Bel Fuse Inc.
Q1 2008 Earnings Call Transcript

Published: 25 Apr 2008

[Operator:]

Ladies and gentlemen thank you for standing by and welcome to the Bel Fuse First Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today April 25, 2008. It is now my pleasure to turn the conference over to Mr. Dan Bernstein, President. Please go ahead, sir.

[Dan Bernstein:]

Thank you Shannon and I would like to welcome everybody to our conference call review of Bel’s First Quarter 2008 Financials. Before we start I would like to hand it over to Collin Dunn, our Vice President in Finance, Collin.

[Collin Dunn:]

Good morning everybody. Thanks Dan. I am going to start with the Safe Harbor Statement. Except for historical information contained in today's news release and on this conference call, the matters discussed including statements regarding improvements in performance and 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 the sectors that rely on our products, the effect of business and economic conditions, capacity and supply constraints or difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment, risk associated with foreign counties, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and competitive responses to those new products, and the risk factors detailed from time to time in the Company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward-looking statement will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements. Now we are moving on to discuss our first quarter 2008 results, starting with sales. For the first quarter of 2008 our sales were $60,869,000.00, which was 1.5% lower than the $61,807,000.00 in the first quarter of 2007. The $60,869,000.00 was also lower than the $69,339,000.00 of the preceding quarter in the end of December 2007. Sales for the first quarter rest significantly on the Modules product group that includes DC to DC converters and custom modules. With other product groups down throughout the quarter, this quarter above here is including the Chinese Lunar New Year holiday period. Products and cost of sales going out of the quarter on a GAAP basis with net after-tax base earnings of $2,167,000.00, this is below the net earnings of $4,009,000.00 for the first quarter of 2007 and above the $10,255,000.00 in the previous that is the fourth quarter of 2007. Our gross margin for this first quarter was approximately 18.5%, which of course is below the $22.5 million gross margin for the same period in 2007. And the first quarter margin was below the 22.2% gross profit margin for the fourth quarter of 2007. The world margin when compared to first quarter 2007 was primarily due to higher sales with Module products returned a little gross profit percentage margins as a larger percentage of the bills of materials of precious components, labor cost increases and lower labor productivity and material cost increases. There has been a shortage of labor in the areas with our products in manufacturing in People’s Republic of China. As we said in our press release, 3,500 workers have been hired and we expect another additional 1,500 will be added. Many workers have returned to their homes for the vacation of the Chinese New Year and we cannot predict how many will return. The addition of new workers with well productivity levels as they become familiar with our methods of production (inaudible) our output. Also PRC officials announced an increase in wage rates should be effective April 1, 2008 in the areas where our products are manufactured. To encourage workers to both return or commence working in these factories, we needed to in effect an early implementation of those high wage rates in the first quarter of 2008. Additionally, the US dollar continued to flow in value against the PRC1 in which all our PRC factory wages are paid. We continue to experience higher material cost that have not been able to pass through to our customers. Although going forward, our selling price increases, we settled with selling price increases immanent throughout the industry. Turning to selling general and administration expenses, the percentage relationship of selling general and administration expenses to net sales decreased from 15.3% during the third three-month period ended March 31, 2007 to 14.7% during the three months just ended. The decrease in selling general and administration expense for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was approximately $600,000.00. The decrease is principally attributed to the following

[Dan Bernstein:]

At this time, Shannon, we would like you to open up the phone from questions people might have.

[Operator:]

(Operator instructions) Our first question comes from the line of Sean Hannan with Needham & Company. Please go ahead.

[Sean Hannan:]

I guess my first question is, it does not seem like from a demand standpoint that you really had a problem, your comments in your release that backlogs remains at least generally at high levels. Is there a way to talk about the linearity of demands for the quarter for each of your four product groups?

[Dan Bernstein:]

I think the major product, I think most of the major demand came from the magnetic product group and that is what we saw as the major increase in backlog and that is our largest product group and I think the other three products were stable over this period.

[Sean Hannan:]

So, if I interpret that correctly, it was when you say stable, it was just kind of similar levels throughout the quarter, whereas Magnetics actually ramped?

