the B then both shares are combined together, I hope you knew that.

[Bill Falesia:]

No, I didn’t know that. Also one last question, just wondered if you can comment on progress or any acquisition or acquisition strategy that you might have?

[Dan Bernstein:]

No, (inaudible) we've looked once again, last two companies we've looked. I won't give you names, but I can tell you, one company had sales of $30 million and EBITDA of $15 million, and our bid was $60 million and they said, they had a bid of $120 million. Last company we looked at about a week ago, we walked out again. They had sales of $25 million, a trialing EBITDA of $6 million, the highest EBITDA they've ever had, and our bid was $42 million, and the bid that they said they had on the table was $45 million, and both times we lost out to equity funds, hedge funds. So once again, we're just not going to buy to buy, and we really can't see how these companies -- we can bring a lot of synergies and a lot of growth potential for these type of companies, which these funds can't do it, but they are still, we still see a lot, even though you hear a lot of things out there negative about hedge funds not having money and not having borrowing, we haven’t come across that yet.

[Bill Falesia:]

But you still remain fairly active in that, that's good to know.

[Dan Bernstein:]

Yeah, but once again, just that -- we thought at this point, it will be lot more difficult for people to raise money and we haven't seen that yet. But if there is a recession, we do feel that's an ideal time for us to really go on there with our war chest and take advantage of it.

[Bill Falesia:]

Fair enough thank you.

[Colin Dunn:]

Bill, just, we have the authority to buy up to 10% of the outstanding shares so we got ways to go yet.

[Bill Falesia:]

That's the A and B, right?

[Dan Bernstein:]

Yeah, A and B combined. Yeah, and the total quote is what Colin?

[Colin Dunn:]

Fairly close, bit over $12 million.

[Dan Bernstein:]

So $1.2 million.

[Bill Falesia:]

Thank you.

[Operator:]

And there appears to be no further question from the phone lines.

[Dan Bernstein:]

Thank you very much for joining us today, and hopefully we'll speak to you next quarter.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.