[Dan Bernstein:]

Yes, to about 40% increase.

[Sean Hannan:]

Okay, but their demand’s flow actually increased as you progressed through the quarter.

[Dan Bernstein:]

Yes and once again, what made it somewhat worse though is because the ramp up came in the backlog in October, November, and December. We really weren’t able to hire any people in January, February, and December because of Chinese New Year. We found it to be almost impossible to hire anybody in the later part of the year because they will not leave current job to work for us because they would loose Chinese bonus and other payments they receive from the other company. So we basically had a period of 10 weeks where we could not really work the backlog at all.

[Sean Hannan:]

So, you have been talking for some time about having labor shortages…

[Dan Bernstein:]

Let me just disagree. Me and Colin are debating this issue. I do not think when you hire 3,500 people in Chinese New Year, I do not think you will have a labor shortage and when the process now lies in 1,500, I think the problem that we are facing is more of the rules and regulations and how to make sure that everything is in line that we can be competitive to attract people. So I do not believe that we have a labor shortage. There is no way we can hire 3,500.

[Sean Hannan:]

Okay, so if you were to look then at 3,500 hires that you had and the 1,500 that you have planned. What is actually replacing staff for regional turnover versus what is incremental on your business now?

[Dan Bernstein:]

Once again, the 3,500 people we are talking about is in addition to what we had before Chinese New Year. So it was not replacing people we lost at Chinese New Year. So, once again, let us round it out. We did not have 10,000 people from Chinese New Year and after Chinese New Year we had 7,000 people. We have a pretty good retention rate of around 92%.

[Sean Hannan:]

Okay, well that is helpful. That is actually a pretty good number.

[Dan Bernstein:]

And you could see, trying to hire 3,500 people from a logistics standpoint and get everybody all fed out and then just get them trained and we do have, over this training period of 12 weeks, we do have a very high turnover rate of probably 30%. So when we hire 3,500 people, in reality, we probably hired 4,500 to 5,000 people but they were left with 3,500.

[Sean Hannan:]

And then, if I could just ask one more question and I will jump back in the queue. So, based on the commentary in the press release, it appears that you expect to recapture a certain level of Magnetics’ revenues in June. Is that correct?

[Dan Bernstein:]

Hopefully we will start seeing improvement and tuning sales in that group should be increasing, yes.

[Sean Hannan:]

So we should effectively think of June as including an incremental bump on top of where your revenues would actually have moved seasonally, or if you could provide thoughts around that revenue level that would be helpful.

[Dan Bernstein:]

It is still kind of early for us to really see, because of all other products and where they stand and what is going on. And we are also very concerned about what is going out in the industry, where when if you look at us and 14

[Sean Hannan:]

Okay, that was helpful. I will jump back into the queue.

[Operator:]

(Operator instructions) Our next question comes from the line of Todd Cooper with Stephens Incorporated. Please go ahead.

[Todd Cooper:]

Well, you answered a number of my questions. I was just kind of going to dance around the demand outlook going forward and how that might relate to any guidance so I will just be direct. Colin, can you provide any guidance for the next quarter or two with regard to margin outlook and revenue growth?

[Colin Dunn:]

Well, there are a couple of things. One is that, we have got the volume issue. I think Dan addressed that and our concerns about the possible double ordering and issues related to that from the customers out there, and because the production has been pretty tight across the industry. As we have been discussing for a while with these continuing cost increases, material cost and of late particularly labor increases in addition, in this particular quarter we have the productivity issues with us, trying to get some of the newer workers up to speed. The labor issues are not going to go away. I do not see goal prices going down particularly. I do not see copper prices going down particularly. One of the things I said this morning and I do not know if you picked up out of this that it is our feeling that, we are going to have to see some price increases fairly imminently in the industry because I do not think anybody can continue to produce that these margins were out of the moment. So, obviously we have got agreements in place, with the number of customers and we cannot do anything and we certainly are not going to navigate those arrangements but we certainly feel that there has to be some price increases to get us back to decent returns within the industry.

[Todd Cooper:]

How quickly can those price increases be implemented and flow through your financials.

[Dan Bernstein:]

I do not think – we tried to seek marginal limits by the end of the second quarter because generally, we all are in contact quarterly or for six months, so the smaller customers, we can implement it very quickly but once again we are driven by the large customers and I do not think we will see any of that until probably the end of the second quarter. So, just a slight improvement I would think.

[Colin Dunn:]

I agree and I would say at the end of the second quarter and a little beyond that, it is going to take a while to get this into place and obviously there is going to be a lot of negotiations at the same time.

[Todd Cooper:]

Okay, well gross margins have run in the load 20% for some time and you just record 18.5% and with the labor inefficiencies being what they were, I mean, with improvements there, can they get back to at least the 20% range in the current quarter?

[Colin Dunn:]

No, its just not going to happen without a price increase. With that approximately at 25% run up in the labor cost in China over the past six months we have had the dollar sink against the -- by about 15% and there are certainly no indications that the dollar is going to improve and so we would expect to see additional labor cost increases which are major cost in China or VAT and utility cost which particularly relate to electricity to run the factories and which gets fast to realize. So, improved labor is not going to get us there. It has to be some cost to pass through.

[Todd Cooper:]

Okay, and at the worst point during the quarter, what were your lead times for the MagJack and the Magnetic products?

[Dan Bernstein:]

Our lead time goes on to be eight weeks and I think at a certain point we always getting stretched to 16 to 18 weeks.

[Todd Cooper:]

What do you think the average will be in the current quarter?

[Dan Bernstein:]

I think our goal is to get it down to hopefully 12 to 14 weeks and by the beginning of the third quarter, we will get it back to 8 to 12 weeks.

[Todd Cooper:]

And when you add the 5,000 new employees to your existing workforce where would that put you in terms of record headcount for the company or is it a record?

[Colin Dunn:]

I think we still maybe a little less in our peak. But I think yes, once again, I think it puts us around 12,000 direct labor, Dan is that number good?

[Dan Bernstein:]

It is a possible idea.

[Todd Cooper:]

Is the hiring and firing flexible enough to rent like you are where you state that you are concerned about demand going forward yet you are hiring another 1,500 people…

[Colin Dunn:]

The problem is you can fire them but then you cannot hire them back. And that was our biggest problem, as in July and August, we saw a little softening in the market place and we laid off about 1,500 workers. And because once again, it was beyond mid-year and then when we saw the increase in the backlog, it is very difficult to hire people and we have tried to tell our customers with these product lines that we cannot see rump up and rump outs and they refuse to develop stocking programs or work with us in stocking programs. And because the training takes 12 weeks it is impossible to ramp up and down. So, once again if we see a softening in the market place our problem is not getting rid of the workers. Our problem is if we see the ramp up again in the fourth quarter, we would be in the same situation we are today.

[Todd Cooper:]

So what is the solution?

[Colin Dunn:]

The solution would be to sit down with our customers and say “Hey, we are willing to take the risk with you and we are willing to put in the inventory but you have to go 50/50 with us in this inventory situation. And if they cannot make the commitment of 50/50 on the inventory, then we really do not have a solution. We still have the memories of 2000 bust when we took at $20 million layoff in inventories. So, you we just cannot go with the blank check and put tons of inventory in without a commitment from our customers.

[Todd Cooper:]

And no one has been willing to take you up on that offer…

[Colin Dunn:]

Not yet, and even on single source items, they refuse to do that. I think being counted of the role of controlling companies today.

[Operator:]

(Operator instructions) Our next question comes from line of Saeed Sedick from Gabelli & Company. Please go on ahead.

[Zahid Siddique:]

Could you break down the revenue by geographic areas?

[Dan Bernstein:]

I do not have that with me.

[Colin Dunn:]

We do not have that readily available and to be honest it is very misleading because if you look at it, I would probably say, it is probably 60% Far East, 20% North America, maybe 25% North America, 15% Europe. The problem we have is that 60% in the Far East and probably 50% for U.S. customers that are subcontractig the Far East.

[Zahid Siddique:]

There is some overlap that way?

[Colin Dunn:]

Yes, but most or that is the majority of it. I would rather that 60% we sell in the Far East, 50% is probably for American customers. Like for example, we sell something to Cisco or HP Illusion, they will use our – Electron – in China. So those products are shipped in China but they really come back and suited to the US customers.

[Zahid Siddique:]

The second question is with regards to your lump sum obligations. I think on the press release you said about $16 million or so, is that the debt you have or is it some other obligations?

[Colin Dunn:]

Right now we have no debt.

[Zahid Siddique:]

Right, that is how I thought. So, that is something else then? Is it a total long term obligations of $16.6 million?

[Colin Dunn:]

That just relates to lease obligations and going forward and stuff like that so it is just operating.

[Zahid Siddique:]

So, the debt remains zero?

[Colin Dunn:]

Yes, we have zero debt.

[Zahid Siddique:]

Then one last question. Any updates on Power-One?

[Dan Bernstein:]

Yes, we are still watching it very carefully and once again we are listening to the investment yesterday. I think they clearly understand that we are seriously interested in doing something with them. However, I think they would like to give a new president CEO time to spend the company around. Yesterday he predicted that they would be breakeven in the second half of the year. I think at that point if they are not breakeven by the second half of this year, that we have a lot more strength to put a little more pressure on but at this point I think the impression that we are getting from the readings I am doing that they would like to give the new president the opportunity turn the company around.

[Operator:]

Our next question comes from a line of Bill Felicia from Felicia & Associates. Please go ahead.

[Bill Felicia:]

Good morning. I was reading over the annual report and I noticed that you still carry a substantial portion of the Toko shares at a loss and can you update what the loss is currently and whether you consider this when you decided to provide a bonus, I guess a 20% bonus on the shares that you sold profitably and who was involved in making the decision on that bonus and did the board approve it?

[Dan Bernstein:]

We presented it to the board. The board did approve it.

[Bill Felicia:]

Regarding the Toko shares, what is loss at this point?

[Colin Dunn:]

I do not have it with me and I am not in the office to just dig that up -- we will be in the queue when the queue comes out in a couple of weeks.

[Dan Bernstein:]

And I would think, we are up on the Power-One stock if that makes you feel any better.

[Bill Felicia:]

Are you planning in awarding the…

[Dan Bernstein:]

And today this Toko president resigned and we still have an interest in looking at Toko. Do you understand with that bonus, that it was spread throughout the whole company and not just to 3 or 4 people?

[Bill Felicia:]

Yes, I understand. I am more concerned with the fact that you sold the profitable shares and held on to losing shares.

[Colin Dunn:]

All the shares were average, so it was not a matter of profitable shares and losing shares. What happened was we sold a set number of shares when the market conditions were good. The market for the shares went down fairly rapidly and we stoped selling and subsequent to that we had some accountancy issues and Toko had a couple of bad quarters. Things did go down worst than they are now, we have recovered somewhat. We have an agreement that we will be looking at that amount. It has been a long time sitting in our books and it is very probable that any loss that is still there at the end of the second quarter we will take the P&L.

[Dan Bernstein:]

And I would be very comfortable if you would like to take our managers bonuses and compare us to anybody in the industry, all our structure and bonus and compared to anybody in the industry and you do a comparison and you tell me if Bel Fuse people are over paid. I would love to see that presented to me. Once again, what I am saying is look at the compensation of Bel and top management and compare it to any company in our side and what we produced and if you think we are overpaid after reviewing those comparisons, I will be glad and sit down and talk to you.

[Bill Felicia:]

But this bonus is base upon, the investment in the company and your profits and apparently you have…

[Dan Bernstein:]

And we are taking it seriously, we take our loss from that and it will affect the bonuses and other things that we have going forward.

[Colin Dunn:]

Yes, at this quarter because we had a poor quarter, there is absolutely no bonus accrual across the company.

[Bill Felicia:]

Right but it seems like, do you plan on making any bonus awards based upon any profits in the Power-One situation?

[Dan Bernstein:]

Oh definitely. We made money in Power-One and we do very well with the stock and it is going to be shared throughout the company. Like any other company. Well in your company, if you make money on a stock, how do you get paid?

[Bill Felicia:]

Well I think the bonuses generally are on the company’s profitability not specifically on one acquisition or another most specially when you…

[Dan Bernstein:]

I mean once again, I think the overall thing once again is A, Was that bonus given to three or four people and shared throughout a company, that bonus went throughout everybody in the company. People in the Far East got one week salary because of that.

[Bill Felicia:]

Right but the bonus was the artisan.

[Dan Bernstein:]

Do you think that money is –

[Bill Felicia:]

The acquisition that was for the upper management right?

[Dan Bernstein:]

No. That will be spread throughout the whole company.

[Bill Felicia:]

The other thing is the Columbia strategic cash portfolio, what is the current status on that and how much money have you been able to take out and what is the current pay out rate?

[Colin Dunn:]

We have taken out about $8 million. I just got an update on that from them yesterday. Sorry just to bare with me. Well I will open it up, and again we will be detailing this in the quarter report. They are expecting by the end of 2008 they would liquidate another 40% to 45% of the fund and then another 5% to 10% in June, July of 2009 and then it will end for the final. But at the moment, it is the paying of that 3.5% and the interest rate more than covers the – in the NIV and the average material is a whole portfolio at the moment is 46 days.

[Bill Felicia:]

Alright. Thank you.

[Operator:]

Thank you, our next question comes from the line of Lawrence Goldstein from Santa Monica Partners. Please go ahead.

[Lawrence Goldstein:]

I got to say something beyond the question I was going to ask. I just marvel at company that made $26 million bucks, having the top two guys less than $600,000.00 in total compensation. I do not know where you find that in America today. As a matter of fact, I just put down the annual report in the proxy of the company South and New Jersey that does less than 10% of your revenues and the - loan was paid $800,000.00 and the company had a year in which they made about $350,000.00. That is more than norm, yours is abnormal. You guys are underpaid and I think your salary and your bonuses and by the way it is great seeing a company that the bonuses go down when the results are not as terrific and you do not see that in too many companies to often. You do not see that either so if they will call us in, we are getting a bargain in people here. The question I had for this, one division you do not talk about but you just did in the last two questions is the money management division. You guys have excluding the position to which you have currently have a – loss, a terrific record in buying 5% of the company and profiting over the years many times. So why don’t you allocate a few bucks to a money management division and then buy one or two stocks every few years? And you keep up the ratio of success of the past, what do you have? One loser in about seven?

[Dan Bernstein:]

Yes. Can you attach that one?

[Colin Dunn:]

Certainly. I think Larry we got to keep our eye on the ball. You know, we have to run the business that we know how to run the best and certainly, we do not put money in to these companies just to turn our butt. We put money into the companies because we think that they got synergies they think. We think they would fit well with that portfolio and through all those other reasons to expand the company now, you got to put all your money to get into the game and sometimes, after we put the money in, we find that the game is not quiet being played the way we want it to be played and so we then bailed out. In some cases, we would like to get going forward and we just got to get the company to cooperate with us. So, I think we are not going to at this stage look at that as a part of our business. It is ancillary and we got our hands full with trying to drive the main part of that business day in and day out.

[Lawrence Goldstein:]

Let me just ask you out of curiosity. Why don’t you go to 9.9% or indeed why do not you go above 10% in any of these…

[Dan Bernstein:]

I think some of them, we had going up to 8%, 9%. I think the concern that is if we do evolve with them with the by-laws of the stocks that if we go above 10% our hands get a lot more tied and give us less flexibility.

[Collin Dunn:]

I think the question that we have with about that line, is really because of them having seven years of loses, we really are kind of uncertain about them, observing around the situation, but other company’s that we feel a lot more confident with, I think we would go up to 10% . I think it more depends on the company but I think we are more concerned that we would like to have the freedom to move in and out and we go above 10% and I think that is where our hands becomes really tied.

[Lawrence Goldstein:]

Spoken like a money manager. Okay. Thank you.

[Dan Bernstein:]

Alright thanks Larry, I appreciate your kind words. We do not get that often calling.

[Operator:]

I think we have a follow up question from the line of Sean Hannan from Needham & Company

[Sean Hannan:]

Yes thank you. So if I can just kind of jump back into March and what you solved for your different product categories, well actually specifically modules, you commented earlier that this is DC and cost of modules I think is where you saw specific strength in the quarter?

[Dan Bernstein:]

Yes.

[Sean Hannan:]

Is there a way to provide more color around that?

[Dan Bernstein:]

Hold on for one second I should be able to do it. Roughly I would say we are up a little bit more than $3.6 million.

[Sean Hannan:]

Okay. And then is this specific to a few programs or is this more broad base strength that you saw?

[Dan Bernstein:]

Once again I think in all products, we already have been 20 customers driven, we really do not have a broad base, customer base so most our sales had come with key customers with key projects.

[Sean Hannan:]

Okay and so can I infer that a lot of this was related ultimately to as computing and storage and –

[Dan Bernstein:]

We, definitely no, we have not been working our telecommunication storage yet.

[Sean Hannan:]

Okay. And then is there any way that you can talk a little bit around, I think you had start to touch some on it a little bit earlier but pricing with MagJack that has always been a topic. If there is a way you could provide perhaps a little bit of color around that and any additional sourcing concerns that the OEM level and this is ever a sect that we become neutralized. Any comments there would be helpful.

[Dan Bernstein:]

No I think once again, more understanding is Toko and Molex have announced price increases in their connectors and namely the gold and copper and the labor in China, there is no question we are going across the board with increases. Now, if we have some margin items, where we maybe had 50% because it is a new product, we might have the whole price to drop but we are breaking even on over low margins. We are definitely going to go from 5% to 7% and once again with lead time of 16 weeks beside all those other factors, now why cannot you ship our products? And if you do ship our product, why is it going to low cost margin products? So I think at this point because of a long lead time and because of there – as I guess, we really do have to come with a price increase across the board.

[Sean Hannan:]

Okay. And it all totally after that is taking effect to which your major yearly ends, where you able to grow margin levels to really return into that lower 20% range if I heard that correctly?

[Dan Bernstein:]

Well, you know, I did say again that we are fighting two battles again. We are fighting the labor increase, we are fighting the dollar increase and we are fighting the material increase and I do not know once again, it is not a straight target given if you tell me material stay the same, labor is going to stay the same and I have no problem for that comment, but more things to change is Southern China in the last four months has not changed in China for the past four to five years.

[Sean Hannan:]

Okay. So if inefficiencies were called out within the press release as a contributor to the gross margin degradation, is there a way to kind of quantify or talk about the size of the inefficiencies versus these other factors as being a head wind?

[Dan Bernstein:]

Now we will look at that Sean and we have taken around and we are really just with so many people and so many departments, it is just not possible to get a meaningful number because that is one of the things that we trying to get our hands around but as of yet, we do not have a good number and I certainly have nothing to share with you at this time.

[Collin Dunn:]

Sean, if we could base that from a sales standpoint, we could have been anywhere from I would say $3 to $5 million RN sales for the quarter if we had enough people.

[Sean Hannan:]

Okay. That is very helpful. Thanks co much.

[Dan Bernstein:]

Thanks Sean.

[Operator:]

We have another follow up question from the line of Lawrence Goldstein with Santa Monica Partners. Please go ahead. (Operator Instruction)

[Lawrence Goldstein:]

Hi! One question is part of our $100 million cash fluid, do we have any material matter -- or Hong Kong Dollars?

[Dan Bernstein:]

No.

[Lawrence Goldstein:]

Sorry. I do.

[Operator:]

There are no further questions at this time.

[Dan Bernstein:]

Thank you and I appreciate everybody joining us toady and we look forward to speaking with you again. Collin, anything else?

[Colin Dunn:]

No, that is it. Thanks everybody! We will talk to you next quarter.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We thank you very much for your participation and we ask that you please disconnect your lines. Have a wonderful afternoon everyone.